FINA 4400 - EXAM 1 (FINAL PREP)

What are the 6 parts of the financial system?

1. Regulatory agencies

2. Financial Institutions

3. Financial Instruments

4. Central Banks

5. Money

6. Financial Markets

2. Financial Institutions

3. Financial Instruments

4. Central Banks

5. Money

6. Financial markets

Which of the following is a core principle of money and banking?

1. Time has value

2. Information is the basis for decisions

3. Risk requires compensation

4. Markets determine prices and allocate resources

5. Stability improves welfare

2. Information is the basis for decisions

3. Risk requires compensation

4. Markets determine prices and allocate resources

5. Stability improves welfare

Which of the following is a characteristic needed for something to be considered money?

1. Unit of account

2. Store of value

3. Means of payment

2. Store of value

3. Means of payment

When your grandma and grandpa went to the movies, the "basket of goods," meaning the ticket, popcorn, candy, and soda, cost $1.50. That same basket of goods now costs $30 for you to go out on a date. What has been the CPI over that period?

When your grandma and grandpa went to the movies, the “basket of goods,” meaning the ticket, popcorn, candy, and soda, cost $1.50. That same basket of goods now costs $30 for you to go out on a date. What has been the CPI over that period?

20

CPI formula

Cost of Goods (current year) / Cost of Goods (base year)

Inflation rate from CPI formula

(Cost of goods (current) - Cost of goods (base)) / Cost of goods (base)

A money aggregate estimated using only the most liquid assets in the economy is known as .

M1

The central bank of the United States is known as __.

The Fed

What is another word for net worth?

Wealth

The purchasing power of a specific currency at a given point in time is known as __.

Inflation

For cryptocurrency to be considered money, it must be __.

Exchangeable for some goods or service

When companies desire to raise money through borrowing funds, they typically issue which of the following?

a) assets

b) bonds

c) stock

When companies desire to raise money through borrowing funds, they typically issue which of the following? a) assets b) bonds c) stock d) hedge funds

b) bonds

Which of the following is NOT one of the main components of a financial system?

a) instruments

b) trading strategies

c) institutions

Which of the following is NOT one of the main components of a financial system? a)instruments b)trading strategies c)institutions d) markets

b) trading strategies

Financial instruments are also known as:

a) securities

b) institutions

c) leverage

Financial instruments are also known as: a) securities b) institutions c) leverage d) markets

a) securities

Which of the following is NOT a main function that financial instruments serve?

a) transfer of risk

b) store of value

c) means of payment

Which of the following is NOT a main function that financial instruments serve? a) transfer of risk b) store of value c) means of payment d) regulate the market

d) regulate the market

Which of the following are common uses of financial derivates?

a) buy houses

b) hedge risk

c) buy companies

Which of the following are common uses of financial derivatives? a) buy houses b) hedge risk c) buy companies d) speculate

b) hedge risk and d) speculate

Which of the following characteristics influence the value of a financial instrument?

a) Likelihood of payment

b) Size of payment

c) Conditions of payment

Which of the following characteristics influence the value of a financial instrument a) likelihood of payment b) size of payment c) conditions of payment d) Timing of payment

all of the above

What happens in the primary market?

Investors buy straight from a company

Which of the following financial institutions transfers risk?

a) insurance company

b) shadow bank

c) depository institution

Which of the following institutions transfers risk? a) insurance company b) shadow bank c) depository institution d) brokerage firm

a) insurance company

When an investor sells shares and the cash has been recorded in their accounting, these funds are known as .

Cleared funds

What is one basis point equal to?

0.01%

-> One one-hundredth of a percentage point

What is another term for interest rates?

Yields

Equation for future value?

FVt = PV(1 + i)^t

Using the future value equation to compute FV is known as

Compounding

You decide to invest $1,000 today for your new daughter, who will begin college in 18 years. You invest in a fund that pays 12% annual interest rate, compounded monthly (1% interest rate). How much will your daughter have from your $1000 investment when she starts college?

$8,578.61

-> 1000(1+.01)^216

(216 months in 18 years)

What is it called when you compute the present value of a future cash flow?

Discounting

Changes in interest rates have a greater impact on the present value of payments made further in the future than on the ones that must be made sooner. T/F?

True

-> This result occurs because the present value is additive, and payments further in the future are worth less than payments nearer in the future.

Present value equation

PV = FVt / (1 + i)^t

You can't believe it! You just won the lottery. The award is $100,000, and you will receive it in 30 years. If your discount rate is 1% monthly compounding over the 360 months until you get paid, what is the present value of the lottery winnings worth today?

$2781.67

-> 100,000/(1+0.01)^360

The discount rate that makes the NPV equal to zero is called?

Internal rate of return (IRR)

Which interest rate includes the impact of inflation?

Nominal interest rate

Financial institutions

Provide access to financial markets, collect and process information, and provide financial services

Ex: Local bank or credit union

Regulatory agencies

Ensure elements of the financial system operate safely and reliably; introduced as a result of the Great Depression.

Central banks

Role is to monitor and stabilize the financial system. Control the availability of money and credit, attempting to manage inflation, economic growth, and financial stability within the financial ecosystem.

-> Control the availability of money and credit, attempting to manage inflation, economic growth, and financial stability within the financial ecosystem

What are the 2 main levers of monetary policy that Central Banks use to accomplish their goal?

1. Adjusting interest-rates in bank-to-bank lending

2. Controlling the money supply in the economy

2) Controlling the money supply in the economy

Monetary policy

Actions by the Fed to manage inflation

Financial instrument

A tool used to transfer resources between savers and businesses/investors

Financial markers - primary role

To facilitate the buying and selling of financial instruments

Which of the following is an example of a financial institution?

a) the federal reserve

b) the new york stock exchange

c) goldman sachs

Which of the following is an example of a financial institution? a) the federal reserve b) the new york stock exchange c) goldman sachs d) both c and a

c) goldman sachs

How do markets contribute to efficient resource allocation?

Markets act as channels to minimize the cost of information gathering and transactions, thereby efficiently allocating resources

Means of payment (Money)

Can be used to finalize any exchange between 2 people

Fiat money

A type of money whose value is printed on a bill or coin and guaranteed by the government

Store value (money)

It is durable and capable of transferring purchasing power from one day to the next.

Income

Flow of earnings over time (paycheck)

Wealth

Net worth; Value of assets minus liabilities

→ Not the same as liquid cash

→ Considers your cash, stocks, bonds, and other investments

-> Not the same as liquid cash

-> Considers your cash, stocks, bonds, and other investments

What is the difference between liquidity and wealth?

Liquidity: How easily an asset can be converted into a means of payment without losing significant value.

Wealth: The market value of assets minus the market value of liabilities