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Chapter 2 Questions

Q1. What are the three basic ways financial capital is channeled from “Net Savers” to “Productive Project Investors”? Q2. What are the four (4) basic markets for financial assets (securities)? Q3. What is the difference between a “spot” market versus a “futures” market?

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Chapter 2 Questions

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  1. Q1. What are the three basic ways financial capital is channeled from “Net Savers” to “Productive Project Investors”? Q2. What are the four (4) basic markets for financial assets (securities)? Q3. What is the difference between a “spot” market versus a “futures” market? Q4. What is the difference between a “money market” versus a “capital market”? Q5. What is the difference between a “primary market” versus a “secondary market”? Chapter 2 Questions

  2. Q1. What are the three basic ways financial capital is channeled from “Net Savers” to “Productive Project Investors”? A1. -Direct Transfers: Net Savers purchase financial securities (aka financial instruments) directly from Productive Project Investors. -Indirectly through Financial Intermediary: Net Savers purchase securities issued by F.I.s, and F.I.s purchase securities issued by Productive Project Investors. -Investment Banks purchase/underwrite securities issued by Productive Project Investors, then sell those securities to F.I.s and/or Net Savers. Q2. What are the four (4) basic markets for financial assets (securities)? Q3. What is the difference between a “spot” market versus a “futures” market? Q4. What is the difference between a “money market” versus a “capital market”? Q5. What is the difference between a “primary market” versus a “secondary market”? Chapter 2 Questions

  3. Q1. What are the three basic ways financial capital is channeled from “Net Savers” to “Productive Project Investors”? A1. -Direct Transfers: Net Savers purchase financial securities (aka financial instruments) directly from Productive Project Investors. -Indirectly through Financial Intermediary: Net Savers purchase securities issued by F.I.s, and F.I.s purchase securities issued by Productive Project Investors. -Investment Banks purchase/underwrite securities issued by Productive Project Investors, then sell those securities to F.I.s and/or Net Savers. Q2. What are the four (4) basic markets for financial assets (securities)? A2. 1. Spot Markets and Futures Markets; 2. Money Markets and Capital Markets; 3. Primary Markets and Secondary Markets; 4. Private Markets and Public Markets. Q3. What is the difference between a “spot” market versus a “futures” market? Q4. What is the difference between a “money market” versus a “capital market”? Q5. What is the difference between a “primary market” versus a “secondary market”? Chapter 2 Questions

  4. Q1. What are the three basic ways financial capital is channeled from “Net Savers” to “Productive Project Investors”? A1. -Direct Transfers: Net Savers purchase financial securities (aka financial instruments) directly from Productive Project Investors. -Indirectly through Financial Intermediary: Net Savers purchase securities issued by F.I.s, and F.I.s purchase securities issued by Productive Project Investors. -Investment Banks purchase/underwrite securities issued by Productive Project Investors, then sell those securities to F.I.s and/or Net Savers. Q2. What are the four (4) basic markets for financial assets (securities)? A2. 1. Spot Markets and Futures Markets; 2. Money Markets and Capital Markets; 3. Primary Markets and Secondary Markets; 4. Private Markets and Public Markets. Q3. What is the difference between a “spot” market versus a “futures” market? A3. A “spot” market is for current “on-the-spot” transactions (i.e., “today”); a “futures” market is for transactions to occur in the future. Q4. What is the difference between a “money market” versus a “capital market”? Q5. What is the difference between a “primary market” versus a “secondary market”? Chapter 2 Questions

  5. Q1. What are the three basic ways financial capital is channeled from “Net Savers” to “Productive Project Investors”? A1. -Direct Transfers: Net Savers purchase financial securities (aka financial instruments) directly from Productive Project Investors. -Indirectly through Financial Intermediary: Net Savers purchase securities issued by F.I.s, and F.I.s purchase securities issued by Productive Project Investors. -Investment Banks purchase/underwrite securities issued by Productive Project Investors, then sell those securities to F.I.s and/or Net Savers. Q2. What are the four (4) basic markets for financial assets (securities)? A2. 1. Spot Markets and Futures Markets; 2. Money Markets and Capital Markets; 3. Primary Markets and Secondary Markets; 4. Private Markets and Public Markets. Q3. What is the difference between a “spot” market versus a “futures” market? A3. A “spot” market is for current “on-the-spot” transactions (i.e., “today”); a “futures” market is for transactions to occur in the future. Q4. What is the difference between a “money market” versus a “capital market”? A4. A “money” market is places of exchange for debt instruments with an original maturity of less than one year. A “capital” market is places of exchange for debt instruments with an original maturity of more than one year and also the market for equity securities (common stocks and preferred stocks). Q5. What is the difference between a “primary market” versus a “secondary market”? Chapter 2 Questions

