Chapter 2

Question 1

What does finance refer to?

Answer 1

Monetary resources and the study of money, currency, assets, and liabilities.

Finance is distinct from economics, which studies the production, distribution, and consumption of goods and services.

Question 2

What are the three main divisions of finance?

Answer 2

• Personal finance
• Corporate finance
• Public finance

Question 3

What are financial instruments?

Answer 3

• Currencies
• Loans
• Bonds
• Shares
• Stocks
• Options
• Futures

Question 4

What is the primary goal of asset management in finance?

Answer 4

Maximize value and minimize volatility.

Question 5

What is financial analysis used for?

Answer 5

Assessing the viability, stability, and profitability of an action or entity.

Question 6

Which subfields are considered multidisciplinary within finance?

Answer 6

• Mathematical finance
• Financial law
• Financial economics
• Financial engineering
• Financial technology

Question 7

When did finance emerge as a distinct academic discipline?

Answer 7

In the middle of the 20th century.

Question 8

What is the role of financial intermediaries?

Answer 8

Channel money from savers and investors to entities that need it.

Question 9

What is the purpose of capital budgeting in corporate finance?

Answer 9

Selecting which projects to invest in.

Question 10

What are the main areas of personal finance?

Answer 10

• Income
• Spending
• Saving
• Investing
• Protection

Question 11

What does corporate finance primarily focus on?

Answer 11

Increasing the value of the firm to shareholders.

Question 12

What does public finance encompass?

Answer 12

• Required expenditures of public sector entities
• Sources of revenue
• The budgeting process
• Sovereign debt issuance

Question 13

What is investment management?

Answer 13

Professional asset management of various securities to meet specified investment goals.

Question 14

What is portfolio optimization?

Answer 14

Selecting the best portfolio given the client’s objectives and constraints.

Question 15

What types of risks are focused on in financial risk management?

Answer 15

• Credit risk
• Market risk
• Operational risk

Question 16

True or False: Credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments.

Answer 16

True

Question 17

What is quantitative finance often synonymous with?

Answer 17

Financial engineering.

Question 18

Fill in the blank: The practice of protecting corporate value against financial risks is known as _______.

Answer 18

[financial risk management]

Question 19

What are the two main types of funding sources for corporations?

Answer 19

• Borrowing (loans, bonds)
• Selling equity (stocks, shares)

Question 20

What role do central banks play in public finance?

Answer 20

Act as lenders of last resort and influence monetary and credit conditions.

Question 21

What is the significance of the scientific method in finance?

Answer 21

It allows theories in finance to be tested.

Question 22

What is the purpose of hedging in financial risk management?

Answer 22

To protect against financial risks.

Question 23

What are the three primary sub-disciplines of finance?

Answer 23

Quantitative finance, managerial finance, financial economics

Question 24

What is quantitative finance often synonymous with?

Answer 24

Financial engineering

Question 25

What does quantitative finance support in a bank's operations?

Answer 25

Customer-driven derivatives business

Question 26

What are 'quants' responsible for in finance?

Answer 26

Building and deploying investment strategies

Question 27

What is the DCF valuation formula used for?

Answer 27

Discounting forecasted free cash flows to present value

Question 28

In financial theory, what does 'discounting' refer to?

Answer 28

Determining the present value of future values

Question 29

What main areas does managerial finance focus on?

Answer 29

* Financial planning and forecasting * Capital budgeting * Capital structure * Working capital management * Risk management * Financial analysis and reporting

Question 30

What is the 'efficient frontier' in finance?

Answer 30

A concept in portfolio optimization representing the best expected return for a given level of risk

Question 31

What foundational theorem discusses capital structure in finance?

Answer 31

Modigliani–Miller theorem

Question 32

How does financial economics differ from real economic variables?

Answer 32

It studies the interrelation of financial variables like prices and interest rates

Question 33

What does asset pricing theory focus on?

Answer 33

Determining the risk-appropriate discount rate and pricing derivatives

Question 34

What is the Black–Scholes formula used for?

Answer 34

Valuing call options

Question 35

What is financial mathematics primarily concerned with?

Answer 35

Modeling of derivatives and risk modeling

Question 36

What are the two analytic branches in financial mathematics?

Answer 36

* Derivatives pricing (risk-neutral probability) * Risk and portfolio management (physical probability)

Question 37

What does experimental finance aim to establish?

Answer 37

Market settings to observe and analyze agents' behavior

Question 38

What does behavioral finance study?

Answer 38

The impact of psychology on financial decisions and markets

Question 39

What is quantum finance?

Answer 39

Applying quantum mechanical approaches to financial theory

Question 40

When can the origin of finance be traced back to?

Answer 40

Around 3000 BCE

Question 41

What was the first historical evidence of banking?

Answer 41

Temples and palaces in West Asia used for storing valuables

Question 42

What significant development in finance occurred between 700 and 500 BCE?

Answer 42

The use of coins as a means of representing money

Question 43

What was the first stock exchange, and when was it opened?

Answer 43

Opened in Antwerp in 1531

Question 44

Fill in the blank: The Modigliani–Miller theorem suggests that even if leverage increases, the ______ stays constant.

Answer 44

WACC (Weighted Average Cost of Capital)

Question 45

True or False: Behavioral finance has become an integral aspect of finance over the last few decades.

Answer 45

True