Financial econ

Got it! Below is the comprehensive and intuitive Quizlet-style flashcard format for all the information from the chapters. Each card is designed to be clear and easy to study, covering every topic and formula.

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### Chapter 1: Investments—Background & Issues

#### Role of Financial Markets

1. Question: What is the role of financial markets?

Answer: To efficiently allocate funds from savers to investors, enabling economic growth.

#### Real vs. Financial Assets

2. Question: What are real assets?

Answer: Physical assets like land, buildings, and equipment that produce goods and services.

3. Question: What are financial assets?

Answer: Claims on real assets, such as stocks and bonds, which provide income or capital gains.

#### Debt vs. Equity

4. Question: What are the two ways firms can raise funds?

Answer: Debt (fixed payments) and equity (residual claims on income/assets).

5. Question: What is the key difference between debt and equity?

Answer: Debt has fixed payments and maturity, while equity has no maturity and pays dividends at discretion.

#### Primary vs. Secondary Markets

6. Question: What is the primary market?

Answer: Where new securities are issued and sold to raise funds.

7. Question: What is the secondary market?

Answer: Where previously issued securities are traded among investors.

#### Money vs. Capital Markets

8. Question: What is the money market?

Answer: Trades debt securities with maturities ≤ 1 year (e.g., T-bills, commercial paper).

9. Question: What is the capital market?

Answer: Trades debt and equity securities with maturities > 1 year (e.g., stocks, bonds).

#### Investment Banks

10. Question: What role do investment banks play in primary markets?

Answer: They help firms issue new securities by advising on pricing and underwriting the offering.

#### Secondary Markets

11. Question: What is the purpose of secondary markets?

Answer: To provide liquidity and price discovery for previously issued securities.

#### Money Market Instruments

12. Question: What are examples of money market instruments?

Answer: Treasury bills, commercial paper, certificates of deposit, and repurchase agreements.

#### Capital Market Instruments

13. Question: What are examples of capital market instruments?

Answer: Corporate bonds, Treasury notes, municipal bonds, and stocks.

#### Derivative Securities

14. Question: What are derivative securities?

Answer: Financial instruments whose value is derived from an underlying asset (e.g., options, futures).

#### Financial Institutions

15. Question: What are depository institutions?

Answer: Banks that accept deposits and provide loans (e.g., commercial banks, credit unions).

16. Question: What are investment intermediaries?

Answer: Entities like mutual funds and hedge funds that pool funds from investors to invest in securities.

#### Role of Financial Institutions

17. Question: What is the role of financial institutions?

Answer: To screen and monitor investments, provide liquidity, and reduce transaction costs for savers.

#### Agency Problems

18. Question: What are agency problems?

Answer: Conflicts of interest between management and shareholders due to separation of ownership and control.

#### Corporate Governance

19. Question: What is corporate governance?

Answer: The system of rules and practices by which a company is directed and controlled.

#### Investment Process

20. Question: What are the two key characteristics of an investment portfolio?

Answer: Asset allocation (distribution across asset classes) and security selection (specific securities within each class).

#### Top-Down vs. Bottom-Up Strategies

21. Question: What is a top-down investment strategy?

Answer: First determine asset allocation, then select securities within each class.

22. Question: What is a bottom-up investment strategy?

Answer: Focus on selecting individual securities based on their value, regardless of asset allocation.

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### Chapter 2: Money Markets

#### Treasury Bills

23. Question: What are Treasury bills (T-bills)?

Answer: Short-term government securities sold at a discount and maturing in ≤ 1 year.

24. Question: How is the bond equivalent yield (BEY) calculated for T-bills?

Answer:

\[

BEY = \frac{F - P_0}{P_0} \times \frac{365}{n}

\]

Where \( F \) = face value, \( P_0 \) = purchase price, and \( n \) = days to maturity.

#### Certificates of Deposit (CDs)

25. Question: What are certificates of deposit (CDs)?

Answer: Time deposits with banks that pay interest and principal at maturity.

