Exam 1 Flashcards
If offered the choice of receiving $5,000 today or $5,000 in ten year’s time, which option would you choose, and why?
$5,000 today because time has value and by receiving the money today you can put it to use immediately.
You wish to buy an annuity that makes monthly payments for as long as you live. You expect the following to occur: As your age at the time of purchase goes up, the number of expected monthly payments decreases so the price of the annuity decreases. The price of the annuity rises as each monthly payment is larger. Because of your poor health you life expectancy is shorter, therefore, the number of expected monthly payments is lower and the price of the annuity ________.
Decreases
Everything else being equal, which would be more valuable to you—a derivative instrument whose value is derived from an underlying instrument with a very volatile price history or one derived from an underlying instrument with a very stable price history? Explain your choice.
The derivative based on the more volatile underlying asset should have more value to you
Under what circumstances might money in the form of currency be the best option as a store of value?
If there were deflation in the economy, then paper currency would increase in value. When deflation occurs, overall prices in the economy are falling and so the notes you hold have more purchasing power. During periods of deflation, prices of assets often fall and so currency might be an attractive option as a store of value.
What role do financial instruments play in regard to information?
Summarize essential information about the borrower
What role do financial markets play in regard to information?
aggregate information from many sources and communicate it widely.
What role do financial institutions play in regard to information?
produce information to screen and monitor borrowers.
Which of the following would be more valuable to you: a portfolio of stocks that rises in value when your income rises or a portfolio of stocks that rises in value when when your income falls? Why?
The most valuable would be a portfolio of stocks that rises in value when your income falls, because it pays off when your marginal utility of income is high.
If a check is drawn on the account of another customer at the bank, do the funds transfer immediately or go through the check clearing process?
Immediately; the funds will be internally transferred.
Six parts of the financial system?
- Money
- Financial instruments
- Financial Markets
- Financial Institutions
- Regulatory Agencies
- Central Banks
What do Financial Markets Exchange?
Financial Instruments
Five core principles of money and banking?
- Time has value
- Risk requires compensation
- Information is the basis for decisions
- Markets determine prices and allocation resources
- Stability improves welfare
What’s the difference between income and wealth?
Income is a flow of earnings over time while wealth is the value of assets minus liabilities
Three characteristics of money?
- Means of payment - no need for a double coincidence of wants
- Unit of Account - it has a standard of value
- Store of value - it’s durable and can trade hands easily (aka liquid)
What makes good money?
- Acceptable for consumers and retailers
- Standardized quality
- Durable
- Valuable relative to its weight (unlike the giant round stones)
- divisible for sales
