Lecture 1

Question 1

Real investments

Answer 1

Investment in real assets, that is assets that will produce real goods and services (land, building, equipment, knowledge)

Question 2

Finance investments

Answer 2

Investment into financial assets. A financial asset is a contractual claim to a stream of cash flows.

Question 3

Direct finance

Answer 3

Finance through financial markets

Question 4

Indirect finance

Answer 4

Finance through financial intermediaries

Question 5

Capital Allocation Function

Answer 5

Impossible to reallize an investment greater than today’s own savings.

Question 6

Consumption shifting function

Answer 6

Need to store your savings ‘‘under your bed’’ if you can’t consume all of it today.

Question 7

Risk Allocation Function

Answer 7

Difficult to spread the risk on your savings across many firms.

Question 8

Information creation function

Answer 8

In the absence of securities’ prices, difficult to know whether financial contract is a
“fair” or “unfair” deal

Question 9

liquidity provision function)

Answer 9

Difficult to get your cash back from the firm today if you suddenly need the money

Question 10

Time Value of Money

Answer 10

The concept that a pound at one point in time is not worth the same as a pound at another point in time

Question 11

Simple interest

Answer 11

interest earned only on the original principal amount invested

Question 12

Compound interest

Answer 12

interest earned on both the initial principal and the interest
reinvested from prior periods

Question 13

Present value

Answer 13

the current value of a future cash flow or a series of future cash flows

Question 14

Discounting

Answer 14

translating a future cash flow into its value in a prior period, most often
(but not necessarily) the present period