Understanding Economics Chapter 11 Questions
bull vs bear markets
A bull market is a strong market with prices moving up for several months or years in a row while a bear market is a mean market with prices falling sharply for several months or years in a row.
In general, would a treasury bond or junk bond pay a higher interest rate on your investment? Why?
A junk bond would pay a higher interest rate because more risk demands more return.
What are the financial intermediaries?
Banks Credit Unions Finance Companies Life Insurance Companies Pension Funds
What are the main differences between credit unions, banks, and life insurance companies in how they serve the financial system?
Banks offer checking accounts, saving accounts, and CDs to attract deposits from consumers and commercial businesses. Credit unions accept deposits, make loans, issue CDs, and offer checking accounts, but they require a membership to use these services. Life insurance companies provide financial protection for a spouse, children, or other dependents in the event of a person's death.
How do CDs appear in multiple markets?
CDs appear in the capital market when they lasts longer than a year. They appear in the money market when they last a year or less.
How are financial assets created in a free enterprise system?
Financial assets are created through savers saving money for borrowers to obtain financial assets.
How are capital and money markets different?
In a capital market, money is loaned for over a year while in a money market, money is loaned for a year or less.
Explain the relationship between risk and return.
Investors must consider how risky the investment is (how much the outcome is uncertain) and demand a higher return.
Which financial assets are the safest?
Municipal bonds, savings bonds, treasury notes, treasury bonds, and treasury bills are the safest financial assets because they are issued by the U.S. government.
What is your role in the circular flow of finance?
My role is being a saver and saving money for investors to use. There may be a point where I will have to borrow money to make large investments.
Why do we have futures contracts?
People use futures contracts to buy or sell a stock at a later date. For example, if someone was to agree to buy gold for a specific price in 6 months, he would hope the price is higher.
Why is portfolio diversification important?
Portfolio diversification is important because all stocks are priced correctly, and bargains are hard to find since many stock analysts are closely watching all stocks. Therefore, it does not matter which stock one purchases. If one buys a large number of different stocks, the gains will offset the losses.
What is the circular flow of finance? (financial system)
Savings Financial Intermediaries Borrowers Financial assets
What is the role of savings in the financial system?
Savings makes economic growth possible because it allows individuals, the government, and businesses to borrow money to produce new goods and services and create more jobs. If people stopped giving money to financial intermediaries, they would stop existing and borrowers would have no way to borrow money and grow the economy.
How do primary and secondary markets differ?
Secondary markets provide more liquidity to its investors. In the secondary market, existing financial assets can be resold to new owners while in the primary market, only the original issuer can sell or repurchase a financial asset.
How is stock market performance evaluated?
The Dow Jones Industrial Average (DIJA) uses an index of 30 stocks as a measure of stock market performance. The Standard & Poor's 500 (S&P 500) uses an index of 500 stocks as a measure of stock market performance.
What is the main difference between the NYSE Euronext and the AMEX-NASDAQ?
The NYSE Euronext was the most prestigious stock exchange while the AMEX-NASDAQ attracted smaller and lesser-known firms.
What is the role of the major nondepository financial institutions in the financial system?
The major nondepository financial institutions collect money provided by savers to loan to borrowers.
What is the difference between a savings account and a certificate of deposit?
The money in savings accounts become available for investors to use, but a certificate of deposit is when an investor has made an interest-bearing loan to the financial institution
What factors determine a bond's value?
The par value, maturity, and coupon rate mainly determine a bond's value. Supply and demand establishes the final value of a bond.
How do finance companies, life insurance companies, and pension funds channel savings to borrowers?
They use the savings they get from customers to provide financial protection if they ever need it.
What are some majors advantages using an online brokerage rather than a stockbroker?
Using an online brokerage allows the investor to buy, sell, or monitor his portfolio from a personal computer or cellphone.
What options are available for investing your money?
certificates of deposit corporate bonds municipal bonds government savings bonds treasury notes and bonds treasury bills individual retirement accounts equities 401(k) plans
What are the four basic investment considerations?
consistency simplicity diversity risk-return relationship
What are the three main components of a bond?
par value maturity coupon rate
ways to buy shares of stock
using a stockbroker opening an Internet account with a discount brokerage firm
