BUS 2000 Takada Exam 2: Characteristics of Good Money System
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Questions and Answers

What must be paid whenever specified in debt financing?

  • Interest (correct)
  • Dividends
  • Principal
  • Maturity date

Which type of financing involves an investment that never has to be repaid?

  • Debenture
  • Secured
  • Common
  • Preferred (correct)

What is a legal obligation for companies who issue secured bonds?

  • Pay interest (correct)
  • Interest is tax deductible
  • Increase debt
  • Must pay dividends

Which special bond feature allows the issuer to repay the bond before maturity?

<p>Callable (D)</p> Signup and view all the answers

What type of securities does an investment banker assist in selling or issuing?

<p>New securities (A)</p> Signup and view all the answers

What are the characteristics of a good money system?

<p>Portability, durability, divisibility, uniqueness, stability (D)</p> Signup and view all the answers

Which components make up the total M1 money supply?

<p>Currency + demand deposits (B)</p> Signup and view all the answers

What does the Federal Reserve focus on to monitor potential inflation?

<p>Total M2 money supply (B)</p> Signup and view all the answers

Who was the immediate past Chairman of the Federal Reserve before Jerome Powell?

<p>Janet Yellen (B)</p> Signup and view all the answers

Which institution is responsible for determining how to control the economy?

<p>Federal Reserve (B)</p> Signup and view all the answers

Where is the largest regional bank of the Federal Reserve located?

<p>New York Federal Reserve (B)</p> Signup and view all the answers

Why does the Federal Reserve increase the federal funds rate and shrink its portfolio of bonds and other assets?

<p>To fight against inflation (D)</p> Signup and view all the answers

What is the purpose of selling government bonds in relation to monetary policy?

<p>To decrease money supply (B)</p> Signup and view all the answers

Which sector includes commercial banks and savings and loans associations in the American banking system?

<p>Life insurance companies (A)</p> Signup and view all the answers

What was the main focus of the Dodd-Frank Wall Street Reform and Consumer Protection Act?

<p>Preventing another banking collapse like in 2009 (A)</p> Signup and view all the answers

Why did the Federal Reserve decide to increase the discount rate and set credit controls?

<p>To reduce money supply (D)</p> Signup and view all the answers

Where is the internationally money fund located?

<p>Washington DC (B)</p> Signup and view all the answers

What activity ratios are impacted positively by implementing a just-in-time strategy?

<p>Efficiency ratios (B)</p> Signup and view all the answers

In financial benchmarking analysis, what type of comparison involves benchmarking against a specific firm's data at a particular point in time?

<p>Horizontal analysis (A)</p> Signup and view all the answers

Which skill is NOT listed as one of the most important skills needed by CFOs?

<p>Problem-solving (D)</p> Signup and view all the answers

What is one of the typical activities that financial managers engage in as part of their role?

<p>Managing taxes (A)</p> Signup and view all the answers

Which type of budget is focused on managing daily operations and acquiring inventory?

<p>Operating budget (B)</p> Signup and view all the answers

What is one of the reasons firms might need long-term funds?

<p>Temporary promotional program (D)</p> Signup and view all the answers

What is the main role of venture capitalists?

<p>Finance new and rapidly growing companies (C)</p> Signup and view all the answers

What does leverage refer to in the context of finance?

<p>Raising funds through borrowing to increase the firm's rate of return (C)</p> Signup and view all the answers

How do venture capitalists add value to the companies they invest in?

<p>Through active participation and assistance in developing new products or services (B)</p> Signup and view all the answers

What does the debt to owner's equity ratio measure?

<p>The degree to which a firm relies on borrowed funds in its operation (B)</p> Signup and view all the answers

Which source of equity financing involves selling ownership stakes to external investors?

<p>Public sale of stock (A)</p> Signup and view all the answers

What is the primary purpose of leveraging in finance?

<p>Increasing the firm's rate of return through borrowing (A)</p> Signup and view all the answers

Study Notes

Economy and Money

  • Economy depends on money as a medium of exchange, unit of value, and store of value
  • Money supply consists of currency and demand deposits (M1) and time deposits and money market accounts (M2)

Debt vs Equity Financing

  • Debt financing:
    • Secured or debenture bonds
    • Must be repaid on maturity date
    • Interest must be paid whenever specified
  • Equity financing:
    • Preferred or common stocks
    • Investment never has to be repaid
    • No legal obligation to pay dividends

Investment Banker

  • Assists in the sale/issue of new securities
  • Underwrites issues
  • Sells to institutional investors

Bond Market

  • Characteristics:
    • Coupon/interest rate
    • Denomination (e.g., $1,000)
    • Principal
    • Maturity date
  • Types:
    • Unsecured/debenture bonds
    • Secured bonds
  • Advantages:
    • Increase debt
    • Interest is tax deductible
    • Legal obligation to pay interest
  • Disadvantages:
    • Temporary source of funds
    • Repaid on maturity date
    • Can be repaid before maturity with call provision

Stock

  • Definition: a type of security that represents ownership in a company

Federal Reserve

  • Responsibilities:
    • Regulates and controls the money supply
    • Supervises and regulates banks
    • Collects data on economic activities
    • Processes checks
  • Tools:
    • Reserve requirement
    • Discount rate
    • Open market operations
  • Current chairman: Jerome Powell

Monetary Policy

  • Objectives:
    • Fight against inflation
    • Regulate money supply
  • Tools:
    • Increase/decrease reserve requirement
    • Increase/decrease discount rate
    • Sell/buy government bonds
    • Set credit controls

American Banking System

  • Components:
    • Depository institutions (commercial banks, savings and loans, credit unions)
    • Non-depository institutions (life insurance companies, pension funds, brokerage firms)

International Banking

  • International monetary fund (IMF) located in Washington, D.C.
  • Stock market performance: 20% fluctuation during COVID-19 pandemic

Financial Management

  • Importance of finance:
    • Financial management is crucial for business decisions
    • Financial managers must possess skills such as people development, building relationships, communication, creativity, objectivity, leadership, and analytical thinking
  • Functions:
    • Planning, budgeting, obtaining funds, controlling funds, collecting funds, auditing, and advising top management
  • Financial planning:
    • Budget process
    • Financial statements
    • Types of budgets (capital, cash, operating)
    • Financial controls and feedback

Financial Ratios and Analysis

  • Leverage ratio:
    • Measures the degree to which a firm relies on borrowed funds
    • Debt to owners' equity ratio
  • Activity ratios:
    • Inventory turnover
    • Just-in-time strategy
  • Financial benchmarking analysis:
    • Horizontal analysis (cross-section comparison)
    • Vertical analysis (time-series comparison)

Sources of Funds

  • Short-term funds:
    • Meet monthly expenses
    • Unanticipated emergencies
    • Cash-flow problems
  • Long-term funds:
    • New product development
    • Replacing capital expenditures
    • M&A (mergers and acquisitions)
    • Expanding current inventory
    • Temporary promotional programs
    • Expansion into new markets
    • Building new facilities

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Description

This quiz covers topics related to the characteristics of a good money system, including portability, durability, divisibility, uniqueness, and stability. It also discusses the components of the money supply such as M1 and M2, and how inflation can be influenced by the size of the money supply.

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