Exam Revision

Question 1

What does a Financial System consist of?

Answer 1

Financial Market
Financial Institutions
Financial Instruments

Question 2

Which 2 markets are there under Financial Markets?

Answer 2

Capital Market (Long Term)
Money Market (Short Term)

Question 3

What is the Purpose of a Financial System?

Answer 3

The system that enables lenders and borrowers to exchange funds.

Question 4

What does a Financial Institution do?

Answer 4

Intermediaries in financial markets; channel the savings of individuals / businesses and governments into loans and investments.

Question 5

What does a Financial Market do?

Answer 5

Are any place where suppliers of funds and demanders of funds meet to transact financial assets.

Question 6

What is the Future Value Equation? (Compounded Anually)

Answer 6

FV = A x (1 + R)^T

Question 7

What is an Annuity?

Answer 7

A stream of equal periodic cash flows over a specified time period.

Question 8

What is a Perpetuity?

Answer 8

An annuity with infinite life; an annuity that never stops providing the holder with a cash flow at the end of each year.

Question 9

What is the Present Value Equation? (Compounded Anually)

Answer 9

PV = A x (1 + R)^-T (inverse of FV)

Question 10

What is the Future Value Equation? (Compounded Frequently)

Answer 10

FV = A x (1 + r / m)^mT

Question 11

What is the Annuity Formula?

Answer 11

PV = A x (1 - (1 + r)^-T / r)

Question 12

What is a risk?

Answer 12

The variability of returns associated with a given asset.

Question 13

What is the Total Rate of Return?

Answer 13

The total gain or loss experienced on an investment over a given period of time.

Question 14

What is the Formula for Total Rate of Return?

Answer 14

Rt = Ct + Pt + Pt-1 / Pt-1

Question 15

Why do we use the Coefficient of Variantion?

Answer 15

To Calculate how much risk you are assuming in comparison to the amount of return you can expect from your investment.

Question 16

What does Variance Measure?

Answer 16

The dispersion of an investment’s return around the expected value of a return.

Question 17

What is the Efficient Frontier of a Portfolio?

Answer 17

The set of optimal portfolios that offers the highest expected return for a defined level of risk OR the lowest risk for a given level of expected return.

Question 18

What are the 3 Different Types of Bonds?

Answer 18

Premium Bond: Value of bond is higher than face value
At Par Bond: Value of bond is the same as face value
Discount Bond: Value of bond is lower that face value

Question 19

What is the Market Portfolio?

Answer 19

The market portfolio belongs to the efficient set, but it has to have a variance higher than the minimum variance portfolio.

Question 20

What kinds of Stock Markets Exist?

Answer 20

Primary: Companies issue stocks for the first time.
Secondary: Investors and Shareholders buy and sell stocks; no company involvement necessary.

Question 21

What is a Common Stock?

Answer 21

Common stockholders are considered residual owners, they recieve a share of shat is left after all other claims on a firm’s income and assests have been satisfied.
Greater risk than preferred stocks; higher risk crates a higher potential for reward.

Question 22

What is a Preferred Stock?

Answer 22

Preferred stockholders have certain privileges over common stock holders.
They are promised a fixed periodic dividend, which is stated either as a percentage or as a dollar amount of the company’s income and assets.
Less risky than common stocks.

Question 23

What is a Financial Instrument?

Answer 23

Any form of financial asset which can be traded.

Question 24

What is Strong-Form Market Efficiency?

Answer 24

Private and inside information is available.

Question 25

What is Semi-Strong Form Market Efficiency?

Answer 25

Public information is available.

Question 26

What is Weak-Form Market Efficiency?

Answer 26

Information is generated using past stock prices.