Chapter 6

Question 1

Pooling of funds can be achieved through what?

Answer 1

Banks

Retail brokerage

Investment institutions

Question 2

Why are pension funds a good financing mechanism for long-term real investment?

Answer 2

A pension fund has long-term liabilities which are likely to match the maturity of long-term assets

Question 3

Why can a person create their own investment fund but cannot create their own annuity?

Answer 3

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

Question 4

What is the economic principle behind saving and investing?

Answer 4

The time shifting of liquidity

Question 5

The lifecycle hypothesis suggests that time shifting of liquidity is generally from who to who?

Answer 5

From older people to younger people

Question 6

When undertaking a trade to obtain a return for taking on financial risk, what may an investor do?

Answer 6

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

Question 7

Why may an investor suffer from negative equity?

Answer 7

Margin finance was used to finance part of the investment

A derivative contract was used to obtain exposure

Question 8

A company may also be considered as what?

Answer 8

A legal person

Question 9

What is a SOVEREIGN in finance?

Answer 9

The authority which has the right to govern a country and to extract taxation

Question 10

Global current account surpluses in one of set of countries must equal what?

Answer 10

Global current account deficits in another set of countries

Question 11

What are the two stages of financing?

Answer 11

Pooling

Project evaluation

Question 12

What 4 things is financer concerned with when providing finance for cooperation projects?

Answer 12

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

Question 13

What is capital budgeting?

Answer 13

Process that company undergoes to evaluate potential major or investments

Question 14

What is investment appraisal?

Answer 14

The finance valuing the project or company and how likely loans can be repaid and how shareholder value will increase

Question 15

How can pooling be achieved?

Answer 15

Through depository intermediaries

Through capital markets

Question 16

What are warehouse brokers?

Answer 16

Individuals who work for nationwide firms rather than operating as independent brokers

Question 17

Where does the ability to to spend more than a country earn arise from?

Answer 17

The willingness of the overseas sector to provide more goods and services to the country than the country provides to the over seas sector.

Question 18

What are the three financial decisions ?

Answer 18

Consumption versus saving

Risk management decisions

Financing decisions

Question 19

What is a private company?

Answer 19

One where the equity shares are not freely available on any public market

Question 20

What is a joint stock company?

Answer 20

A legal person in which two or more natural persons come together for a venture and the company issues certificates of ownership

Question 21

What financial decisions do enterprises have to make?

Answer 21

Investment decisions

Risk management decisions

Question 22

What is a governments principle source of income?

Answer 22

Taxation

Question 23

What is one reason for the large financial surpluses that China generated?

Answer 23

Build up of large precautionary savings by households in absence of government provision.

Question 24

Intra sectoral ?

Answer 24

Within

Question 25

Inter-sectoral

Answer 25

Between

Question 26

Inter-country

Answer 26

Cross border

Question 27

Examples of intra inter etccc

Answer 27

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

Question 28

The household sectors is generally what?

Answer 28

A net provider of funds to other sectors of the economy

Question 29

What happens if foreign investors are reluctant to invest?

Answer 29

Exchange rates fall then interest rates rise until they attractive enough for foreign investors to invest in

Question 30

What does financing an excess of spending over income require?

Answer 30

Capital inflow to a country equal to the current deficit.

Question 31

What is the private sector balance equal to ?

Answer 31

Investment- savings

Question 32

What is government sector balance?

Answer 32

Government spending- taxation

Question 33

What is domestic balance?

Answer 33

The sum of all the other sectors,

I-S)+(G-T

Question 34

What is the overseas balance?

Answer 34

Difference between exports and imports

Question 35

What has the globalisation of world trade and finance lead to?

Answer 35

Increasing importance of overseas sector

Global financial imbalances cnB

Question 36

The US government deficit in 2008 was financed by which sectors?

Answer 36

Households
Business
Foreign