Certified Financial Management Specialist Practice Exam

What is one of the major functions of capital markets?

1. Facilitating loan distributions

2. Providing interest rate guarantees

3. Enabling securities trading

4. Issuing government bonds

The correct answer is: Enabling securities trading

One of the major functions of capital markets is enabling securities trading, and this role is crucial for the overall efficiency and liquidity of the financial system. Capital markets allow investors to buy and sell equity and debt securities, which represent ownership in companies or claims on their future income, respectively. This trading function fosters price discovery, enabling investors to make informed decisions based on current market conditions. Additionally, through the trading of securities, capital markets facilitate the movement of capital from those who have excess funds (investors) to those who need capital for growth and development (companies and governments). This creates an environment where resources are allocated effectively, leading to investment in various sectors of the economy, ultimately contributing to economic growth. In contrast, while facilitating loan distributions, providing interest rate guarantees, and issuing government bonds have their importance, they are not the defining functions of capital markets in the same way that securities trading is. Facilitating loan distributions typically falls under the purview of banking systems, while interest rate guarantees are often associated with specific financial products rather than the broader market functionality. Issuing government bonds is a specific activity that occurs within the capital markets but does not encompass the full scope of its primary functions.