  6. Q1. What are the three basic ways financial capital is channeled from “Net Savers” to “Productive Project Investors”? A1. -Direct Transfers: Net Savers purchase financial securities (aka financial instruments) directly from Productive Project Investors. -Indirectly through Financial Intermediary: Net Savers purchase securities issued by F.I.s, and F.I.s purchase securities issued by Productive Project Investors. -Investment Banks purchase/underwrite securities issued by Productive Project Investors, then sell those securities to F.I.s and/or Net Savers. Q2. What are the four (4) basic markets for financial assets (securities)? A2. 1. Spot Markets and Futures Markets; 2. Money Markets and Capital Markets; 3. Primary Markets and Secondary Markets; 4. Private Markets and Public Markets. Q3. What is the difference between a “spot” market versus a “futures” market? A3. A “spot” market is for current “on-the-spot” transactions (i.e., “today”); a “futures” market is for transactions to occur in the future. Q4. What is the difference between a “money market” versus a “capital market”? A4. A “money” market is places of exchange for debt instruments with an original maturity of less than one year. A “capital” market is places of exchange for debt instruments with an original maturity of more than one year and also the market for equity securities (common stocks and preferred stocks). Q5. What is the difference between a “primary market” versus a “secondary market”? A5. A “primary” market is the market where securities are sold by the issuing Productive Project Investor and the P.P.I receives cash. A “secondary” market is the market for securities which have been previously sold in the Primary Market can be bought and sold multiple times. Chapter 2 Questions

  7. Q6. What is the difference between a “private market” and a “public market”? Q7. How did the instructor categorize the six (6) largest kinds of financial institutions? Q8. What is the difference between a Commercial Bank and an Investment Bank? Examples? Q9. What is the difference between a Commercial Bank and a Financial Service Corporation? Examples? Q10. What are the major kinds of Investment Companies? Chapter 2 Questions

  8. Q6. What is the difference between a “private market” and a “public market”? A6. “Private” means a total dollar amount below (about) $5 million raised from no more than (about) 40 or 50 investors. “Public” means permission has been obtained from the U.S. Securities and Exchange Commission (“S.E.C.) to raise more than (about) $5 million from more than (about) 40 or 50 investors. Q7. How did the instructor categorize the six (6) largest kinds of financial institutions? Q8. What is the difference between a Commercial Bank and an Investment Bank? Examples? Q9. What is the difference between a Commercial Bank and a Financial Service Corporation? Examples? Q10. What are the major kinds of Investment Companies? Chapter 2 Questions

  9. Q6. What is the difference between a “private market” and a “public market”? A6. “Private” means a total dollar amount below (about) $5 million raised from no more than (about) 40 or 50 investors. “Public” means permission has been obtained from the U.S. Securities and Exchange Commission (“S.E.C.) to raise more than (about) $5 million from more than (about) 40 or 50 investors. Q7. How did the instructor categorize the six (6) largest kinds of financial institutions? A7. 1. Depository Institutions (e.g., Commercial Banks, Credit Unions, S&Ls) ; 2. Contractual Savings Institutions (e.g., Insurance Companies, Pension Funds); 3. Investment Intermediaries (e.g., Mutual Funds, private equity funds, finance companies); 4. Investment Banks (as advisors, underwriters and brokers); 5. Financial Service Corporations (combinations of all of the above under one holding corporation, like JP Morgan Chase; Bank of America, Wells Fargo Corp.); 6. Central Banks (e.g., Federal Reserve System). Q8. What is the difference between a Commercial Bank and an Investment Bank? Examples? Q9. What is the difference between a Commercial Bank and a Financial Service Corporation? Examples? Q10. What are the major kinds of Investment Companies? Chapter 2 Questions

