Untitled Quiz

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.