Lecture 1

Question 1

Finance

Answer 1

how individuals, institutions, governments and businesses acquire and spend money and other financial assets

Question 2

Financial environment

Answer 2

encompass the financial system, institutions, markets and individuals that make the economy operate efficiently

Question 3

Entrepreneurial finance

Answer 3

how performance focused firms manage operations and assets

Question 4

Personal finance

Answer 4

how individuals prepare for financial emergencies

Question 5

Three areas of finance

Answer 5

1. institutions and markets
2. financial management
3. investments

Question 6

Institutions

Answer 6

help the financial system operate efficiently and can transfer funds

Question 7

Markets

Answer 7

physical locations or electronic forums that facilitate the flow of funds

Question 8

Investment area

Answer 8

involves sale / marketing, analysis of securities and management of investment risk through diversification

Question 9

Financial management

Answer 9

involves financial planning, asset management and fund raising decisions to enhance firms value

Question 10

What happened to tech price bubble in 2000

Answer 10

it burst

Question 11

What exaggerated 2001 recession

Answer 11

9/11

Question 12

What happened to housing price bubble in 2006

Answer 12

in burst resulting in steep decline in prices

Question 13

Six principles of finance

Answer 13

1. time value of money
2. risk return tradeoff
3. diversification of investments
4. efficient financial market
5. management vs owner objectives
6. reputation matters

Question 14

Time value of money

Answer 14

money in hand today is worth more now than the promise of receiving it in the future

Question 15

Risk return tradeoff

Answer 15

high risk usually results in high reward

Question 16

Diversification of investments

Answer 16

some risk can be removed by splitting up investments into several assets or securities helping to absorb loss

Question 17

Efficient financial markets

Answer 17

having information efficient markets

Question 18

Information efficient markets

Answer 18

when the prices of securities reflect all information available at any point in time

Question 19

Management vs owner objectives

Answer 19

managers objectives may differ from owners, also known as Principe agent problem
(owners may want to increase return, managers may want to gain more sales)

Question 20

Reputation matters

Answer 20

high reputation reflects high quality ethical behaviour

Question 21

Four main components of the US monetary system

Answer 21

1. policy makers
2. monetary system
3. financial institutions
4. financial markets

Question 22

Who are the 4 policy makers

Answer 22

1. president
2. congress
3. US treasury
4. federal reserve board

Question 23

What is the role of policy makers

Answer 23

to pass laws and set fiscal and monetary policies

Question 24

What two entities make up the US monetary system

Answer 24

1. federal reserve central bank
2. commercial banking system

Question 25

What is the role of the monetary system

Answer 25

create and transfer money

Question 26

What are the four types of financial institutions

Answer 26

1. depository instituions 2. contractual savings organisations 3. securities firms 4. finance firms

Question 27

What is the role of financial institutions

Answer 27

accumulate and lend / invest savings

Question 28

What are the four types of financial markets

Answer 28

1. debt securities markets 2. equity securities markets 3. derivative securities markets 4. foreign exchange markets

Question 29

What is the role of financial markets

Answer 29

to market and facilitate transfer of financial assets

Question 30

Money markets

Answer 30

where debt securities of one year or less are traded

Question 31

Four features of money market securities

Answer 31

1. high liquidity 2. can be easily sold old traded with little loss in value 3. short lives 4. low risk low return

Question 32

Capital markets

Answer 32

where debt securities with maturities longer than one year or corporate stocks are issued or traded

Question 33

Primary markets

Answer 33

where the initial offering or origination of debt and equity securities take place

Question 34

Secondary markets

Answer 34

physical locations or electronic forums where debt and equity securities are traded

Question 35

Debt securities markets

Answer 35

where money markets securities, bonds and mortgages are originated and traded

Question 36

Equity securities markets

Answer 36

where corporate ownership shares are initially sold and traded

Question 37

Derivative securities markets

Answer 37

where financial contracts that derive their values from underlying debt and equity securities are originated and traded

Question 38

Foreign exchange markets

Answer 38

electronic markets where traders buy and sell currencies on behalf of business / other clients