  10. Q6. What is the difference between a “private market” and a “public market”? A6. “Private” means a total dollar amount below (about) $5 million raised from no more than (about) 40 or 50 investors. “Public” means permission has been obtained from the U.S. Securities and Exchange Commission (“S.E.C.) to raise more than (about) $5 million from more than (about) 40 or 50 investors. Q7. How did the instructor categorize the six (6) largest kinds of financial institutions? A7. 1. Depository Institutions (e.g., Commercial Banks, Credit Unions, S&Ls) ; 2. Contractual Savings Institutions (e.g., Insurance Companies, Pension Funds); 3. Investment Intermediaries (e.g., Mutual Funds, private equity funds, finance companies); 4. Investment Banks (as advisors, underwriters and brokers); 5. Financial Service Corporations (combinations of all of the above under one holding corporation, like JP Morgan Chase; Bank of America, Wells Fargo Corp.); 6. Central Banks (e.g., Federal Reserve System). Q8. What is the difference between a Commercial Bank and an Investment Bank? Examples? A8. A Commercial Bank essentially makes loans to businesses and owns a portfolio of government securities financed with deposit liabilities and other capital. An Investment Bank essentially advises corporations and governments about what kind of securities to sell; acts as an underwriter to purchase and re-sell the offerings of securities by corporations and governments; and operates wholesale and/or retail brokerage operations. [Bank of Oklahoma and Goldman Sachs]. Q9. What is the difference between a Commercial Bank and a Financial Service Corporation? Examples? Q10. What are the major kinds of Investment Companies? Chapter 2 Questions

  11. Q6. What is the difference between a “private market” and a “public market”? A6. “Private” means a total dollar amount below (about) $5 million raised from no more than (about) 40 or 50 investors. “Public” means permission has been obtained from the U.S. Securities and Exchange Commission (“S.E.C.) to raise more than (about) $5 million from more than (about) 40 or 50 investors. Q7. How did the instructor categorize the six (6) largest kinds of financial institutions? A7. 1. Depository Institutions (e.g., Commercial Banks, Credit Unions, S&Ls) ; 2. Contractual Savings Institutions (e.g., Insurance Companies, Pension Funds); 3. Investment Intermediaries (e.g., Mutual Funds, private equity funds, finance companies); 4. Investment Banks (as advisors, underwriters and brokers); 5. Financial Service Corporations (combinations of all of the above under one holding corporation, like JP Morgan Chase; Bank of America, Wells Fargo Corp.); 6. Central Banks (e.g., Federal Reserve System). Q8. What is the difference between a Commercial Bank and an Investment Bank? Examples? A8. A Commercial Bank essentially makes loans to businesses and owns a portfolio of government securities financed with deposit liabilities and other capital. An Investment Bank essentially advises corporations and governments about what kind of securities to sell; acts as an underwriter to purchase and re-sell the offerings of securities by corporations and governments; and operates wholesale and/or retail brokerage operations. [Bank of Oklahoma and Goldman Sachs]. Q9. What is the difference between a Commercial Bank and a Financial Service Corporation? Examples? A9. Commercial Banks (see above); a Financial Service Corporation is a holding corporation which owns several different types of financial intermediaries (commercial bank, mutual funds, investment bank, insurance+). Q10. What are the major kinds of Investment Companies? Chapter 2 Questions

