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(CFA Level 1) Market Organization & Structure Questions and Answers Fully Solved
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(CFA Level 1) Market Organization &Structure
3 Main Functions of the financial system: - answer1. Allow entities to save borrow
money, raise equity capital, manage risks, trade assets currently or in the future, and
trade based on their estimate of asset value
2. Determine the returns (i.e., interest rates) that equate the total supply of savings with
the total demand for borrowing
3. Allocate capital to its most efficient uses
Purposes of Financial System: Savings - answer Save & expect a return that
compensate for risk and use. Firms save some funds for future use to fund future
expend
Purposes of Financial System: Borrowing - answer Individuals and firms borrow for a
variety of reasons
Purposes of Financial System: Issuing Equity - answerRaising Equity by issuing equity.
Capital Providers will share in any FCF.
Purposes of Financial System: Risk Management - answer-Changing interest rates,
currency values, commodities values, and defaults on debt all provide risk. One could
hedge against these risk.
Purposes of Financial System: Exchange assets - answer-i.e. exchange USD for EUR
Purposes of Financial System: utilizing Information - answer-Earning a return based on
the information they have
Equilibrium Interest rate - answerThe rate at which the amount individuals, businesses
and governments desire to lend
Financial Assets - answer-Securities (stocks & bonds)
-Derivatives contracts
-Currencies
Real assets - answer-Real estate,
-Equipment
-Commodities
-Other physical assets
Debt Securities - answerPromised to repay borrowed funds
, Public (publicly traded) securities - answertraded on exchanges or through securities
dealers and are subject to regulatory oversight
Private Securities - answer-Not traded in public market
-Often illiquid and not subject to regulation
Derivative Contracts - answer-Values depend on the values of other assets
Financial derivative contracts - answer-Based on equities, equity indexes, debt, debt
indexes, or other financial contracts
Physical derivative contracts - answerDerive their value from the values of physical
assets such as gold, oil, and wheat
Spot Markets - answerMarkets for immediate delivery. Contracts for the future delivery
of physical and financial assets include forwards, futures and option
Primary Market - answerThe market for newly issued securities
Secondary Market - answerSubsequent sales of securities
Money market - answer-Markets for debt securities with maturities of one year or less
Capital Markets - answerRefer to markets for longer-term debt securities and equity
securities that have no specific maturity date
Traditional investment markets - answer-Refer to those for Debt & Equity
Alternative Markets - answer-Refer to those for hedge funds, commodities, real estate,
collectibles, gemstones, leases, and equipment,
-usually more difficult to value, require investor due diligence, and therefore often sell at
a discount
issue - answerinitial sale of a security when the security is sold to the public
Fixed income securities - answerrefer to debt securities that are promises to repay
borrowed money in the future
Short Term Fixed income Securities - answerGenerally have a maturity of less than one
or two years
Long Term term maturities - answerLonger than 5 to 10 years
-Bonds are long term
-note are typically intermediate
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