29 Questions
What must be paid whenever specified in debt financing?
Interest
Which type of financing involves an investment that never has to be repaid?
Preferred
What is a legal obligation for companies who issue secured bonds?
Pay interest
Which special bond feature allows the issuer to repay the bond before maturity?
Callable
What type of securities does an investment banker assist in selling or issuing?
New securities
What are the characteristics of a good money system?
Portability, durability, divisibility, uniqueness, stability
Which components make up the total M1 money supply?
Currency + demand deposits
What does the Federal Reserve focus on to monitor potential inflation?
Total M2 money supply
Who was the immediate past Chairman of the Federal Reserve before Jerome Powell?
Janet Yellen
Which institution is responsible for determining how to control the economy?
Federal Reserve
Where is the largest regional bank of the Federal Reserve located?
New York Federal Reserve
Why does the Federal Reserve increase the federal funds rate and shrink its portfolio of bonds and other assets?
To fight against inflation
What is the purpose of selling government bonds in relation to monetary policy?
To decrease money supply
Which sector includes commercial banks and savings and loans associations in the American banking system?
Life insurance companies
What was the main focus of the Dodd-Frank Wall Street Reform and Consumer Protection Act?
Preventing another banking collapse like in 2009
Why did the Federal Reserve decide to increase the discount rate and set credit controls?
To reduce money supply
Where is the internationally money fund located?
Washington DC
What activity ratios are impacted positively by implementing a just-in-time strategy?
Efficiency ratios
In financial benchmarking analysis, what type of comparison involves benchmarking against a specific firm's data at a particular point in time?
Horizontal analysis
Which skill is NOT listed as one of the most important skills needed by CFOs?
Problem-solving
What is one of the typical activities that financial managers engage in as part of their role?
Managing taxes
Which type of budget is focused on managing daily operations and acquiring inventory?
Operating budget
What is one of the reasons firms might need long-term funds?
Temporary promotional program
What is the main role of venture capitalists?
Finance new and rapidly growing companies
What does leverage refer to in the context of finance?
Raising funds through borrowing to increase the firm's rate of return
How do venture capitalists add value to the companies they invest in?
Through active participation and assistance in developing new products or services
What does the debt to owner's equity ratio measure?
The degree to which a firm relies on borrowed funds in its operation
Which source of equity financing involves selling ownership stakes to external investors?
Public sale of stock
What is the primary purpose of leveraging in finance?
Increasing the firm's rate of return through borrowing
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
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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