Chapter 11 Econ. Review

(a) In financial asset markets, how do capital markets differ from money markets?

In a capital market money can be lended to you for longer than a year and in money markets it can only be lended for less than a year.

The lower the risk in an investment, the lower its ______

Return

What are the Standard & Poor's and Moody's ratings based on?

S & P ratings are the agency's opinion on the likelihood or probability of default by a corporate or sovereign, Moody's ratings are based on expected losses, reflecting both on the likelihood of default and expected financial losses in the event of default.

Before putting money into mutual funds, a potential investor can review the fund's performance in its______

Stock Market

Securities is another name for a______

Financial Asset

To transfer money between savers and borrowers, allowing investment to take place, an economy needs a(n)______

Financial System

Coupon Rate

the interest rate that a bond issuer will pay to a bondholder

Maturity

the time at which payment to a bondholder is due

(a)What types of government bonds are available to investors?

~Treasury Securities. Bonds, bills, and notes issued by the U.S. government are generally called "Treasuries" and are the highest-quality securities available. ~Municipal Bonds ~Corporate Bonds ~Zero-Coupon Bonds

Corporate Bond

A bond that a corporation issues to raise money to expand its business

(b) How do primary markets differ from secondary markets?

A primary market is financial assets that can only be redeemed by only the original investor and in secondary markets assets can be resold.

What advantages do bonds offer to firms that issue them?

Coupon rate will not go up or down and bond holders don't own part of the company.

The use of assets to earn income or profit constitutes a(n)______

Investment

What disadvantages do bonds present for the issue?

Issued must make fixed payments even in bad years.

(b)What is the disadvantage?

It is slightly riskier

What are the primary functions of Life Insurance Companies?

Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to name beneficiaries when the insured dies. The insurance company promises death benefits in exchange for premiums paid by policyholders.

(a) What is the investment advantage of money market mutual funds over CDs and savings accounts?

Money market funds offer higher yields than savings accounts but are relatively safer than bonds. Therefore, if you're looking for a combination of safety and higher interest rates, money market funds can be a smart place to keep your short-term savings or emergency fund.

What three organizations help ensure value and prevent dishonesty in the bond market?

Moody's, S&P, and Fitch

(b)Which type of offers the greatest tax advantage?

Municipal

What are the primary functions of Mutual Funds?

Mutual funds assets and let you invest in different types of stocks and bonds with the help of investment professionals. These funds have multiple functions, such as saving you time and money, as well precisely tailoring your portfolio to reach your financial objectives.

What are the primary functions of Pension Funds?

Pension funds are pooled monetary contributions from pension plans set up by employers, unions, or other organizations to provide for their employees' or members' retirement benefits.

The collection of all one's financial assets make up one's______

Portfolio

How does an investor earn money, by buying bonds at discount?

The investor buys bonds below par value and earns full par at redemption in addition to the interest.

What are the primary functions of Finance Companies?

The primary function of finance companies is to make loans to individuals and corporations. Finance companies do not accept deposits, but borrow short- and long- term debt, such as commercial paper and bonds, to finance the loans.

What are the primary functions of Bank Savings and Loan Association, Credit Unions?

The primary function of savings and loan associations is the financing of long-term residential mortgages. Savings and loan associations accept deposits in saving accounts, pay interest on these accounts, and make loans to residential home buyers.

Junk Bond

a lower-rated, potentially higher-paying bond