savings and investment quiz

Question 1

positive capital inflow

Answer 1

if Foregin citizens save more money in US than Americans in other nations
increase domestic investment

Question 2

negative capital inflow

Answer 2

if Americans save more in other nations than foreign citizens save in US
decrease domestic investment

Question 3

three tasks of financial system

Answer 3

reducing transaction costs
reducing risk
providing liquidity

Question 4

reducing transaction cost

Answer 4

banks and other financial services companies make it easier and less costly for firms to engage in financial transactions like borrowing to make investments

Question 5

reducing risk

Answer 5

sale stock in company to reduce total risk by engaging in diversification

Question 6

diversification

Answer 6

investing in several assets with unrelated, or independent risk

Question 7

providing liquidity

Answer 7

ease by which an asset (financial or physical) can be converted into cash

Question 8

financial system providing liquidity in different ways

Answer 8

issuing loans, bonds, or stocks

Question 9

financial sector

Answer 9

network of institutions that link borrowers and lenders
includes banks, mutual funds, pension funds, and other financial intermediaries

Question 10

asstets

Answer 10

anything tangible or intangible that has value
claim to future income

Question 11

interest rate

Answer 11

the amount a lender charges borrowers for borrowing money
the price of a loan

Question 12

interest bearing assets

Answer 12

assets that earn interest over time
ex) bonds

Question 13

financial assets

Answer 13

a paper claim that entitles the buyer to future income from the seller

Question 14

example of financial assets

Answer 14

stocks, bonds, loans, bank deposits

Question 15

physical assets

Answer 15

a claim on a tangible object that gives the owner the right to dispose of the object they wish
ex) house or car

Question 16

liabilites

Answer 16

a requirement to pay money in future
ex) a loan

Question 17

who is the liability and asset in a loan

Answer 17

borrower= liability
lender = asset (due to loan repaid with interest)

Question 18

loans

Answer 18

a lending agreement between an individual lender and individual borrow

Question 19

upside of loans

Answer 19

loans are good for individuals and small businesses
they are tailored to your needs

Question 20

downside of loans

Answer 20

loans require a lot of transactions costs
negotiating terms of loan
credit history
ability to repay
not liquid (easy to resell)

Question 21

bonds

Answer 21

IOU issued by borrower

Question 22

who is the liability and asset in a bond

Answer 22

owner = asset
issuer = liability (due to paying back fixed interest each year plus principle)

Question 23

upside of bonds

Answer 23

no negotiations with bonds so no transaction cost inquired
borrow large sums of money
easy to resell (liquid)
bonds are related on risk so you know what your getting into

Question 24

downside of bonds

Answer 24

higher default risk on bond = higher interest rate bond pays to attract investors

Question 25

bond prices and interest rates relationship

Answer 25

inversely related

Question 26

stocks

Answer 26

a share in the ownership of a company large companies issue stock to reduce risk

Question 27

who is the liability and asset in a stock

Answer 27

owner = asset company = liability (they have to share profit)

Question 28

upside of stock

Answer 28

stocks have higher rate of returns than bonds

Question 29

downside of stocks

Answer 29

stocks are riskier than bonds stocks are a hope, bonds are a promise

Question 30

bonds are

Answer 30

securities, loans no ownership of company

Question 31

stocks are

Answer 31

equities ownership of corporation

Question 32

loan backed securities

Answer 32

an asset created by pooling individual loans and selling shares in that pool

Question 33

example of loan backed securities

Answer 33

mortgage backed securities

Question 34

upside of loan backed securities

Answer 34

easy to trade provides for diversification more liquid than loan

Question 35

downside to loan backed securities

Answer 35

not always safe (2008 recession)

Question 36

three types of financial intermediaries

Answer 36

mutual funds pension funds life insurance companies banks

Question 37

mutual funds

Answer 37

creates a stock portfolio by buying and holding shares in companies and then selling shares of the stock portfolio to individual investors

Question 38

pension funds

Answer 38

nonprofit institutions that collect the savings of their members and invest those funds in a wide variety of assets (retirement)

Question 39

life insurance companies

Answer 39

guarantee payment to policyholder's beneficiaries when the policy holder dies improves welfare by reducing risk

Question 40

banks

Answer 40

provide liquid assets in form of a bank deposit to lenders and use those funds to finance liquid investment spending needs of borrowers

Question 41

bank deposits

Answer 41

a claim on a bank that obliges the bank to give the depositor their cash when demanded