  12. Q6. What is the difference between a “private market” and a “public market”? A6. “Private” means a total dollar amount below (about) $5 million raised from no more than (about) 40 or 50 investors. “Public” means permission has been obtained from the U.S. Securities and Exchange Commission (“S.E.C.) to raise more than (about) $5 million from more than (about) 40 or 50 investors. Q7. How did the instructor categorize the six (6) largest kinds of financial institutions? A7. 1. Depository Institutions (e.g., Commercial Banks, Credit Unions, S&Ls) ; 2. Contractual Savings Institutions (e.g., Insurance Companies, Pension Funds); 3. Investment Intermediaries (e.g., Mutual Funds, private equity funds, finance companies); 4. Investment Banks (as advisors, underwriters and brokers); 5. Financial Service Corporations (combinations of all of the above under one holding corporation, like JP Morgan Chase; Bank of America, Wells Fargo Corp.); 6. Central Banks (e.g., Federal Reserve System). Q8. What is the difference between a Commercial Bank and an Investment Bank? Examples? A8. A Commercial Bank essentially makes loans to businesses and owns a portfolio of government securities financed with deposit liabilities and other capital. An Investment Bank essentially advises corporations and governments about what kind of securities to sell; acts as an underwriter to purchase and re-sell the offerings of securities by corporations and governments; and operates wholesale and/or retail brokerage operations. [Bank of Oklahoma and Goldman Sachs]. Q9. What is the difference between a Commercial Bank and a Financial Service Corporation? Examples? A9. Commercial Banks (see above); a Financial Service Corporation is a holding corporation which owns several different types of financial intermediaries (commercial bank, mutual funds, investment bank, insurance+). Q10. What are the major kinds of Investment Companies? A10. Mutual Funds, Private Equity Funds, Hedge Funds, Exchange Traded Funds. Chapter 2 Questions

  13. Q11. Which financial institution is owned by all U.S. national commercial banks but is controlled by a board that is appointed by the President of the United States? Q12. What is the largest source of external funds for most U.S. companies? Q13. What is the difference between a stock exchange (with a physical location) and the Over-The-Counter Market? Q14. What is the difference between a common stock traded in the secondary market versus the IPO market? Chapter 2 Questions

  14. Q11. Which financial institution is owned by all U.S. national commercial banks but is controlled by a board that is appointed by the President of the United States? A11. The U.S. central bank the Federal Reserve System: its 12 Independent District Banks and their boards of directors (elected by district-based Commercial Banks as stockholders and by the Board of Governors), and its Board of Governors (comprised of 7 members appointed by the POTUS). Q12. What is the largest source of external funds for most U.S. companies? Q13. What is the difference between a stock exchange (with a physical location) and the Over-The-Counter Market? Q14. What is the difference between a common stock traded in the secondary market versus the IPO market? Chapter 2 Questions

  15. Q11. Which financial institution is owned by all U.S. national commercial banks but is controlled by a board that is appointed by the President of the United States? A11. The U.S. central bank the Federal Reserve System: its 12 Independent District Banks and their boards of directors (elected by district-based Commercial Banks as stockholders and by the Board of Governors), and its Board of Governors (comprised of 7 members appointed by the POTUS). Q12. What is the largest source of external funds for most U.S. companies? A12. Loans from Commercial Banks. Q13. What is the difference between a stock exchange (with a physical location) and the Over-The-Counter Market? Q14. What is the difference between a common stock traded in the secondary market versus the IPO market? Chapter 2 Questions

  16. Q11. Which financial institution is owned by all U.S. national commercial banks but is controlled by a board that is appointed by the President of the United States? A11. The U.S. central bank the Federal Reserve System: its 12 Independent District Banks and their boards of directors (elected by district-based Commercial Banks as stockholders and by the Board of Governors), and its Board of Governors (comprised of 7 members appointed by the POTUS). Q12. What is the largest source of external funds for most U.S. companies? A12. Loans from Commercial Banks. Q13. What is the difference between a stock exchange (with a physical location) and the Over-The-Counter Market? A13. A stock exchange with a physical location is essentially a wholesale market for large value blocks of securities transactions by the members-only. The members are investment companies and investment banks trading large blocks of securities. The “Over-The Counter” Market is places of exchange where security brokers and dealers (brokers which carry inventories of securities) trade securities in large or small blocks on both a wholesale and retail basis, and usually are transacting business over telephone lines (i.e., by phone) or the internet. Q14. What is the difference between a common stock traded in the secondary market versus the IPO market? Chapter 2 Questions

