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IC101-Chapters 1-7 > Chapters 1-2 > Flashcards

Chapters 1-2 Flashcards

1
Q

4 Main Functions of the Finance Industry

A

1) Provision of money and clearing and settlement of payment using money
2) Financing- Pooling resources and transferring them over time and space
3) Provision of liquidity
4) Risk Management

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2
Q

What is net worth/ equity

A

Difference between total assets & debits

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3
Q

What is an Autarkic economy

A

Self sufficient without trade (buying or selling)

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4
Q

Example of Autarkic economy

A

North Korea as there is no domestic trade

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5
Q

What is finance

A

Finance is about assessing RISK, PRICING it and then transferring it through credit and capital market

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6
Q

What is pooling

A

Gathering small sums and then when a large sum has been collected, using this to invest in large scale projects

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7
Q

What is the human economic lifecycle

A

The idea that individuals seek to smooth consumption over the course of their lifetime. Borrowing in times of low income and saving during periods of high income

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8
Q

What is gold?

A

An asset which does not generate any principle and income flows.

A speculative asset

Store of value

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9
Q

The ‘law of one price’ in relation to financial assets implies that in competitive markets…

A

If 2 financial assets are essentially the same, they will trade at the same market price.

If a single asset is traded in more than one market it will trade at the same price in each of them

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10
Q

When interests rates rise, the price of a bond will fall/rise?

A

Fall

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11
Q

Assets can be valued in different ways depending on what?

A

The intention of the asset owner with respect to its asset.

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12
Q

Why may bank shares trade below net asset value?

A

Asset values are overstated

The bank has little or no franchise value

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13
Q

What would real estate valeurs of residential property, in valuing a house consider?

A

1) Comparable houses
2) Realised sales prices from such houses
3) Any differences between the house being valued and comparables

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14
Q

Derivatives have little value because?

A

The statement may be considered to be untrue.

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15
Q

What does interest rate operate through?

A

The price of credit

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16
Q

What bank determines the demand for credit

A

The central bank

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17
Q

What three different types of markets does the price mechanism operate in?

A

1) Markets in goods and services
2) labour markets
3) financial markets

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18
Q

What is capital widening?

A

Greater investment to make use of existing technology and increase the amount of capital available. Spending more money on technology to increase productivity

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19
Q

What is capital deepening?

A

Increasing capital available to each employee, thereby hopefully increasing productivity

20
Q

What is the general equilibrium theory?

A

Competitive markets are efficient and ensure that companies produce the things that people eat in the right quantities

21
Q

What is no free lunch?

A

Investors cannot consistently expect returns on their financial assets because the risk is too high

22
Q

What does allocative efficiency imply?

A

That the price of an asset accurately reflects the discounted stream of future earnings that expected to yield over its lifetime.

23
Q

What are the three pillars of finance?

A

1) optimising over time
2) measuring and managing risks
3) valuing financial assets

24
Q

What is pure time value?

A

Yield on government bonds for the period in question

25
Q

What is risk? what is it measured by?

A

The possibility of unexpected outcomes. Usually measured as variability of return

26
Q

What is risk aversion?

A

A measure of how willing someone is to pay to reduce their exposure to risk

27
Q

What is franchise value?.

A

Amount of value their brand name reputation and skills add to the company value behind the cost of their assets

28
Q

What are the two ways financial assets are valued?

A

1) Amortised cost- accounting rule based on the historical cost of acquiring the asset
2) market to market- uses fair value

29
Q

What are the two classes the regulatory rules require banks to categorise their balance sheets into?

A

1) banking book

2) trading book

30
Q

Risk Management could mean what?

A

1) avoiding risk by holding savings only in government guaranteed bank deposits
2) holding a wide range of assets with different characteristics
3) Never buying shares

31
Q

A loan is?

A

A way of obtaining liquidity

32
Q

A financial asset is?

A

A contract

33
Q

A bubble results when?

A

Market prices exceed what a scientific valuation based on expected future cash flows would estimate as the value of an asset

34
Q

An asset should be allocated to either the trading book or the banking book according to whether?

A

The intention is to trade it or hold it

35
Q

A bank is insolvent if?

A

Its assets are worth less than its liabilities

36
Q

A society is likely to become richer over time as a result of?

A

Capital widening
Capital deepening
Venture capital investment

37
Q

What does pricing in credit and market capital involves?

A

The time value of money

An assessment of risk

38
Q

If shares are always orderly priced, what does this mean?

A

In relation to the shares of similar companies

In relation to the expected cash flows and risk of the asset

39
Q

Real investment means?

A

Investment in physical tangible assets such as real estate, research and development and other non-financial assets

40
Q

What is an example of an opportunity cost?

A

Income forgone by taking a long holiday rather than taking a job

An opportunity to invest that absorbed a large proportion of current income.

41
Q

What does Pari-passu mean?

A

Proportionally without reference

42
Q

Companies are subject to only which type of risks?

A

Business and Financial risk

43
Q

What is credit enhancement a result of?

A

Seniority/ priority ranking and subordination

44
Q

How do companies benefit from a tax shield?

A

By employing debt in their capital structure

45
Q

The optimum amount of debt is determined by?

A

The trade-off between the tax shield benefit and bankruptcy costs

46
Q

A type of intermediary which generally has a capital structure with ‘undivided interest’ is?

A

A mutual fund

47
Q

Principle and Income/Interest flows come from?

A

Employment

Tax revenue

Rental income

IC101-Chapters 1-7 (7 decks)

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