Theory Of Financial Markets

Question 1

What is finance

Answer 1

The study of present value of the prospective receipt of something of value

Question 2

Three questions of finance

Answer 2

1) how to determine prices of things that provide owners with future amounts of money
2) what is the value today of future amounts of money
3) is the price and value today of future amounts of money the same

Question 3

What is an asset

Answer 3

Something of value that represents known or potential receipts of value. Can be a house or car, or a stock or bond.

Question 4

What is a financial asset/security

Answer 4

Asset that imparts a current secured claim of ownership to future cash flows, and the financial contracts that concern themselves with such assets

Question 5

Default free

Answer 5

Honoring promises and paying what it promises to pay and when it promises to do so. Sovereign debt is default free bc it can print its own money, state debt is not

Question 6

Risk free

Answer 6

Certainty of outcome, absence of uncertainty regarding future VALUE. Time and inflation can make bonds not risk free; therefore, the risk free asset is sovereign debt with a very very short maturity. Aka, the 1 day T-bill or the overnight repo rate.

Question 7

What is arbitrage

Answer 7

Buying something at one price and selling it a higher price without assuming any risk in doing so.

Question 8

Unless ___, an arbitrage transaction is unlikely to be possible

Answer 8

An asset has two different prices at the same time (ex: in two marketplaces)