Economics Chapter 11 Flashcards

Questions and Answers

What is investment?

The act of redirecting resources from being consumed today so that they may create benefits in the future.

What is a financial system?

The system that allows the transfer of money between savers and borrowers.

What is a financial asset?

Claim on the property or income of a borrower.

What is a financial intermediary?

Institution that helps channel funds from savers to borrowers. Signup and view all the answers

What is a mutual fund?

Fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets. Signup and view all the answers

What is diversification?

Spreading out investments to reduce risks. Signup and view all the answers

What is a portfolio?

A collection of financial assets. Signup and view all the answers

What is a prospectus?

An investment report to potential investors. Signup and view all the answers

What does return refer to in investing?

The money an investor receives above and beyond the sum of money initially invested. Signup and view all the answers

What is a coupon rate?

Interest rate that a bond issuer will pay to a bondholder. Signup and view all the answers

What does maturity mean in the context of bonds?

The time at which payment to a bondholder is due. Signup and view all the answers

What is par value?

The amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity. Signup and view all the answers

What is yield in relation to bonds?

The annual rate of return on a bond if the bond were held to maturity. Signup and view all the answers

What is a savings bond?

Low-denomination bond issued by the United States government. Signup and view all the answers

What is a municipal bond?

A bond issued by a state or local government or municipality to finance improvements. Signup and view all the answers

What is a corporate bond?

A bond that a corporation issues to raise money to expand the business. Signup and view all the answers

What does the Securities and Exchange Commission do?

An independent agency of the government that regulates financial markets and investment companies. Signup and view all the answers

What is a junk bond?

A lower-rated potentially higher-paying bond. Signup and view all the answers

What is a capital market?

Market in which money is lent for periods of less than a year. Signup and view all the answers

What is a primary market?

Market for selling financial assets that can only be redeemed by the original holder. Signup and view all the answers

What is a secondary market?

Market for reselling financial assets. Signup and view all the answers

What is a share?

Portion of stock. Signup and view all the answers

What are equities?

Claims of ownership in a corporation. Signup and view all the answers

What is a capital gain?

The difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller. Signup and view all the answers

What is a capital loss?

The difference between a lower selling price and a higher purchase price resulting in a financial loss for the seller. Signup and view all the answers

What is a stock split?

The division of a single share of stock into more than one share. Signup and view all the answers

What is a stockbroker?

A person who links buyers and sellers of stock. Signup and view all the answers

What is a brokerage firm?

A business that specializes in trading stocks. Signup and view all the answers

What is a stock exchange?

A market for buying and selling stock. Signup and view all the answers

What is the OTC Market?

An electronic marketplace for stocks and bonds. Signup and view all the answers

What is Nasdaq?

American market for OTC securities. Signup and view all the answers

What are futures?

Contracts to buy or sell at a specific date in the future at a price specified today. Signup and view all the answers

What are options?

Contracts that give investors the choice to buy or sell stock and other financial assets. Signup and view all the answers

What is a call option?

The option to buy shares of stock at a specified time in the future. Signup and view all the answers

What is a put option?

The option to sell shares of stock at a specified time in the future. Signup and view all the answers

What is a bull market?

A steady rise in the stock market over a period of time. Signup and view all the answers

What is a bear market?

A steady drop in the stock market over a period of time. Signup and view all the answers

What is the Dow?

Index that shows how certain stocks have traded. Signup and view all the answers

What is the S & P 500?

Index that shows the price changes of 500 different stocks. Signup and view all the answers

What is the Great Crash?

The collapse of the stock market in 1929. Signup and view all the answers

What is speculation?

The practice of making high-risk investments with borrowed money in hopes of getting a big return. Signup and view all the answers

On which exchange are Blue chip stocks traded?

New York Stock Exchange (NYSE). Signup and view all the answers

Why are stocks riskier than bonds?

Purchasing the stock is riskier because the firm selling the stock may earn lower profits than what they expected, or it may lose money. Signup and view all the answers

When do investors suffer capital losses?

When the seller experiences financial loss from not receiving more than what he or she paid for it. Signup and view all the answers

When do investors experience capital gains?

When they sell stock for more than what they paid for it. Signup and view all the answers

Why can growth stocks be profitable?

They pay few or no dividends and their earnings are reinvested in the company. Signup and view all the answers

What do income stocks pay?

Dividends. Signup and view all the answers

What are bonds?

Loans to a company. Signup and view all the answers

What is the definition of stocks?

Ownership in a company. Signup and view all the answers

What does a certificate of deposit accept?

Small investments as low as $100. Signup and view all the answers

Study Notes

Investment and Financial Concepts

Investment involves reallocating resources from present consumption to generate future benefits.
The financial system facilitates the movement of money between savers and borrowers.
A financial asset represents a claim on the income or property of a borrower.

Types of Financial Institutions

Financial intermediaries, such as banks, channel funds from savers to borrowers.
Mutual funds aggregate the savings of multiple investors to invest in a diverse range of financial assets.

Risk Management in Investments

Diversification is a strategy to spread investments across various assets to mitigate risks.
A portfolio consists of an individual's collection of financial assets.

Investment Documentation

A prospectus is a detailed report provided to potential investors outlining an investment's features.
Return refers to the profit received by an investor that exceeds their original investment.

Bonds and Fixed-Income Securities

The coupon rate is the interest rate a bond issuer pays to bondholders.
Maturity indicates when a bondholder will receive the principal payment.
Par value represents the purchase amount of a bond, to be repaid at maturity.

Bond Characteristics

Yield is the annual return rate an investor would earn if holding a bond until maturity.
Savings bonds are low-cost bonds issued by the U.S. government.
Municipal bonds are issued by local governments for public projects, while corporate bonds are issued to fund business expansion.

Market Types and Trading

The capital market is where short-term financial transactions occur.
The primary market involves the initial sale of financial assets, while the secondary market facilitates their resale.
Shares represent ownership stakes in a company, with equities denoting stakes in a corporation.

Stock Market Dynamics

Capital gains and losses are based on the difference between purchase and selling prices of assets.
A stock split increases the number of shares while maintaining the overall value.
Stockbrokers connect buyers and sellers in the stock market, facilitated by brokerage firms.

Stock Exchanges and Marketplaces

Stock exchanges are venues for trading stocks, whereas the OTC market is an electronic platform.
Nasdaq is a prominent market for traded OTC securities.

Derivatives and Market Trends

Futures contracts specify agreements to buy or sell assets at a predetermined future date and price.
Options provide choices to buy (call) or sell (put) financial assets at future dates.

Market Performance Indicators

A bull market indicates rising stock prices over time, while a bear market denotes a decline.
Indices, like the Dow and S&P 500, track stock performance and price changes.

Historical Context

The Great Crash of 1929 refers to a major stock market collapse that precipitated the Great Depression.

Investment Strategies

Speculation involves high-risk investments utilizing borrowed finances for potential high returns.
Blue-chip stocks are considered stable investments from reputable companies, typically traded on the NYSE.

Stock Characteristics and Investment Behavior

Stocks generally carry more risk than bonds due to the inherent uncertainty of company profits.
Income stocks provide steady dividends, while growth stocks reinvest earnings for potential future profit.
Certificates of deposit (CDs) require small minimum investments, offering various maturity dates for investors to choose from.

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Test your knowledge on key economic concepts with these flashcards from Chapter 11. Learn important definitions such as investment, financial systems, and more. Perfect for mastering the fundamentals of economics.