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
