Chapter 2 Flashcards
What does finance refer to?
Monetary resources and the study of money, currency, assets, and liabilities.
Finance is distinct from economics, which studies the production, distribution, and consumption of goods and services.
What are the three main divisions of finance?
- Personal finance
- Corporate finance
- Public finance
What are financial instruments?
- Currencies
- Loans
- Bonds
- Shares
- Stocks
- Options
- Futures
What is the primary goal of asset management in finance?
Maximize value and minimize volatility.
What is financial analysis used for?
Assessing the viability, stability, and profitability of an action or entity.
Which subfields are considered multidisciplinary within finance?
- Mathematical finance
- Financial law
- Financial economics
- Financial engineering
- Financial technology
When did finance emerge as a distinct academic discipline?
In the middle of the 20th century.
What is the role of financial intermediaries?
Channel money from savers and investors to entities that need it.
What is the purpose of capital budgeting in corporate finance?
Selecting which projects to invest in.
What are the main areas of personal finance?
- Income
- Spending
- Saving
- Investing
- Protection
What does corporate finance primarily focus on?
Increasing the value of the firm to shareholders.
What does public finance encompass?
- Required expenditures of public sector entities
- Sources of revenue
- The budgeting process
- Sovereign debt issuance
What is investment management?
Professional asset management of various securities to meet specified investment goals.
What is portfolio optimization?
Selecting the best portfolio given the client’s objectives and constraints.
What types of risks are focused on in financial risk management?
- Credit risk
- Market risk
- Operational risk
True or False: Credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments.
True
What is quantitative finance often synonymous with?
Financial engineering.
Fill in the blank: The practice of protecting corporate value against financial risks is known as _______.
[financial risk management]
What are the two main types of funding sources for corporations?
- Borrowing (loans, bonds)
- Selling equity (stocks, shares)
What role do central banks play in public finance?
Act as lenders of last resort and influence monetary and credit conditions.
What is the significance of the scientific method in finance?
It allows theories in finance to be tested.
What is the purpose of hedging in financial risk management?
To protect against financial risks.
What are the three primary sub-disciplines of finance?
Quantitative finance, managerial finance, financial economics
What is quantitative finance often synonymous with?
Financial engineering
What does quantitative finance support in a bank’s operations?
Customer-driven derivatives business
What are ‘quants’ responsible for in finance?
Building and deploying investment strategies
What is the DCF valuation formula used for?
Discounting forecasted free cash flows to present value
In financial theory, what does ‘discounting’ refer to?
Determining the present value of future values
What main areas does managerial finance focus on?
- Financial planning and forecasting
- Capital budgeting
- Capital structure
- Working capital management
- Risk management
- Financial analysis and reporting
What is the ‘efficient frontier’ in finance?
A concept in portfolio optimization representing the best expected return for a given level of risk
What foundational theorem discusses capital structure in finance?
Modigliani–Miller theorem
How does financial economics differ from real economic variables?
It studies the interrelation of financial variables like prices and interest rates
What does asset pricing theory focus on?
Determining the risk-appropriate discount rate and pricing derivatives
What is the Black–Scholes formula used for?
Valuing call options
What is financial mathematics primarily concerned with?
Modeling of derivatives and risk modeling
What are the two analytic branches in financial mathematics?
- Derivatives pricing (risk-neutral probability)
- Risk and portfolio management (physical probability)
What does experimental finance aim to establish?
Market settings to observe and analyze agents’ behavior
What does behavioral finance study?
The impact of psychology on financial decisions and markets
What is quantum finance?
Applying quantum mechanical approaches to financial theory
When can the origin of finance be traced back to?
Around 3000 BCE
What was the first historical evidence of banking?
Temples and palaces in West Asia used for storing valuables
What significant development in finance occurred between 700 and 500 BCE?
The use of coins as a means of representing money
What was the first stock exchange, and when was it opened?
Opened in Antwerp in 1531
Fill in the blank: The Modigliani–Miller theorem suggests that even if leverage increases, the ______ stays constant.
WACC (Weighted Average Cost of Capital)
True or False: Behavioral finance has become an integral aspect of finance over the last few decades.
True
