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Monetary and Financial System

Modules: 03_ Financial System
Review Questions

Q1. For each of the following financial transaction indicate whether it involves direct finance or
indirect finance by writing in the space provided a D for direct finance and an I for indirect finance.

SL Issues Answer
1 IFIC Bank issues commercial paper to T & T. I
2 You buy a share of a mutual fund. I
3 You buy a life insurance policy. I
4 You buy a share of a company. D
5 You borrow TK.1000 from your father. D
6 You obtain a TK. 50,000 mortgage from DBHL. I
7 You buy a govt. savings bond. I
8 SQUARE sells a share of its stock to APEX. D
9 You take out a car loan from a NBFI I
10 T & T issues commercial paper to Petro Bangla D
Answer with explanation:

1. I - This is an example of indirect finance as the transaction involves the use of a financial intermediary
(IFIC Bank) between the borrower (T&T) and the ultimate lender (savers or investors who have
provided funds to IFIC Bank).
2. I - Buying a share of a mutual fund can be considered a form of indirect financing. Indirect financing
refers to a situation in which a borrower obtains funds through an intermediary or middleman, such
as a bank or financial institution. In the case of a mutual fund, the mutual fund company pools money
from many investors and uses it to purchase a portfolio of assets, such as stocks, bonds, or other
securities. When an investor buys a share of a mutual fund, they are effectively lending money to the
mutual fund company, which in turn invests the money in the underlying assets. Therefore, buying a
share of a mutual fund can be considered a form of indirect financing since the investor is providing
funds to the mutual fund company, which then uses the funds to invest in a portfolio of assets.
3. I - This is an example of indirect finance as the life insurance company acts as a financial intermediary
between the policyholder (ultimate lender) and the borrower who will receive the funds from the life
insurance company.
4. D - This is an example of direct finance as you are buying a share of a company directly, which
means that your funds are going directly to the company and then to the borrowers who have
received financing from the company.
5. D - This is an example of direct finance as you are borrowing money directly from your father, who
is the ultimate lender.
6. I - This is an example of indirect finance as you are obtaining a mortgage from DBHL, which is acting
as a financial intermediary between you (the borrower) and the ultimate lender (savers or investors
who have provided funds to DBHL).
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7. I - Buying a government savings bond can be considered a form of indirect financing. Indirect
financing refers to a situation in which a borrower obtains funds through an intermediary or
middleman, such as a bank or financial institution. In the case of a government savings bond, the
government issues the bond to the investor, who is effectively lending money to the government.
However, the investor does not directly provide the funds to the government, but rather purchases
the bond through an intermediary, such as a bank or broker.
8. D - This is an example of direct finance as APEX is buying a share of SQUARE's stock directly,
which means that APEX's funds are going directly to SQUARE and then to the borrowers who have
received financing from SQUARE.
9. I - This is an example of indirect finance as the NBFI (financial intermediary) is providing the car loan
to you (the borrower) on behalf of the ultimate lender (savers or investors who have provided funds
to the NBFI).
10. D-Based on the information provided, it appears that T&T is issuing commercial paper to Petro
Bangla, which suggests that this is a form of direct financing. Direct financing refers to a situation in
which a borrower obtains funds directly from a lender, without the involvement of any intermediary
or middleman. In this case, T&T is obtaining funds directly from Petro Bangla by issuing commercial
paper to them.

Q Multiple Choice Question

1. A financial system is concerned with mobilization of fund from:
a) Banker to Borrower
b) Depositor to Banker
c) Saver to Borrower
d) Saver to Lender

The correct answer is c) Saver to Borrower.

Explanation: A financial system facilitates the transfer of funds from those who have excess funds
(savers) to those who need funds (borrowers).

2. The equity gap of your company has been financed by a commercial bank by
purchasing the shares. This is an example of:
a) indirect Finance
b) Direct Finance
c) Direct Financial h1strument
d) Both(a)and(c)

The correct answer is d) both (a) and (c).

Explanation: Direct finance involves the flow of funds directly from savers to borrowers, while direct
financial instruments are securities that represent a direct claim on the underlying asset. In this case,
the commercial bank is purchasing shares in the company, which is a direct financial instrument.

3. indirect finance refers to flow of savings

a) from savers to entrepreneurs
b) from ultimate lenders to ultimate borrowers
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c) from depositors to financial intermediaries

d) from providers to users of funds via agents

The correct answer is c) from depositors to financial intermediaries.

Explanation: Indirect finance refers to the flow of funds from savers to borrowers through financial
intermediaries like banks and other financial institutions.

4. Financial intermediation is done by -

a) Brokers and Jobbers
b) Mutual Funds
c) Central Bank
d) None of the above

The correct answer is b) Mutual Funds.

Explanation: Financial intermediation involves the process of mobilizing funds from savers and
channeling them to borrowers. Brokers and jobbers are involved in trading of securities, while central
banks are responsible for monetary policy and regulating the banking system.

