Learning Objectives

This course is a primer on financial markets and products. Upon completing this course, you will learn about:

What constitutes a financial market.

The purpose of financial markets.

The participants who use the financial markets.

Where the major financial markets are located.

The difference between exchange-traded and over-the-counter (OTC) markets.

How financial markets are regulated.

The major money market products.

The major capital market products.

The major derivative market products.

  Money Markets

As is the case for most financial markets, the money markets are primarily institutional in nature – they are

used by large financial institutions and by corporates. Transaction sizes are frequently in the amount of $100 million or more, with minimum amounts of $1 million.

 For investors, the primary purpose of the money markets is to provide for liquid investments that can be used  to invest short-term funds.  For issuers such as banks, finance companies, and large corporations, money markets provide a source of low-cost funds that are constantly rolled over. This means that new securities are issued as old securities mature, in order to become a permanent part of their funding.

  The securities that are traded on the money-market fall into two main categories, and these are explored on

the next page...

This is a primary market transaction as the shares are newly issued and the proceeds go to the issuer.

  Examination – Page 1 of 4  

   1. An individual has purchased 1,000 shares of the newly issued common stock of XYZ company, with XYZcorporation receiving the proceeds of the sale. Is the transaction:

a) A primary market transaction  b) A secondary market transaction  c) Could be either of the above  

  2. The bank/dealer market in foreign exchange is an example of which type of market?

a) A physical marketplace  b) An exchange  c) An OTC Market  

  3. The major provider of investment funds to the capital markets are:

a) Banks  b) Brokers  c) Central Banks  d) Individuals  

  

 4. The regulation of domestic financial markets is exclusively a responsibility of the country's central bank.

a) True  b) False  

  5. Which of the following statements is false?

a) A dealer buys and sells securities for his own account.  b) A broker buys and sells securities for his own account  c) A broker transmits market information to his clients and earns a commission on any trades done.  

  6. Which of the following is not a market for raising or investing funds?

a) Money Market  b) Bond Market  c) Equity Market  d) Derivatives Market

 7. Corporations with weak credit ratings can borrow money by issuing which of the following securities?

a) High Grade Bondsb) Commercial Paperc) High Yield Bondsd) Banker's Acceptances

8. Which of the following instruments is a discount instrument?

a) Commercial Paperb) Certificates of Depositc) Fed Fundsd) Repurchase Agreements

9. A forward contract is most similar to which of the following products?

a) An optionb) A futures contractc) A swap

A futures contract is essentially the exchange-traded equivalent of a forward contract, which is an OTC product. An option is very different from a forward in that the former is the right to buy or sell, while the latter is the obligation to buy or sell. A swap has multiple settlements whereas a forward has a single settlement.  

  

10. Which of the following products requires the buyer to pay a premium?

a) A forward contractb) A futures contractc) An optiond) A swap