Chapter 1 Review Questions

Identify the four types of financial markets

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

What are the three areas of finance?

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

Identify the financial functions in the financial system

1. monetary system 2. financial institutions 3. financial markets

What are the six principles of finance?

1. money has a time value 2. higher returns are expected for taking on more risk 3. diversification of investments can reduce risk 4. financial markets are efficient in pricing securities 5. manager and stockholder objectives may differ 6. reputation matters

What are the four major components of an effective financial system?

1. policy makers 2. an efficient monetary system 3. a system for channeling savings into investment 4. financial markets and procedures for transferring claims to wealth

What is a financial environment?

The financial environment encompasses the financial system, institutions, markets and individuals that make the economy operate efficiently

What is finance?

The study of how individuals, institutions, governments and businesses acquire spend, and manage money and other financial resources

Financial institution financial function

carry out savings-investment process via the financial functions of accumulating savings and lending/investing savings

Monetary system financial funtion

creating and transferring money

How do debt securities and equity securities differ?

debt securities are obligations to repay borrowed funds while common stocks are ownership shares in corporations

Foreign exchange markets

electronic markets in which banks and institutional traders buy and sell various currencies on behalf of businesses and other clients

financial institutions

intermediaries that help the financial system operate efficiently and assist the savings-investment process

investments

involve the marketing of securities, securities analysis, and the management of investment risk

financial management

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

Derivative securities markets

markets for financial contracts that derive their values from underlying debt and equity securities

Primary security markets

markets in which the initial offering of debt and equity securities to the public occurs

Equity securities markets

markets where common stocks are initially sold and traded

Debt securities markets

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

Secondary securities markets

markets where the transfer of existing debt and equity securities between investors occurs

Briefly describe the differences between money and capital markets

money markets are the markets where the debt instruments of one year or less are traded. In contrast, capital markets are markets for debt securities with maturities in excess of one year and corporate stocks

Financial markets financial funtion

perform the financial functions of marketing and transferring financial assets

financial markets

physical locations or electronic forums that facilitate the flow of funds

Entrepreneurial finance

studies how grwoth-driven, performance-focused, early-stage firms raise financial capital and manage their operations and assets

Personal finance

studies how individuals prepare for financial emergencies, protect against premature death and the loss of property, and accumulate wealth over time