ACCA Financial Management (F9) Certification Practice Exam

What can be inferred about capital markets?

1. They are exclusively for government transactions

2. They are where new securities are issued

3. They only handle equity trading

4. They discourage foreign investment

The correct answer is: They are where new securities are issued

Capital markets play a crucial role in the financial system by facilitating the issuance and trading of securities. When new securities are issued, it typically takes place in the primary market, which is a key component of capital markets. This process allows companies, governments, and other entities to raise funds for various purposes, such as expansion, infrastructure development, or meeting operational needs. Investors can purchase these new securities, thereby providing the issuers with the capital they need. Understanding that capital markets are not limited to only one aspect, the issuance of new securities highlights their expansive nature. They also encompass secondary markets, where existing securities are bought and sold among investors. This dual function of capital markets, allowing for both the introduction of new securities and the trading of established ones, is essential for providing liquidity and investment opportunities. The concept that capital markets are exclusively for government transactions does not hold since they serve a broad range of entities. Similarly, the notion that they only handle equity trading limits their scope; capital markets also involve debt instruments such as bonds. Finally, the idea that they discourage foreign investment misrepresents the openness of capital markets to diverse investors from different regions, encouraging broader participation in various investment opportunities globally. Therefore, capital markets are fundamentally about the issuance of new securities