Financial Markets Study Guide

Rosa deposited $500 in a savings account with a simple interest rate of %3 each year. IF she made no other deposit or withdraws, how much interest had she earned at the end of 2 years. a) $1.50 b) $15.00 c) $3.00 d) $30.00

$30.00 Show calculations: 2 yrs(.3%) = .6% .6%($500) = $30.00

Investing in a wide range of companies to reduce the level of risk

Diversification

The first sale of shares of stock by a firm to outside investors

Initial Public Offering (IPO)

Refers to how easily money or financial assets can be exchanged for a good or service

Liquidity

A bank account that pays an interest rate, but withdrawing money typically requires a trip to the bank or an automatic teller machine

Savings Account

A card that lets the person make purchases, and the cost is immediately deducted from that person's checking account

Debit Card

The monetary value a homeowner would have after selling the house and repaying any outstanding bank loans used to buy the house

Equity

An institution, like a bank, that receives money from savers and provides funds to borrowers

Financial Intermediary

A person who invests in mutual funds is choosing an investment that a) Has the lowest risk and the lowest return b) Has the highest risks and the highest returns c) Has the highest risks and the lowest returns d) Has a balance of low risk/low return and high risk/high return option

Has a balance of low risk/return and high risk/return option

A bond issued by cities that wish to borrow

Municipal Bond

Funds that buy a range of stocks or bonds from different companies, thus allowing an investor an easy way to diversify

Mutual Funds

People who own at least some shares of stock in a firm

Shareholders

Tyler's family wants to buy a new computer system that costs $2,000. They could get a 3-year personal loan form the bank at a fixed rate of 10% simple interest. They could get a 3-year loan from a finance company that charges 8%, compounded annually. Calculate the total cost of each loan after 3 years, and then decide which credit offer the family should accept.

Show calculations:

An interest rate calculation only on the principal amount

Simple Interest

A claim on partial ownership of a specific firm.

Stock

Which sentence describe the risk and returns of investing in stocks? a) They offer the lowest risk and the lowest potential returns b) They offer the highest risks and the highest potential returns c) They offer the lowest risk, but the highest potential return d) The offer the highest risks, but the lowest possible returns.

They offer the highest risks and the highest potential returns.

A bond issued by the federal government through the U.S. Department of the Treasury

Treasury Bond

Financial investments in new companies that are still relatively small in size, but that have potential to grow substantially

Venture Capital

A financial contract through which a borrower like a corporation, a city or state, or the federal government agrees to repay the amount that was borrowed and also a rate of interest over a period of time in the future.

Bond

Someone who owns bonds and receives the interest payments

Bondholder

A mechanism for a saver to deposit funds at a bank and promise to leave them at the bank for a time, in exchange for a higher rate of interest

Certificate of Deposit (CD)

A bank account that typically pays little or no interest, but that gives easy access to money, either by writing a check or by using a "debit card"

Checking Account

An interest rate calculation on the principal plus the accumulated interest

Compound Interest

A bond issued by firms that wish to borrow

Corporate Bond