#### Commercial Paper

26. Question: What is commercial paper?

Answer: Short-term unsecured debt issued by corporations to fund working capital needs.

#### Repurchase Agreements (Repos)

27. Question: What is a repurchase agreement (repo)?

Answer: A short-term loan where securities are sold with an agreement to repurchase them at a higher price.

#### Money Market Funds

28. Question: What are money market funds?

Answer: Mutual funds that invest in short-term, low-risk securities like T-bills and commercial paper.

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### Chapter 3: Bond Markets

#### Treasury Notes and Bonds

29. Question: What are Treasury notes?

Answer: Government debt securities with maturities of 2–10 years.

30. Question: What are Treasury bonds?

Answer: Government debt securities with maturities of 10–30 years.

#### Municipal Bonds

31. Question: What are municipal bonds?

Answer: Debt securities issued by state and local governments, often tax-exempt.

#### Corporate Bonds

32. Question: What are corporate bonds?

Answer: Debt securities issued by corporations to raise capital, with higher yields than government bonds.

#### Callable Bonds

33. Question: What is a callable bond?

Answer: A bond that the issuer can repay before maturity at a specified price.

#### Convertible Bonds

34. Question: What is a convertible bond?

Answer: A bond that can be converted into a specified number of shares of the issuer’s stock.

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### Chapter 4: Equity Markets

#### Common Stock

35. Question: What are the key characteristics of common stock?

Answer: Residual claim on assets, voting rights, and potential for dividends.

36. Question: What is the formula for stock return?

Answer:

\[

R = \frac{P_t - P_{t-1} + D_t}{P_{t-1}}

\]

Where \( P_t \) = current price, \( P_{t-1} \) = previous price, and \( D_t \) = dividend.

#### Preferred Stock

37. Question: What is preferred stock?

Answer: A hybrid security with fixed dividends and priority over common stock in bankruptcy.

#### Stock Market Indices

38. Question: What is the Dow Jones Industrial Average (DJIA)?

Answer: A price-weighted index of 30 large U.S. companies.

39. Question: What is the S&P 500?

Answer: A market-cap-weighted index of 500 large U.S. companies.

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### Chapter 5: Derivative Securities

#### Options

40. Question: What is a call option?

Answer: The right to buy an asset at a specified price (strike price) before expiration.

41. Question: What is a put option?

Answer: The right to sell an asset at a specified price before expiration.

#### Futures

42. Question: What is a futures contract?

Answer: An agreement to buy or sell an asset at a specified price and date in the future.

#### Swaps

43. Question: What is a swap?

Answer: An agreement to exchange cash flows or liabilities between two parties.

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### Chapter 6: Mutual Funds and ETFs

#### Mutual Funds

44. Question: What is a mutual fund?

Answer: A pooled investment vehicle that collects funds from investors to buy a diversified portfolio of securities.

45. Question: What is the net asset value (NAV) of a mutual fund?

Answer:

\[

NAV = \frac{\text{Market value of assets} - \text{Liabilities}}{\text{Number of shares}}

\]

#### ETFs

46. Question: What is an ETF?

Answer: A fund that trades on an exchange like a stock and tracks an index or sector.

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### Formulas Section

#### Treasury Bills

47. Question: What is the bond equivalent yield (BEY) formula?

Answer:

\[

BEY = \frac{F - P_0}{P_0} \times \frac{365}{n}

\]

#### Stock Return

48. Question: What is the formula for stock return?

Answer:

\[

R = \frac{P_t - P_{t-1} + D_t}{P_{t-1}}

\]

#### Present Value

49. Question: What is the present value formula?

Answer:

\[

PV = \frac{C}{(1 + r)^T}

\]

Where \( C \) = future cash flow, \( r \) = discount rate, and \( T \) = time.

#### Perpetuity

50. Question: What is the value of a perpetuity?

Answer:

\[

PV = \frac{C}{r}

\]

Where \( C \) = annual cash flow and \( r \) = discount rate.

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