The Basic Tools of Finance

Question 1

Finance is

Answer 1

studies how people make decisions regarding:
* The allocation of resources over time
* The handling of risk

Question 2

Present value of a future sum is

Answer 2

Amount of money today needed to produce a future amount of money, given prevailing interest rates

Question 3

Future value of a sum is

Answer 3

The amount of money in the future that an amount of money today will yield, given prevailing interest rates

Question 4

Compounding is

Answer 4

The accumulation of sum of money where the interest earned on the sum earns additional interest.

Question 5

Risk aversion

Answer 5

Dislike of uncertainty

Question 6

Utility

Answer 6

• A person’s subjective measure of well-being or satisfaction
• Diminishing marginal utility help explain why
  most people are risk averse.

Question 7

Diminishing marginal utility refers to

Answer 7

the phenomenon that each additional unit of gain leads to an ever-smaller increase in subjective value.

Question 8

The utility function

Answer 8

Diminishing marginal utility: the $1000 loss reduce utility more than the $1000 gain increases it.