  17. Q11. Which financial institution is owned by all U.S. national commercial banks but is controlled by a board that is appointed by the President of the United States? A11. The U.S. central bank the Federal Reserve System: its 12 Independent District Banks and their boards of directors (elected by district-based Commercial Banks as stockholders and by the Board of Governors), and its Board of Governors (comprised of 7 members appointed by the POTUS). Q12. What is the largest source of external funds for most U.S. companies? A12. Loans from Commercial Banks. Q13. What is the difference between a stock exchange (with a physical location) and the Over-The-Counter Market? A13. A stock exchange with a physical location is essentially a wholesale market for large value blocks of securities transactions by the members-only. The members are investment companies and investment banks trading large blocks of securities. The “Over-The Counter” Market is places of exchange where security brokers and dealers (brokers which carry inventories of securities) trade securities in large or small blocks on both a wholesale and retail basis, and usually are transacting business over telephone lines (i.e., by phone) or the internet. Q14. What is the difference between a common stock traded in the secondary market versus the IPO market? A14. An “IPO” is an “initial public offering” of securities by a corporation (usually common stock) wherein it is the first time the corporation is selling its stock on a “public” versus “private” basis, in the Primary Market. The Secondary Market (see Q/A no. 5). Chapter 2 Questions

  18. Q15. How does an investor in a common stock receive a return on their equity investment? Q16. What are the S&P 500 Index, the Dow Jones Industrial Average (“DJIA”), and the NASDAQ Composite Index? What is one important way these indices are used? Chapter 2 Questions

  19. Q15. How does an investor in a common stock receive a return on their equity investment? A15. An investor in common stock pays a price as agreed between that investor and whomever is selling the stock in hopes of receiving in the future (a) cash dividend payments per share (i.e., dividend income), plus (b) an increase in the market price of the common stock which the investor can realize in cash in the future by selling the common stock (i.e., capital gains income). Q16. What are the S&P 500 Index, the Dow Jones Industrial Average (“DJIA”), and the NASDAQ Composite Index? What is one important way these indices are used? Chapter 2 Questions

  20. Q15. How does an investor in a common stock receive a return on their equity investment? A15. An investor in common stock pays a price as agreed between that investor and whomever is selling the stock in hopes of receiving in the future (a) cash dividend payments per share (i.e., dividend income), plus (b) an increase in the market price of the common stock which the investor can realize in cash in the future by selling the common stock (i.e., capital gains income). Q16. What are the S&P 500 Index, the Dow Jones Industrial Average (“DJIA”), and the NASDAQ Composite Index? What is one important way these indices are used? A16. S&P 500 Index: an industry-broad portfolio of 500 of the largest, widely-held, U.S. corporations the common stock of which is publicly-traded. Managed by Standard & Poor’s Corporation. This Index reflects the average stock price performance for all companies in the Index. Chapter 2 Questions

  21. Q15. How does an investor in a common stock receive a return on their equity investment? A15. An investor in common stock pays a price as agreed between that investor and whomever is selling the stock in hopes of receiving in the future (a) cash dividend payments per share (i.e., dividend income), plus (b) an increase in the market price of the common stock which the investor can realize in cash in the future by selling the common stock (i.e., capital gains income). Q16. What are the S&P 500 Index, the Dow Jones Industrial Average (“DJIA”), and the NASDAQ Composite Index? What is one important way these indices are used? A16. S&P 500 Index: an industry-broad portfolio of 500 of the largest, widely-held, U.S. corporations the common stock of which is publicly-traded. Managed by Standard & Poor’s Corporation. This Index reflects the average stock price performance for all companies in the Index. Dow Jones Industrial Average is a small portfolio of 30 very large and very well-known corporations’ common stock This Index reflects the average stock price performance for these very-large “blue chip” companies with the implication being their performance as a group is one kind of indicator as to how the stock market is doing in general (even though it is not a representative sample from a statistical perspective). NASDAQ Composite Index: a portfolio of approximately 3,200 technology-oriented corporations’ common stocks. The price performance of these three indices tend to track together over time primarily because professional investors own the majority of common stocks outstanding. These indices are used primarily to gain a sense of how the average large public company’s common stock value is doing, the implication being that if the value is increasing, then professional investors believe corporations financial condition is expected to improve in the future. Also, stock price movements influence consumer confidence and consumer spending (70% of Gross Domestic Product, one key measure of an economy’s performance). Chapter 2 Questions

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