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Principles of Finance > Exam #1 Study Guide - Chapter 1-5 > Flashcards

Exam #1 Study Guide - Chapter 1-5 Flashcards

1
Q

What is a balance sheet?

A

financial statement that enumerates (as of a point in time) what an economic unit owns and owes and its net worth

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2
Q

Define return. What are its two components?

A

what is earned on an investment; the sum of income and capital gains generated by an investment

Components: capital gains, dividends, and interest income

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3
Q

What is risk?

A

possibility of loss; the uncertainty that the anticipated return will not be achieved

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4
Q

What is financial leverage?

A

use of borrowed funds in return for agreeing to pay a fixed return; use of debt financing

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5
Q

Define valuation.

A

process of determining what an asset is currently worth

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6
Q

What is the role of money?

A

may be used to transfer purchasing power to the future, money acts as a store of value from one time period to another,

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7
Q

What is M-1 and M-2?

A

M-1: sum of coins, currency, and demand deposits

M-2: sum of coins, currency, demand deposits, savings accounts, and small certificates of deposit

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8
Q

What is liquidity?

A

ease of converting an asset into cash without loss; the depth of a financial market

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9
Q

What is a CF (certificate of deposit)?

A

time deposit issued by a bank with a specified interest rate and maturity

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10
Q

What do higher interest rates do to the cost of credit?

A

makes borrowing money more expensive for consumers and businesses

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11
Q

What is the safest security and why?

A

U.S. Treasury Bill: the full faith of the U.S. government guarantees that interest and principal payments will be paid on time.

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12
Q

What are required reserves and excess reserves?

A

required: funds that banks must hold against deposit liabilities

excess: reserves held by a bank in excess of those it must hold to meet its reserve requirement

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13
Q

What is a money market mutual fund and what kinds of securities does it buy?

A

investment company that invests solely in short-term money market instruments

treasury bills, commercial paper, repurchase agreements, bankers acceptances, tax anticipation notes

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14
Q

What is a syndicate?

A

selling group formed to market a new issue of securities

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15
Q

What legislation created the Public Accounting Oversight Board?

A

Sarbanes-Oxley Act of 2002

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16
Q

What is the federal agency that insures investors against brokerage company collapse?

A

Securities Investor Protection Corporation (SIPC)

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17
Q

What is the middleman that brings investors (savers) and users together?

A

Intermediary

18
Q

What is the name of federal laws that require the timely disclosure of company information that may affect the value of securities?

A

Sarbanes-Oxley / Securities and Exchange Commission (SEC)

19
Q

What is the first sale of common stock to the public?

A

Initial public offering (IPO)

20
Q

What is the Sarbanes-Oxley Act? What are its key provisions? Why was it created?

A

Sarbanes-Oxley Act was an act intended to restore public confidence in the securities market.

The independence of auditors and the creation of the PCAOB, corporate responsibility and financial disclosure, conflict of interest and corporate fraud and accountability.

It was created to improve auditing and public disclosure in response to several accounting scandals in the early 2000s.

21
Q

What is appreciation plus dividends?

A

total return

22
Q

What is a market maker on an organized (stock) exchange?

A

they are an intermediary that buys stock to sell to somebody else, they impersonally transfer the stocks from sellers to the buyers

23
Q

What is the difference between bid and ask prices?

A

spread

24
Q

What is an order to buy or sell that is cancelled at the end of day?

A

day order

25
Q

What is an order to buy or sell a security for the best available price?

A

market order

26
Q

What is the purchase of securities in anticipation of a price increase?

A

long position

27
Q

What is the use of borrowed funds in an investment?

A

leveraging (financial leverage)

28
Q

what organization sets the margin requirements?

A

Federal Reserve Board

29
Q

What is the Federal reserve? What are its objectives?

A

The U.S. central banking system

setting interest rates, managing the money supply, and regulating financial markets

30
Q

What is monetary policy?

A

management of the money supply for the purpose of maintaining stable prices, full employment, and economic growth

31
Q

What is the money supply?

A

total amount of money in circulation

32
Q

How is the federal reserve organized?

A

president appoints board of governors

board of governors sits on federal open market committee and appoints three directors to the twelve district banks

the twelve district banks elects four representatives for the federal open market committee

member banks elect six directors to twelve district banks

33
Q

How many years do the governors serve?

A

4 except new hampshire and vermont which are 2

34
Q

What is fiscal policy?

A

taxation, expenditures, and debt management by the federal government

35
Q

What is the FOMC and what does it do and why?

A

part of the federal reserve that establishes and executes monetary policy

determines the direction of monetary policy by directing open market operations

36
Q

What are the three tools of the federal reserve?

A

open market operations - the purchase and sale of securities in the open market by the federal reserve

discount rate - interest rate charged banks for borrowing reserves from the federal reserve

reserve requirements - the amount of cash that banks must hold in reserve against deposits made by their customers

37
Q

define a recession

A

period of at least six months during which the economy experiences increased unemployment and negative growth

38
Q

define inflation

A

general increase in prices with special emphasis on increases in consumer prices

39
Q

how many district banks are there/

A

12

40
Q

3 ways to expand money

A

1) buy bonds

2) decrease discount rate

3) decrease reserve amount

Principles of Finance (1 decks)

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