5. Who practices direct mode of finance?

a) Mutual Fund
b) Bond Market
c) Stock Market
d) All of the above
e) Only (b) and (c)

The correct answer is e) only (b) and (c).

Explanation: Direct mode of finance involves the flow of funds directly from savers to borrowers
through financial instruments like bonds and stocks. Mutual funds pool funds from investors to invest
in various securities, and therefore, do not practice direct mode of finance.

6. Bangladesh Govt. asks banks to offer subsidized credit to farmers and exporters and banks
are complying it. It is a/an-
a) Inte1mediation function
b) Credit function
c) Policy function
d) Social function
e) All of the above

The correct answer is c) Policy function.

Explanation: The government asking banks to offer subsidized credit to farmers and exporters is an
example of a policy function.

7. Which one of the following is a direct financial instrument

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a) Savings Deposit
b) Deposit Pension Scheme
c) Share of Companies
d) Shares of financial institutions
e) Both (c) and (d)

The correct answer is c) Share of Companies.

Explanation: Shares of companies represent a direct claim on the underlying assets and are
therefore, direct financial instruments.

8. Which one of the following is not included under financial superstructure

a) Regulatory system
b) Financial institutions
c) Financial instruments
d) Leasing companies
e) Merchant banks

The correct answer is d) Leasing companies.

Explanation: Leasing companies are a type of financial institution and are included under financial
superstructure.

9. Which of the following is not a feature of rudimentary finance?

a) Absence of an any of financial instrument
b) No financial instrument other than money
c) All economic units are forced to be balanced units
d) All economic units can invest more than their savings
e) It ends up with low levels of savings ai1d investments.

The correct answer is d) All economic units can invest more than their savings.

Explanation: Rudimentary finance refers to a basic financial system that is characterized by a limited
range of financial instruments and a lack of financial institutions. In such a system, all economic units
are forced to be balanced units, meaning they cannot invest more than they save.

10. In a financial intermediation process, the ultimate lender is:

a) Banks
b) Depositors
c) Shareholders
d) Central Bank

The correct answer is b) Depositors.

Explanation: In a financial intermediation process, banks act as financial intermediaries by

mobilizing funds from depositors and channeling them to borrowers. Therefore, the ultimate lender
in this process is the depositor.

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3. Name the nature of following financial instruments (whether Direct or Indirect):

Sl Financial Instruments Answer

i) Mutual Fund Indirect finance
ii) Debenture Direct finance
iii) Certificate of Deposit Indirect finance
iv) Bank Loan Indirect finance
v) Prize Bond Indirect finance
vi) Currency Notes and Coins Direct finance
vii) Bill of Exchange Drawn on importer Indirect finance

viii) Treasury Bill Indirect finance

ix) Cheque Direct finance
x) Lottery Slip Indirect finance
Answer with explanation:

i) Mutual Fund - Indirect finance. Mutual funds pool money from multiple investors and invest in a diversified
portfolio of securities, making it an indirect way of investing in the financial market.
ii) Debenture - Direct finance. Debentures are a type of debt instrument issued by companies to borrow
money from the public. It is a direct way for companies to raise money from investors.
iii) Certificate of Deposit - Indirect finance. A certificate of deposit is a financial instrument that represents
a time deposit with a bank. It is a way for banks to raise money from the public by offering a fixed rate of
interest.
iv) Bank Loan - Indirect finance. Because Bank is an intermediator.
v) Prize Bond - Indirect finance. Prize bonds are a type of lottery bond issued by the government. It is an
indirect way for the government to raise money from the public.
vi) Currency Notes and Coins - Direct finance. Currency notes and coins are physical forms of money that
are issued by the government and directly used for transactions.
vii) Bill of Exchange Drawn on importer - Indirect finance. A bill of exchange is a financial instrument that
represents a debt owed by one party to another. In this case, it is an indirect way for an exporter to obtain
financing by selling the bill to a financial intermediary who then sells it to the importer.
viii) Treasury Bill - Indirect finance. Treasury bills are a type of short-term debt security issued by the
government to borrow money from the public. It is an indirect way for the government to raise money from
investors.
ix) Cheque - Direct finance. A cheque is a type of direct finance where the payer directly pays the payee by
writing a cheque on their account.
x) Lottery Slip - Indirect finance. Lottery slips are a type of lottery bond issued by the government. It is an
indirect way for the government to raise money from the public.

