Worksheet to The Five Financial Markets

I. Choose appropriate words for the blanks to complete the sentences.

#1. Channeling ______between lenders and borrowers is an important ______of financial markets.

#2. Total risk in the economy cannot be ______, but individual risk can be reduced by ______the risk over many individuals.

#3. Even though ______do not know how to make products, they can still buy stock in companies that ______such products.

#4. Corporate stock allows the separation of ______and ______of companies.

#5. The market for bank loans is sometimes called the ______market.

#6. The five financial markets are stock, ______, money, ______, and options markets.

#7. When financial markets destabilize, the whole ______becomes unstable.

#8. Corporate stock is an ______claim on the company.

#9. Cash ______are also called distributed profits.

#10 Another name for profits is ______.

#11. The bond market trades in ______claims.

#12. When interest on bonds is paid ______each year, we say that interest is paid semi-annually.

#13. The bond market trades in debt having ______over one year.

#14. The real wealth effect refers to changes in the value of stocks and bonds affect the wealth and spending behavior of ______.

#15. Business and consumers use the ______market as an indicator of future movements in the economy.

#16. When business is unhappy with its future outlook for the economy, we say that business is ______.

#17. Movement in bond prices can affect long term ______rates, which in turn, affects the ______decisions of consumers and business.

#18. Higher long term interest rates ______long term spending in the economy.

#19. ______interest rates can affect long term interest rates, and thus long term spending in the economy.

#20. Monetary policy, as carried out by the government, is undertaken in the ______market.

  1. Answer each question using one sentence and good English

#1. Why were futures and options markets created?

#2. How can a corn farmer hedge his corn crop?

#3. What is the definition of a call option on stock XYZ.

#4. How can competition between speculators keep financial markets stable?

#5. How can we define a risk averter?

#6. How do we define an efficient market?

  1. Which word does not belong in the group?

#1. stock, bonds, dividends, futures, options

#2. stockholders, managers, investors, consumption, directors

#3. bonds, option, interest rates, maturity, coupon

#4. futures, options, risk, ownership claim, hedge

#5. return, yield, liquidity premium, certificate, risk premium

#6. risk averter, finance, raise money, issue stock, capital gain

#7. efficiency, risk, lowest cost, breakeven, highest profit,

#8. inside information, illegal, securities laws, criminal, long run

#9. buyer, efficiency, seller, supply, demand,

#10. corporation, output, company, enterprise, business

  1. Use the reading to answer (orally) each question below

#1. What are the three functions of financial markets?

#2. Why is it difficult to consistently make large speculative profits in efficient markets?

#3. How does the stock market affect the economy?

#4. How does the bond market affect the economy?

#5. Use an example to explain the concept of risk aversion.