Chapter 6 Flashcards
Pooling of funds can be achieved through what?
Banks
Retail brokerage
Investment institutions
Why are pension funds a good financing mechanism for long-term real investment?
A pension fund has long-term liabilities which are likely to match the maturity of long-term assets
Why can a person create their own investment fund but cannot create their own annuity?
Because:
The professional knowledge required to create an annuity is at too high a level for most people
Annuities require pooling of funds and this cannot be achieved by an individual
People don’t know on which they day they will die
What is the economic principle behind saving and investing?
The time shifting of liquidity
The lifecycle hypothesis suggests that time shifting of liquidity is generally from who to who?
From older people to younger people
When undertaking a trade to obtain a return for taking on financial risk, what may an investor do?
Use margin finance to pay for some of the investment
Use derivative contract to obtain the required risk exposure
Use cash to buy the investment
Why may an investor suffer from negative equity?
Margin finance was used to finance part of the investment
A derivative contract was used to obtain exposure
A company may also be considered as what?
A legal person
What is a SOVEREIGN in finance?
The authority which has the right to govern a country and to extract taxation
Global current account surpluses in one of set of countries must equal what?
Global current account deficits in another set of countries
What are the two stages of financing?
Pooling
Project evaluation
What 4 things is financer concerned with when providing finance for cooperation projects?
Estimated cash outflows from initial investment and running costs during project
Cash inflows from revenues
Time value of money
Appropriate risk premium to apply to expected inflows
What is capital budgeting?
Process that company undergoes to evaluate potential major or investments
What is investment appraisal?
The finance valuing the project or company and how likely loans can be repaid and how shareholder value will increase
How can pooling be achieved?
Through depository intermediaries
Through capital markets
What are warehouse brokers?
Individuals who work for nationwide firms rather than operating as independent brokers
Where does the ability to to spend more than a country earn arise from?
The willingness of the overseas sector to provide more goods and services to the country than the country provides to the over seas sector.
What are the three financial decisions ?
Consumption versus saving
Risk management decisions
Financing decisions
What is a private company?
One where the equity shares are not freely available on any public market
What is a joint stock company?
A legal person in which two or more natural persons come together for a venture and the company issues certificates of ownership
What financial decisions do enterprises have to make?
Investment decisions
Risk management decisions
What is a governments principle source of income?
Taxation
What is one reason for the large financial surpluses that China generated?
Build up of large precautionary savings by households in absence of government provision.
Intra sectoral ?
Within
Inter-sectoral
Between
Inter-country
Cross border
Examples of intra inter etccc
Domestic intra sectorial flows (household bank deposits to mortgages)
Domestic inter-sectoral flows (between household and firms)
Inter country flows which equilibrate the export surpluses of China, Saudi Arabia and Germany
The household sectors is generally what?
A net provider of funds to other sectors of the economy
What happens if foreign investors are reluctant to invest?
Exchange rates fall then interest rates rise until they attractive enough for foreign investors to invest in
What does financing an excess of spending over income require?
Capital inflow to a country equal to the current deficit.
What is the private sector balance equal to ?
Investment- savings
What is government sector balance?
Government spending- taxation
What is domestic balance?
The sum of all the other sectors,
I-S)+(G-T
What is the overseas balance?
Difference between exports and imports
What has the globalisation of world trade and finance lead to?
Increasing importance of overseas sector
Global financial imbalances cnB
The US government deficit in 2008 was financed by which sectors?
Households
Business
Foreign
