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Questions and Answers
What are the three major divisions of the finance discipline?
Which of the following describes financial analysis?
What essential concept does the field of finance study?
Which of the following is NOT considered a financial instrument?
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In what century did finance emerge as a distinct academic discipline?
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Which of the following is a field that is multidisciplinary within finance?
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Which statement best describes risks in finance?
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Which of the following is a purpose of financial management?
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What is typically the first way an entity can raise capital if its income is less than its expenditure?
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What role does a financial intermediary like a bank play in the lending process?
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What type of financing involves selling stock to raise capital?
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Which of the following statements is correct regarding how investors might earn a return?
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Who typically facilitates the issuance and trading of securities?
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In corporate financing, what is the primary purpose of selling bonds?
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What is meant by 'wholesale finance'?
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How do financial institutions typically service private investors?
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Study Notes
Finance
- Finance refers to monetary resources, currency, assets, and liabilities, and its study and discipline.
- Finance is a distinct subject with similarities to economics, which is the study of goods and services production, distribution, and consumption.
- Finance can be categorized into personal, corporate, and public finance.
- Financial activities in financial systems include buying, selling, and trading financial instruments like currencies, loans, bonds, shares, stocks, options, and futures.
- Assets can be banked, invested, and insured to maximize value and minimize loss.
- Risk is inherent in every financial action and entity.
Subfields of Finance
- Finance features various subfields, including asset, money, risk, and investment management.
- These subfields aim to maximize asset value and minimize volatility.
- Financial analysis assesses the viability, stability, and profitability of actions and entities.
- Finance encompasses multidisciplinary areas, such as mathematical finance, financial law, financial economics, financial engineering, and financial technology.
- Financial theories can be tested through the scientific method in experimental finance.
History of Finance
- Finance has roots in the early history of money, dating back to prehistoric times.
- Ancient and medieval civilizations incorporated fundamental financial functions like banking, trading, and accounting into their economies.
- The global financial system emerged in the late 19th century.
- In the mid-20th century, finance emerged as a separate academic discipline from economics.
- Doctoral programs in finance were established in the 1960s and 1970s.
- Finance is now extensively studied through career-focused undergraduate and master's level programs.
Financial System & Capital Flows
- The financial system encompasses capital flows between individuals and households (personal finance), governments (public finance), and businesses (corporate finance).
- Finance studies how money flows from savers and investors to entities needing it.
Financial Intermediaries and Capital Acquisition
- Savers and investors can earn interest or dividends by putting their money to productive use.
- Individuals, companies, and governments raise money through loans, credit, and selling bonds.
- Entities with surplus funds can lend or invest them for a return.
- Entities with insufficient funds can raise capital through:
- Borrowing via loans (for individuals) or selling government or corporate bonds.
- Selling equity (stocks or shares, including preferred or common stock).
- Institutional investors (like investment banks and pension funds) and private individuals (retail investors) can be owners of bonds and stock.
Lending and Investing
- Lending can be indirect via financial intermediaries (like banks) or through bond market purchases.
- Lenders receive interest, borrowers pay a higher interest, and financial intermediaries earn a difference for arranging the loan.
- Banks aggregate the activities of numerous borrowers and lenders.
- Banks accept deposits from lenders (with interest) and lend those deposits to borrowers.
- Investing typically involve purchasing stock, either individual securities or via mutual funds.
- Corporations sell stocks to investors, utilizing "equity financing" for capital.
Investment Banks and Related Services
- Investment banks locate initial investors and facilitate listing securities (shares and bonds).
- Investment banks also facilitate securities exchanges, enabling trading after listing.
- Various service providers manage investment performance or risk. These include mutual funds, pension funds, wealth managers, and stock brokers, primarily serving retail investors.
- "Wholesale finance" designates inter-institutional trade, investment, and fund management at a large scale.
- Institutions offer specialized products, such as bespoke options, swaps, structured products, and specialized financial instruments.
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Description
This quiz covers the fundamentals of finance, exploring its definition, categories, and subfields. Participants will learn about personal, corporate, and public finance, as well as the importance of financial instruments and risk management. Test your knowledge and understanding of this essential economic discipline.
