TOPIC 1: OVERVIEW OF FINANCIAL SYSTEMSf

TEST 1
SECTION1: Match the terms with suitable explanations

Terms Explanations
1. Interest rate a. Financial institutions that accept deposits and make loans
2. Risk sharing b. A financial market in which longer-term debt and equity
instruments are traded
3. Stock c. A debt security that promises to make payments periodically for a
specified period of time.
4. Lender-savers d. The market in which exchange rates are determined.
5. Bond e. Institutions (such as banks, insurance companies, mutual funds,
pension funds, and finance companies) that borrow funds from
people who have saved and then make loans to others.
6. Financial intermediation f. The process of indirect finance whereby financial intermediaries
link lender-savers and borrower-spenders.
7. Primary market g. Markets in which funds are transferred from people who have a
surplus of available funds to people who have a shortage of
available funds.
8. Banks h. The cost of borrowing or the price paid for the rental of funds
9. Secondary market i. A financial market in which new issues of a security are sold to
initial buyers.
10. Money markets j. A secondary market in which dealers at different locations who
have an inventory of securities stand ready to buy and sell
securities to anyone who comes to them and is willing to accept
their prices.
11. Borrower-spenders k. The process by which financial intermediaries create and sell
assets with risk characteristics that people are comfortable with
and then use the funds they acquire by selling these assets to
purchase other assets that may have far more risk.
12. Foreign exchange market l. A financial market in which securities that have previously been
issued can be resold.
m. A claim on the borrower’s future income that is sold by the
13. Capital market borrower to the lender.
14. Financial markets n. A security that is a claim on the earnings and assets of a
corporation
15. Financial instrument o. Financial markets where only short-term debt instruments are
traded.
16. Over-the-counter market p. Non-profit institutions mutually organized and owned by their
members (depositors). Their primary objective is to satisfy the
depository and lending needs of their members, who have to
belong to a particular group
17. Credit unions q. The units who have saved can lend funds.
18. Wholesale market
19. Risk
20. Financial intermediaries
r. The units with a shortage of funds must borrow funds to finance
their spending
s. Market where extremely large transactions occur, as for money
market funds or foreign currency
t. The degree of uncertainty associated with the return on an asset

SECTION 2: Fill in the gaps using the words below

funds payment structural secondary adjust

insurance functions mechanisms entities debt
organized exchanges primary equity theft or fire capital
depository over-the-counter transfer money parameters
contractual savings investment

2.1. The main (1)______________ of financial systems are to:

• provide the (2) ______________ by which funds can be transferred from units in surplus to units
with a shortage of (3) ______________ in order to directly or indirectly facilitate lending and
borrowing
• enable wealth holders to (4) ______________ the composition of their portfolios
• provide (5) ______________ mechanisms, e.g. cheques, debit cards and credit cards
• provide mechanisms for risk (6) ______________, e.g. insurance contracts allow a party such as a
firm or household to transfer the risk of loss of wealth due to (7) ______________ to another party
such as an (8) ______________ company.

2.2. From a (9) ______________ point of view a financial system can be seen in terms of the (10)
______________ that compose the system. A financial system comprises financial markets, securities
and financial intermediaries.
- Financial markets can be classified on the basis of several (11) ______________: the nature of
the financial securities traded ((12) ______________ versus (13) ______________ markets),
forms of organization ((14) ______________ versus (15) ______________ markets), maturity
of the financial instruments traded ((16) ______________ markets versus (17)
______________ markets).
- Financial securities traded in financial markets are (18) ______________ instruments (bonds,
notes and bills), and (19) ______________ instruments (common and preferred stocks).
- Financial intermediaries comprise (20) ______________ institutions (commercial banks,
savings and loan associations and credit unions), (21) ______________ institutions (insurance
companies and pension funds), and (22) ______________ intermediaries (mutual funds,
finance companies, investment banks and securities firms).

SECTION 3: Reading comprehension

Why stock markets matter for you
By BBC News Online's Stefan Armbruster
The saying goes: "Don't invest what you can't afford to lose".
But as stock markets fall, it is not just people who own shares who lose out. When the bears replace
the bulls, in other words, when the market falls, it affects almost everyone because stocks and shares
have become an integral part of almost all our financial lives. But just as the stock market can go up, it
can also go down. Usually the first to react to this are the institutional investors who are involved in
the financial markets on a daily basis.
The internet boom is an example. Many personal investors felt they were burnt by the popping of the
dot.com bubble. By the time they got around to selling shares in any number of failing internet based
companies, the big City investors had already pulled out of the market. The institutional investors did
not escape unharmed either. And the hits that they took also have an indirect, but potentially serious
effect, on many people's financial health. Any pain suffered by these institutional investors impact on
the returns paid on pensions, savings accounts or the interest charged on mortgages.
For individuals with a more direct interest - say day traders attracted by the tech boom - share holdings
can be used as collateral to borrow money. But if the value and income from shares evaporate and the
bank calls in the loan, the result can be big losses or personal bankruptcy. Meanwhile pensions linked
to the stock market, like the ones being promoted by the UK government, are not immune. Unlike the
state pension which is paid out at a rates set by the government, investing in a private pension indexed
to the stock market can increase the value of the contributions dramatically, but they can also be
erased.
Your job can also depend on the markets as companies use their valuation and the issue of new shares
to borrow capital to expand. If they are unable to do this, then they have to find ways of increasing the
company's value to attract investors. The key tool they use is to cut jobs.

According to the text, are the following statements true or false?

1. Nearly everybody suffers the consequences when share prices go down.
2. Institutional investors are usually slower to sell when the market falls than personal investors.
3. The value of pensions paid by the government can go up and down with the stock market.
4. Companies can acquire new capital for expansion by issuing new shares.
5. Companies sometimes make people redundant in order to increase the company’s value (and its
share price).
SECTION 4: Write a paragraph to describe the figure below.