Podcast
Questions and Answers
What is the primary function of the financial system?
What is the primary function of the financial system?
Which of the following is NOT a component of financial intermediaries?
Which of the following is NOT a component of financial intermediaries?
What is a mutual fund primarily used for?
What is a mutual fund primarily used for?
Which of the following represents a sacrifice in the context of investment?
Which of the following represents a sacrifice in the context of investment?
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What information do stock tables provide?
What information do stock tables provide?
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What is a bond primarily considered as?
What is a bond primarily considered as?
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What aspect do financial intermediaries help reduce in investment decisions?
What aspect do financial intermediaries help reduce in investment decisions?
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What do money markets primarily deal with?
What do money markets primarily deal with?
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Which of the following accurately describes indirect finance?
Which of the following accurately describes indirect finance?
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Which of the following is NOT a distinguishing characteristic of financial intermediaries?
Which of the following is NOT a distinguishing characteristic of financial intermediaries?
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Study Notes
Principle of Investment
- Financial system groups institutions matching saving to investment.
- Financial system coordinates savers and borrowers through institutions.
- Institutions are categorized into financial markets and intermediaries.
- Financial markets include stock and bond markets.
- Financial intermediaries include banks and mutual funds.
- Financial intermediaries help savers, indirectly providing funds to borrowers.
Sacrifice
- Sacrifice is giving up something of value now for something better later.
Stock Tables
- Stock tables provide price, volume, dividend, and price-earnings ratio information.
Bank Operations
- Banks take deposits, make loans, pay interest on deposits, charge interest on loans, and facilitate transactions.
- Banks help provide a medium of exchange.
Mutual Funds
- Mutual funds sell shares to the public and invest in a portfolio of stocks and bonds.
Financial Intermediaries
- Financial intermediaries play an important role in financial markets.
- They reduce transaction costs.
- They allow risk-sharing among participants.
- They improve information asymmetry to reduce losses.
Bond Definition
- A bond is a certificate detailing the borrower's obligations to the bondholder.
- Credit risk is the probability the borrower will fail to pay principal or interest.
- Stock represents a claim to a firm's ownership and earnings.
- Equity financing is raising money through stock sales.
- Stocks are riskier than bonds with potential for higher returns.
- Mutual funds allow individuals to diversify with smaller investments.
National Savings
- National saving represents income remaining after consumption and government spending.
Investment
- Investment is purchasing assets for future income gain.
- Future value is the value of an investment over time.
Risk
- Risk is the chance of decreased investment value.
- Return is the profit or yield from an investment.
- Liquidity is an asset's ease of conversion to cash without loss.
Financial Market Functions
- Financial markets signal information including interest rates, stock prices, and exchange rates.
- Financial market signals serve as indicators of economic activity.
- Stock prices and interest rates indicate market views of companies and institutions.
- Primary markets facilitate new securities sales.
- Secondary markets enable resale of previously issued securities.
Liquidity
- Liquidity refers to the ease of converting an asset into cash.
Investment Decisions
- Cash flow estimations and discounting are essential for investment decisions.
- Future value calculations project future asset worth.
- Discounted present value (DPV) calculates the current value of future cash flow considering the appropriate discount rate.
- In investment decisions, the opportunity cost of capital needs to be compensated for.
Zero-Coupon Bond
- Zero-coupon bonds have a face value, maturity date, and discount rate. The current value discounts the expected future value.
Savings vs. Investment
- Savings are low risk, low return, and high liquidity
- Investments are high risk, high return, and low liquidity
Financial Intermediary Importance
- Financial intermediaries reduce transaction costs by leveraging scale and expertise.
- Intermediaries facilitate risk-sharing by balancing assets' risk profiles.
- Intermediaries mitigate problems associated with asymmetric information.
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