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Q4. Indicate whether the following terms belong to financial infrastructure or financial
superstructure;

Sl no Terms Answer
i) Bank Company Act - 1991 Financial Infrastructure
ii) Currency Notes Financial Infrastructure
iii) Mutual Fund Financial Superstructure
iv) Bangladesh Shilpa Bank Financial Infrastructure
v) IAS - 30 for Bank Accounting Financial Superstructure
vi) Bangladesh Bank Circulars Financial Infrastructure
vii) Banking Financial Institutions Financial Infrastructure
viii) OTC market Financial Superstructure
ix) Bill of Exchange Financial Superstructure
x) Janata Bank General Banking Manuals Financial Infrastructure

Explanations: Financial infrastructure and financial superstructure are two important concepts in the field of
finance. Here's an overview of what these terms mean:

 Financial infrastructure: This term refers to the basic systems, institutions, and services that
underpin financial transactions and activities. Examples of financial infrastructure include payment
and settlement systems, financial market infrastructure, regulatory frameworks, and financial
intermediaries such as banks and other financial institutions. Financial infrastructure provides the
foundation for financial activities and supports economic growth and development.
 Financial superstructure: This term refers to the more advanced and complex financial
instruments, markets, and activities that build upon the foundation of financial infrastructure.
Examples of financial superstructure include derivatives, securitization, structured finance, and other
advanced financial products and services. Financial superstructure can provide greater opportunities
for risk management, investment, and financing, but it also requires more sophisticated knowledge,
expertise, and regulation.

3. Put the following financial instruments in the appropriates box or boxes below:

 Treasury Bill
 Mutual Fund
 Common Stock
 Inter Bank Loan
 Cheque
 6 Months Fixed Deposits
 Working Capital Loan
 Syndicated Terms Loan
 Inter Bank Deposit
 Corporate Bond

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Answer:

Issues Direct Financial Instruments: Indirect Financial Instruments:

 Cheque  Inter Bank Loan
 6 Months Fixed Deposits
Banking Market  Working Capital Loan
 Syndicated Terms Loan
 Inter Bank Deposit

 Treasury Bill  Mutual Fund

 Corporate Bond
Security Market  Common Stock

4. Please look at the following financial transactions and decide whether they fit in
(a) the money market or the capital market,
(b) the primary or the secondary market, and
(c) the debt or equity market.
a. You visit a local bank today and secure a three-year loan to finance the purchase of a new car
and some furniture.
MM/CM PM/SM DM/EM
b. You purchase a new Treasury bill for Tk.800 through the Central bank in a neighboring city for
delivery today.
MM/CM PM/SM DM/EM
c. You have purchased 100 shares of a company's stock through a phone call to your broker, who
is linked to a major stock exchange.
MM/C PM/SM DM/EM
d. You contact a local bank and purchase a Tk.15,000 two-year CD bearing an interest rate on
which you and the bank's officer have agreed.
MM/CM PM/SM DM/EM
e. The corporation you represent needs to raise Tk.25 million immediately to purchase raw
materials. You contact a securities dealer who agrees to advertise the sale of Tk. 25 million in
commercial paper and maturing in 90 days.
MM/C PM/SM DM/E
Answer :
a. Money market, Primary market, Debt market
b. Money market, Secondary market, Debt market
c. Capital market, Secondary market, Equity market
d. Money market, Primary market, Debt market
e. Money market, Primary market, Debt market

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5. What functions of the financial system do the following transactions illustrate or

represent?

a) Mamun purchases health and accident insurance policies through the company
where he works.
b) Sharrnin uses her credit card to purchase wallpaper for a home remodeling project.
c) Dynamic Corporation places some of its current earnings in a bank CD, anticipating a
need for funds in about a year to build a new warehouse.
d) The Treasury sells new bonds in the open market to cover a large deficit.
e) Mr. and Mrs. Habib hope to put their three young children through college
someday. Accordingly, they begin buying Govt. Savings bonds.
f) Needing immediate spending power, a Corporation sells its holdings of Beximco bonds
through a security broker.
g) Banks have been asked to repo1t central bank all suspicious transactions in order to
prevent money launder.
Answer :
a) The transaction represents the function of risk management in the financial system. By purchasing
health and accident insurance policies, Mamun is transferring the risk of potential future medical
expenses to the insurance company.
b) The transaction represents the function of payment and credit in the financial system. Sharrnin is
using her credit card to make a purchase, deferring the payment until a later date when she receives
her credit card statement.
c) The transaction represents the function of savings and investment in the financial system. Dynamic
Corporation is saving its current earnings by placing them in a bank CD, anticipating a future need for
funds for a specific purpose.
d) The transaction represents the function of government finance in the financial system. The Treasury
is selling bonds in the open market to raise funds to cover a large deficit, which is a form of government
borrowing.
e) The transaction represents the function of savings and investment in the financial system. Mr. and
Mrs. Habib are buying Govt. Savings bonds as a form of investment for the purpose of future
education expenses.
f) The transaction represents the function of liquidity and investment in the financial system. The
Corporation is selling its holdings of Beximco bonds to raise cash quickly, thereby converting an
investment into cash.
g) The transaction represents the function of regulation and supervision in the financial system. The
banks are being asked to report suspicious transactions to the central bank to prevent money
laundering and ensure compliance with regulations.

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