Financial Markets & Basic Tools of Finance

Question 1

Finance is the field of economics that studies…

Answer 1

• how people make decisions regarding the allocation of resources over time and the handling of risk

Question 2

Financial system

Answer 2

• the group of institutions in the economy that help to match one person’s savings with another person’s investment

Question 3

Financial markets

Answer 3

• the institutions through which savers can directly provide funds to borrowers
• aka platforms where financial assets like stocks, bonds, and currencies are bought and sold

Question 4

Financial intermediaries

Answer 4

• financial institutions where savers can directly provide funds to borrowers
• ie banks, investment funds

Question 5

Bond

Answer 5

• a certificate of debt that specifies the obligations of the borrower to the holder of the bond

Question 6

What are the two characteristics of a bond?

Answer 6

• term = the length of time until the bond matures or “expires”
• credit risk = the probability that the borrower will fail to pay some of the interest

Question 7

Government bonds

Answer 7

• the safer the credit risk, the lower the interest rate

Question 8

Stocks

Answer 8

• represents a claim to partial ownership in a firm and therefore a claim to the profits it makes
• offers both higher risks and higher returns compared to bonds

Question 9

Equity financing

Answer 9

• the sale of stock to raise money

Question 10

Banks _____ from people who want to ____ and use the ____ to make _____ to people who want to ______

Answer 10

• take deposits
• save
• deposits
• loans
• borrow

Question 11

Banks ______ on their deposits and charge _____ slightly higher interest rates on their loans

Answer 11

• pay depositors
• pay depositors interest

Question 12

Last price in terms of stocks

Answer 12

• the price at which the stock was traded

Question 13

Dividends

Answer 13

• profits to shareholders

Question 14

Profits not paid out are called…

Answer 14

• retained earnings

Question 15

Time value of money

Answer 15

• difference between the value of money today and money in the future

Question 16

Future value

Answer 16

• the estimated value of a current asset at a specified future date, based on the interest rate

Question 17

Compounding

Answer 17

• the accumulation of a sum of money in a bank account where the the interest earned remains in the account to earn additional interest in the future