The financial system

Question 1

What is finance?

Answer 1

How individuals, businesses, governments and institutions acquire, spend and manage money and other financial assets

Question 2

What are two financial themes?

Answer 2

Entrepreneurial finance and personal finance

Question 3

Define entrepreneurial finance

Answer 3

How growth driven, early stage, performance focused firms manage assets and raise funds

Question 4

Define personal finance

Answer 4

How individuals accumulate wealth, prepare for financial emergencies and protect against loss of property and premature death

Question 5

What are the 3 areas of finance

Answer 5

Institutions and markets, investments and financial management

Question 6

what is the role of institutions

Answer 6

Institutions allow the financial system to operate efficiently by allowing savers and investors to transfer funds to businesses, governments and individuals that wish to invest their money into physical assets

Question 7

What are markets

Answer 7

Physical locations or electronic forums that facilitate the flow of funds

Question 8

What are investments

Answer 8

Investments are the sale or marketing of securities, analysis of securities and management of investment risk through portfolio diversification

Question 9

What is financial management

Answer 9

Financial planning, fund-raising and asset management decisions that enhance firm value

Question 10

What are the six principles of finance?

Answer 10

Time value of money, risk-return trade-off, diversification of investments, efficient financial markets, management versus owner objectives, reputation matters

Question 11

What is time value of money?

Answer 11

Money received today is worth more than the promise of receiving the same amount in the future. This exists because money can be invested and therefore grow overtime.

Question 12

What is risk return trade off?

Answer 12

Risk is the uncertainty about the outcome or payoff of an investment in the future. rational investors would only choose a riskier investment If the expected return is high enough to justify the risk.

Question 13

What is diversification of investments?

Answer 13

Not all investment risk is the same, some risk can be removed or diversified by investing in several different assets or securities

Question 14

What are efficient financial markets?

Answer 14

A financial market is information efficient if the prices of securities reflect all the information available to the public at any point in time and change when new information becomes available. information efficient markets provide liquidity and fair prices

Question 15

What are management versus owner objectives?

Answer 15

Management objectives may differ to an owners objective, an owner/investor may be interested in maximising return on investments, whilst the manager may seek to emphasise firm sales and assets

Question 16

Define reputation matters

Answer 16

Ethical behaviour is how an organisation treats other businesses legally fairly and honestly. high reputation value reflects high ethical behaviour. Therefore, adopting ethical standards is the right thing to do.

Question 17

Define securities

Answer 17

Securities are financial instrument that can be traded and has monetary value

Question 18

Define liquidity

Answer 18

Liquidity is how easily an assets can be converted into cash

Question 19

Define money markets

Answer 19

Where that securities with maturities of one year or less are traded, money market trades have high liquidity, therefore can easily be sold or traded with little loss of value, therefore low returns and low risk

Question 20

Define capital markets

Answer 20

Where that securities with maturities of one year or more and corporate stocks are issued and traded

Question 21

What are primary markets?

Answer 21

Where the initial offering origination of debt and equity securities take place

Question 22

What are secondary markets?

Answer 22

Physical locations or electronic forums, where debt (mortgage and bonds) and equity security are traded, investors can actively buy and sell existing securities in the secondary market

Question 23

‘What is the debt securities market?

Answer 23

Where money, market securities, bonds and mortgages are traded and originated

Question 24

What are equity securities markets?

Answer 24

Where corporate ownership shares are initially sold and traded

Question 25

What are derivative securities market?

Answer 25

Where financial contracts derived from underlying debt and equity securities are originated and traded , e.g. forwards, swaps, futures and options

Question 26

What are foreign exchange markets?

Answer 26

Electronic markets were institutional traders and banks buying sell, different currencies, on behalf of clients and businesses