Chapter 18- Financial Markets

The present discounted value of a future payment can be calculated using which of the following formulas?

(Future payment)/[(1+ Interest rate)^N]

The P/E ratio, or price to earnings ratio of a stock, can be computed using which of the following formulas?

(Price of stock share)/(Earnings per share).

An instituition that makes savings available to investors is known as

A financial intermediary

______ are debt contracts that are issued frequently by corporations.

Bonds

When investors wish to determine the current price to pay for an asset, it would be useful to

Calculate the present value

______ gains refers to the financial gain by investors when selling stock in a corporation for more than they paid for them.

Capital

Shares of ownership in a corporation are known as

Corporate stock

The interest rate set for a bond at the time of issuance is the

Coupon rate

Par value is the

Face value of a bond.

Default refers to the

Failure to make interest or principal payments on a bond.

Changes in expectations about future corporate profits imply:

Fluctuating stock prices; shifts in the supply and demand for a company's stock

The _____ the interest rate paid, the smaller is the present discounted value of a specific amount of money today.

Higher

As the interest rate on borrowed funds and thus interest payments _____, the less households consume and the greater the amount of _____ is available for loans.

Increase; money

The first issuance to the general public of stock in a corporation is called the:

Initial public offering

How does a recession impact the financial markets?

It decreases loanable funds.

Corporate profits minus dividends is:

Retained earnings

The PDV of a future payment declines when the interest rate

Rises

The difference in rates of return on uncertain and certain investments is called the _____ premium.

Risk

All investments are typically

Risky

Large swings in stock prices are usually caused by

Widespread changes in expectations

Present discounted value refers to

Value today of future payments adjusted for interest accrual.

Failure of a corporation to make a bond's promised payment is known as _____.

Default

The risk premium is the

Difference in rates of return on safe and risky investments.

The Dow Jones Industrial Average is an arithmetic average of ___ blue-chip industrial stocks.

30

Venture capitalists

Are a critical link between entrepreneurial ideas and market reality.

A bond is

A promise to repay a loan.

A financial intermediary is

An institution that makes savings available to investors.

The current yield on a bond is equal to the interest payment ______ by its price.

Divided

Corporate profits minus retained earnings is :

Dividends

The two ways that investors in stock can look forward to gaining financially when firms are profitable are through

Dividends; capital gains

Identify two the following that would be considered the most liquid assets?

Cash; bonds that are allowed to be resold

Which of the following would push all stock prices up or down at the same time?

Consumer confidence; congressional and deficit decisions; monetary policy

Dividends are equal to

Corporate profits minus retained earnings.

A business organization having continuous existence independent of its owners and power and liabilities distinct from those of its members is called a __________.

Corporation

There is an inverse relationship between the price of an existing bond and its

Current yield

Par value is the

Amount to be repaid when the bond is due.

Capital gains are

An increase in the market value of an asset.

Expected value refers to the

Probable value of a future payment

_______ discounted value is the value today of future payments adjusted for interest accrual.

Present

The price of a stock share divided by profit per share is called the:

Price/earnings ratio

Ownership shares in a corporation are known as

Stocks

The primary risk a bond holder faces is

The possibility that the corporation that issues the bond will default.

Which of the following reasons explains why a firm would demand loanable funds?

To increase physical capital; to expand their business

Bonds may be issued by the US

Treasury

The first sale to the general public of stock in a corporation is referred to as

An initial public offering

The probable value of a future payment, including the risk of nonpayment is called the

Expected value

The intersection of demand and supply in the market for loanable funds determines the _______ rate.

Interest

There is an ______ relationship between the amount of loanable funds demanded and the rate of interest.

Inverse

A corporation's current stock price

Is determined by the current profits and dividends that investors expect the corporation to generate in the future.

The _____ discounted value of money is today's value of some amount of money to be received in the ______.

Present; future

The intersection of the demand for loanable funds and the supply of loanable funds determines the

Prevailing interest rate.

Retained earnings are

The amount of corporate profit not paid out in dividends.

Dividends are

The amount of corporate profit paid out for each share of stock.