ACCA Financial Management (F9) Certification Practice Exam

What key activity occurs in the capital markets?

1. Only currency trading

2. Issuance of new securities

3. Long-term investment strategies

4. Short-term lending and borrowing

The correct answer is: Issuance of new securities

The capital markets are primarily characterized by the issuance of new securities, which is the core function that enables organizations to raise funds for long-term investments and growth. This process involves companies, municipalities, and government entities offering various types of securities, such as stocks and bonds, to investors. By issuing these securities, they can access the capital necessary for expanding operations, funding projects, and achieving strategic goals. This activity is crucial as it contributes to the overall health and liquidity of the financial markets, allowing for efficient allocation of resources across different sectors. The successful issuance of new securities lead to increased investment opportunities for investors and can stimulate economic growth. In contrast, options involving only currency trading, long-term investment strategies, or short-term lending and borrowing represent different functions within the financial system. Currency trading is more related to foreign exchange markets, while long-term investment strategies pertain to how investors allocate their funds rather than the mechanism of raising capital. Short-term lending and borrowing is typically associated with money markets, not capital markets. Therefore, the issuance of new securities accurately captures the primary function of capital markets, facilitating the flow of funds from savers to those looking to invest in long-term projects.