Lesson 1: The Investment Environment

Question 1

*The art and science of managing money

Answer 1

Finance

Question 2

• focuses on the determination of value and how to make the best decisions with respect to the use of funds or financial resources

Answer 2

Finance

Question 3

• focuses on how resources are used to achieve corporate goals

Answer 3

Finance

Question 4

IS BOTH A SCIENCE AND AN ART OF CORRECT APPLICATION OF THE ECONOMIC AND ACCOUNTING CONCEPTS AND PRINCIPLES TH AT DEFINE THE SYSTEM, STRUCTURE, AND PROCESS OF MANAGEMENT, ALLOCATION, AND UTILIZATION OF FINANCIAL RESOURCES, INVESTMENTS, AND EXPENDITURES.

Answer 4

Finance

Question 5

• Study of how _________ use scarce resources to produce valuable commodities and distribute them among different people with various needs

Answer 5

societies

Question 6

• Study of how _________ within a society generally make choices that involve the use of scarce resources from among alternative wants that need to be satisfied

Answer 6

individuals

Question 7

• The field of finance is actually an outgrowth of economics.

Answer 7

Economics

Question 8

• In fact, finance is sometimes referred to as ___________.

Answer 8

Financial Economics

Question 9

• Financial managers must understand the economic framework within which they operate in order to react or anticipate to changes in conditions.

Answer 9

Economics

Question 10

• The primary economic principle used by financial managers is ______________ which says that financial decisions should be implemented only when benefits exceed costs.

Answer 10

Marginal Analysis

Question 11

___________ is primarily concerned with the presentation of financial data,

Answer 11

Accounting

Question 12

the ______________ is primarily concerned with analyzing and interpreting this information for decision-making purposes.

Answer 12

financial manager

Question 13

primarily responsible for the flow of funds from the lender to the borrower

Answer 13

Financial System

Question 14

Have a surplus of money that they probably want to generate more money with

Answer 14

Savers

Question 15

Do not have enough money and therefore may need to borrow money

Answer 15

Borrowers

Question 16

Control money supply (increase or decrease) in the economy

Answer 16

Central Bank

Question 17

cash and other liquid assets that the banks are required to keep

Answer 17

Reserve Requirements

Question 18

rate at which banks can borrow from the central banks

Answer 18

Interest Rates

Question 19

buying and selling of securities

Answer 19

Open market

Question 20

Formula of effective Rate

Answer 20

ER = (Nominal rate -earnings on reserves) / (1- reserve ratio)

Question 21

The current commitment of money or other resources in the expectation of reaping future benefits

Answer 21

Investment

Question 22

The productive capacity of the economy

Answer 22

Real Asset

Question 23

Means by which individuals in well developed economies hold their claims on real assets

Answer 23

Financial Asset

Question 24

accepts savings and places it in any variety of investment vehicle.

Answer 24

Financial Institution

Question 25

They are intermediaries that channel savings of individuals, businesses and governments into loans or investments

Answer 25

Financial Institution

Question 26

organized forum in which suppliers and users of funds can transact

Answer 26

Financial Markets

Question 27

exists as a result of the interaction between the suppliers and demanders of short-term funds (those having a maturity of a year or less).

Answer 27

money Markets

Question 28

can be executed directly or through an intermediary.

Answer 28

Money Markets

Question 29

short term, marketable, liquid, low risk

Answer 29

Money Markets

Question 30

Examples of money market instruments

Answer 30

1. Treasury Bills 2. Certificate of deposits 3. Commercial Papers

Question 31

is a market that enables suppliers and demanders of long-term funds to make transactions.

Answer 31

Capital markets

Question 32

Designed with extreme diverse provisions regarding payments provided to the investor and protection against the bankruptcy of the issuer

Answer 32

Capital Markets

Question 33

Examples of Capital Market

Answer 33

1. Bonds 2. Equity Securities 3. Derivatives

Question 34

onger term borrowing or debt instruments than those traded in the money market. Fixed income debt instruments

Answer 34

Bond Market

Question 35

debt instrument issued by the government that matures longer than a year

Answer 35

Treasury Bonds/notes

Question 36

longer term debt instruments. A means by which private institutions borrow money from the public

Answer 36

Corporate Bonds

Question 37

bonds with specific collateral backing them in the event of firm bankruptcy

Answer 37

Secured Bonds

Question 38

lower priority claim to the firm’s assets in times of bankruptcy

Answer 38

Unsecured Bonds

Question 39

give the firm the option to repurchase the bond from the holder at a stipulated call price

Answer 39

Collateral Bonds

Question 40

give the bondholder the option to convert each bond into a stipulated number of shares

Answer 40

Convertible Bonds

Question 41

has a residual claim and a limited liability feature

Answer 41

Common Stock

Question 42

similar to both equity and bond

Answer 42

Preferred Stock

Question 43

are accounts held with banks or other savings institutions and held by a variety of depositors.

Answer 43

Cash deposits

Question 44

Main Charactristics of cash deposits

Answer 44

Capital + Return

Question 45

Types of deposit accounts

Answer 45

1. Instant Access 2. Fixed Term 3. Notice of accounts

Question 46

also known as the minimum balance

Answer 46

Maintaining Balance

Question 47

the minimum amount that the bank account holder must have in the account or must maintain in the account to receive certain benefits and to avoid costs

Answer 47

Maintaining Balance

Question 48

amount of cash that must be kept in the bank account at all times as part of a loan agreement or contract

Answer 48

Compensating Balance

Question 49

pools sums of money from resources, which are then invested in financial assets.

Answer 49

Mutual Funds

Question 50

retirement planning for individuals

Answer 50

Pension Funds

Question 51

contributions made to charitable or educational institutions

Answer 51

Endowment Funds

Question 52

assume the risks of adverse events in exchange for a flow of insurance premiums

Answer 52

Insurance Companies

Question 53

unregulated private investment partnerships which seek to exploit various market opportunities and thereby to earn larger returns than ordinarily available

Answer 53

Hedge Funds

Question 54

associated with rising levels of GDP, consumption and expenditure, investment expenditure and decreasing levels of unemployment

Answer 54

Recovery

Question 55

a downturn in economic activity and is associated with falling levels of GDP, consumption and investment expenditure

Answer 55

Recession

Question 56

a recession that lasts longer and has a larger decline in business activity

Answer 56

Depression

Question 57

measures the average price of goods consumed by urban wage-earners

Answer 57

Consumer Price Index (CPI)

Question 58

measures the average price of all the GNP

Answer 58

GDP Deflation

Question 59

The increase in the average price level in the economy

Answer 59

Inflation

Question 60

Is the percentage of annual increase in the general price level.

Answer 60

Inflation

Question 61

Computing for inflation rate:

Answer 61

Inflation rate = CPI (this year) - CPI (last Year) / CPI (last year) x 100

Question 62

basic interest rate, no inflation, no uncertainties

Answer 62

Real Risk-free rate

Question 63

published rate and the growth rate of your money

Answer 63

Nominal Interest Rate

Question 64

reflects that real cost of funds.

Answer 64

Real Interest Rate

Question 65

This is the nominal rate reduced by the the loss of the purchasing power resulting from inflation.

Answer 65

Real Interest Rate