Chapter10-11

Question 1

Financial system

Answer 1

is a system that allows the transfer of money between savers and borrowers

Question 2

Diversification and its advantage

Answer 2

The spreading out of investments to reduce risk, financial intermediaries help individual savers diversify their investments

Question 3

The relationship of risk and return

Answer 3

They are related, The higher potential return of the investment, the greater the risk involved

Question 4

What are the four types of risks

Answer 4

Liquidity risk, Inflation rate risk, credit risk, time risk

Question 5

Return

Answer 5

is the money an investor receives above and beyond the sum of money initially invested

Question 6

liquidity risk

Answer 6

you may not be able to convert the investment back into cash quickly enough for your needs

Question 7

Inflation rate risk

Answer 7

inflation rates erode the value of your assets

Question 8

credit risk

Answer 8

borrowers may not pay back the money that they borrowed or they may be late in making payments

Question 9

time risk

Answer 9

you may have to pass up better opportunities for investment

Question 10

financial assets

Answer 10

documents that confirm their deposit or bond purchase, such as passbooks or bond certificates, known as financial assets which represent claims on property or income of the borrower

Question 11

corporate bonds

Answer 11

is a bond that a corporation issues to raise money as it expands its business

Question 12

bonds

Answer 12

loans that represent debt that a government or corporation must repay to a investor

Question 13

how are bonds related

Answer 13

rate bonds on a number of factors,
including the issuer’s ability to make future payments and to repay the
principal when the bond matures.

Question 14

who does the rating for bonds

Answer 14

Standard & Poor’s and Moody’s

Question 15

rank bonds from safest to riskiest

Answer 15

Savings Bonds - safest
Treasury Bonds, Bills, and Notes,
Municipal Bonds,
Corporate Bonds,
Junk Bonds - riskiest

Question 16

bull market

Answer 16

the stock market rises steadily over time

Question 17

bear market

Answer 17

the stock market falls over a period time

Question 18

s&p 500

Answer 18

is an index that tracks the performance of 500
different stocks.

Question 19

The Dow Jones Industrial Average

Answer 19

is an index that shows how stocks of 30 companies in
various industries have changed in value.

Question 20

Mutual funds

Answer 20

pool money from investors to buy a range
of financial assets

Question 21

junk bond

Answer 21

Junk bonds are lower-rated, potentially higher-paying bonds. These are
very high risk.

Question 22

Municipal Bonds

Answer 22

are issued by state or local governments to finance such
improvements as highways, state buildings, libraries, police stations, and
schools.

Question 23

savings bonds

Answer 23

Savings bonds are low-denomination ($50 to $10,000) bonds issued by the
United States government. Savings bonds are purchased below par value
(a $100 savings bond costs $50 to buy) and interest is paid only when the
bond matures.

Question 24

stock split

Answer 24

the division of a single share of stock into more than one share

Question 25

coupon rate

Answer 25

the interest rate that the issuer will pay the bondholder.

Question 26

maturity

Answer 26

the time when payment to the bondholder is due.

Question 27

par value

Answer 27

the amount that an investor pays to purchase the bond and that will be repaid to the investor at maturity.

Question 28

financial indeterminacy

Answer 28

accept funds from savers and make loans to investors.

Question 29

capital gain

Answer 29

is earned when a stockholder sells stock for more than he or she paid for it. A stockholder that sells stock at a lower price than the purchase price suffers a capital loss.

Question 30

flat money

Answer 30

Flat money, also called “legal tender,” has value because the government decreed that is an acceptable means to pay debts.

Question 31

six characteristics of money

Answer 31

portability, durability, divisibility, uniformity, limited supply, acceptability

Question 32

representative money

Answer 32

Representative money has value because the holder can exchange it for something else of value.

Question 33

bank run

Answer 33

Widespread panic in which a great number of people withdraw money

Question 34

federal reserve system

Answer 34

as the nation’s first true central bank. (Also known as the “Fed”)

Question 35

causes of stock market crash

Answer 35

During the 20’s banks loaned large sums of money to many high risk businesses Farmers were unable to pay back loans due to crop failures and hard times on farms Stock Market crashed and caused widespread bank runs, thousands of banks failed Hawley-Smoot Tariff (June 1930) raised tariffs on 20,000 imported goods

Question 36

FDIC

Answer 36

The Banking Act of 1933 created , the FDIC insures customers’ deposits up to $250,000.

Question 37

gold standard

Answer 37

The U.S. was taken off of the gold standard in August 1971. (Nixon)

Question 38

Fractional Reserve System

Answer 38

a banking system that keeps only a fraction of funds on hand and lends out the remainder

Question 39

three functions of money

Answer 39

medium of exchange, unit of account, store of value

Question 40

mortgage

Answer 40

A mortgage is a specific type of loan that is used to purchase real estate.

Question 41

certificate of deposits,

Answer 41

usually have a slightly greater return but liquidity is reducedare available through banks, which use the funds deposited in CDs for a fixed amount of time.

Question 42

credit union

Answer 42

Credit unions are cooperative lending associations for particular groups, usually employees of a specific firm or government agency.

Question 43

commercial banks

Answer 43

Commercial banks offer checking services, accept deposits, and make loans.

Question 44

finance companies

Answer 44

Finance companies make installment loans to consumers.