Finance 1 Flashcards

1
Q

what are the two main things the existence of financial markets allow

A
  • inter-temporal exchange
  • exchange of risk
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2
Q

what are the 5 main categories of financial markets

A
  • the stock market
  • the bond market
  • the money market
  • the foreign exchange market
  • the hedging market
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3
Q

what is the primary function of the stock market

A
  • to raise permanent capital in the form of new shares being sold to equity investors
  • whether in an IPO or an SEO
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4
Q

what differentiates a treasury bill, note and bond

A
  • the time to maturity of the bond
  • if the time to maturity is short-term like less than 1 year, its a bill
  • if the time to maturity is medium-term between 1 to 10 years, its a note
  • if the time to maturity is long-term like over 10 years, its a bond
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5
Q

what is the money market

A
  • the money market is a market for debt securities that will pay off in the very short-term
  • usually overnight or a couple of days
  • they are comprised of a series of closely connected wholesale OTC short-term financial markets
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6
Q

what is the forex market

A
  • the forex market is where foreign exchange currencies are bought and sold
  • its a market for the exchange of purchasing power from one currency to another
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7
Q

what is the hedging market mainly used for

A
  • the hedging market is mainly used for the management of risk
  • like buying and selling of risk through derivatives products
  • such as options, futures and forwards
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8
Q

what is the difference between a primary and secondary market

A
  • primary markets are where governments and corps initially sell securities or do an IPO
  • secondary markets are where they are traded from one investor to another (after debt and equity securities are originally sold)
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9
Q

what is the first principle of finance

A
  • the time value of money
  • the fact that “a pound today is worth more than a pound tomorrow”
  • because you can invest the pound today and start earning interest immediately
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10
Q

what is the generic formula for future value, FV

A
  • FV = C*(1+r)^t
  • C = cash flow
  • r = interest rate
  • t = time
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11
Q

what is the generic formula for the present value, PV

A
  • PV = C / (1+r)^t
  • RHS = the discount factor
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12
Q

what is perpetuity and what is the formula for the PV of a perpetuity

A
  • perpetuity is a constant stream of payments
  • PV = C_1 / r
  • C_1 = cash flow in the next period
  • r = discount rate
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13
Q

what is the formula for the PV of a growing perpetuity

A
  • PV of a growing perpetuity = C_1 / (r-g)
  • g = growth rate
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14
Q

what is an annuity

A
  • an annuity is a level stream of regular payments that lasts for a fixed number of periods
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15
Q

what is the formula for the PV of an annuity

A
  • PV of an annuity = C*(1/r - 1/r(1+r)^t)
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16
Q

what is growing annuity

A
  • growing annuity is a stream of growing cash flows that occur at regular intervals and eventually come to an end
17
Q

what is the formula for the PV of growing annuity

A
  • PV of growing annuity = C/(r-g)*[1 - (1+g/1+r)^t]