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WVU FIN 330 - Exam 1 Study Guide
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Finance 330 5th EditionExam # 1 Study Guide chapters 1-4Chapter 1Financial Markets: structures through which funds flowPrimary Markets vs. Secondary MarketsPrimary Markets: are markets in which corporations raise funds through new issuesSecondary Markets: markets that trade financial instruments once they are issued.Types of Financial Markets-Money Markets: markets that trade debt securities or instruments with maturities of less than a yearCapital Markets: markets that trade debt and equity instruments with maturities of more than one yearForeign Exchange Markets: markets in which cash flows from the sale of products of assets denominated in a foreign currency are transactedDerivative Markets: markets in which derivative securities tradeInitial Public Offerings: the first public issue of financial instruments by a firmDerivative Security: a financial security whose payoffs are linked to other, previously issued securitiesMoney Markets vs. Capital MarketsMoney Markets: markets that trade debt securities or instruments with maturities of one year of lessOver-the-Counter Markets: markets that do not operate in a specific fixed location- rather, transactions occur via telephones, wire transfers, and computer tradingCapital Markets: markets that trade debt and equity instruments with maturities of more than one yearMoney Market InstrumentsTreasury Bills: short-term obligations issued by the U.S. governmentFederal funds: short-term funds transferred between financial institutions usually for no more than one day Repurchase agreements: agreements involving the sale of securities by one party to another with a promise by the seller to repurchase the same securities from the buyer at a special date and priceNegotiable certificate of deposit: bank-issued time deposit that specifies an interest create and maturity and is negotiableBanker’s acceptance: time draft payable to a seller of goods, with payment guaranteed by a bankCorporate stock: the fundamental ownership claim in a public corporationMortgages: loans to individuals of business to purchase a home, land, or other real propertyCorporations bonds: long-term bonds issued by corporationsTreasury bonds: long-term bonds issued by corporations State and local government bonds: long-term collateralized by a pool of assets and issued but agencies of the U.S. governmentBank and consumer loans: loans to commercial banks and individuals Derivative Security Markets: the markets in which derivative securities tradeDerivative Security: an agreement between two parties to exchange a standard quantity of an asset, at a predetermined price on a specified date in the future Financial Regulation- Financial instruments are subject to regulations imposed but regulatory agencies such as the SECFinancial Institutions: Institutions that preform the essential function of channeling funds from those with surplus funds to those with shortages of fundsTypes of Financial Institutions-- Commercial banks- Thrifts- Insurance companies- Securities firms and investment banks- Finance companies- Mutual funds- Hedge funds- Pension fundsDirect Transfer: A corporation sells its stock of debt directly to investors without going through a financial institution Indirect Transfer: a transfer of funds between suppliers and users of funds through a financial intermediaryLiquidity: the ease with which an asset can be converted into cash as its fair market ValuePrice Risk: the risk that an asset’s price with be lower than its purchase priceDelegated Monitor: an economic agent appointed to act on behalf of smaller investors in collecting information and/or investing on their behalfAsset Transformers: financial claims issued by an FI that are more attractive Diversity: the ability of an economic agent to reduce risk by holding a numberEconomies of scale: the concept that cost reduction in trading and other transaction services results from increased efficiency when Fls preform these servicesEtrade: buying and selling shares on the internetChapter 2Nominal Interest Rates: The interest rates actually observed in financial markets Loanable Funds: a theory of interest rate determination that views equilibrium interest rates in financial markets as a result of the supply and demand for loanable funds-The quantity of loanable funds supplied increases as interest rates increase-The aggregate supply of loanable funds is the sum of the quantity supplied by the separate fund supplying sectors (households, businesses, governments, foreign agents)Factors That Cause the Supply and Demand Curves for Loanable Funds to ShiftSupply of funds- wealth of fund suppliers, risk of financial security, future spending needs, monetary policy objectives, and economic conditionsWealth- as the total wealth of financial market participants increases, the absolute dollar value available for investment purposes increasesRisk: as the risk of a financial security decreases, it becomes more attractive to suppliers of fundsNear-term Spending Needs- when financial markets participants have few near-term spending needs, the absolute dollar value of funds available to invest increases Economic conditions- underlying economic conditions themselves and improve in a country relative to other countries, the flow of funds to that country increasesInflation: The continual increase in the price level of basket of goods and servicesReal Interest Rate: the interest rate that would exist on a default free security if no inflation were expectedRIR= NIR-Expected(IP)Factors Affecting Nominal Interest Rates- Inflation- Real Interest Rate- Default Risk- Liquidity Risk- Special Provisions - Term to MaturityDefault risk: the risk that a security issuer will default on that security by being an interest of principle paymentsLiquidity Risk: the risk that a security can be sold at a predictable price with low transaction costs on shortsTerm and Structure of Interest Rates: A comparison of market yields on securities, assuming all characteristics except maturity are the same Unbiased Expectations Theory-at a given point in time the yield curve reflects the market’s current expectations of future short-term ratesLiquidity Premium Theory-is a extension of unbiased expectations theory, and is based of the idea that investors will hold long term maturities only if they offered at a premium to compensate for future uncertainty in a securities valueTime Value of Money-Time value of money is a notion


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WVU FIN 330 - Exam 1 Study Guide

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