Fi363 Final Exam Study Notes

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FI363 STUDY GUIDE FOR FINAL

Multiple Choice -- Review the following course concepts.

a. Interest rates and interest rate calculations
a. An interest rate is the cost of borrowing or the price paid for the rental of funds ( usually expressed as a percentage of the rental of $100 per year. b. Interest rate calculations is the percentage of the rental of $100 per year. The interest rate calculation -- .50% is 0.005 and 50% is fifty cents charge on a dollar. Use calculator for figuring interest rates. PVM value and FV c. Q3C1 – The price paid for the rental of borrowed funds (usually expressed as a percentage of the rental of $100 per year is common referred to as the interest rate. b. Various types of financial markets

d. Q4—Financial markets and institutions: do all of the below – affect the types of goods and services produced in an economy, affect the profits of business and involve the movement of huge quantities of money. e. P 2, Financial markets are markets in which funds are transferred from people who have an excess of available funds to people who have a shortage. Money markets, capital markets, Stocks and bonds are capital markets (over 1 year) money market are less than one year. f. Financial markets are key factor in producing high economic growth, and poorly performing financial markets are one reason that many countries in the world remain desperately poor. g. Debt market is a form of financial market. Equity market is stock market h. Long term debt equity instruments are traded in the capital market—Q5 i. Securities are: a share of common stock, a treasury bill and a certificate of deposit. j. Financial markets are markets in which funds are transferred from people who have a surplus of available funds to people who have a shortage of available funds k. Primary market and secondary market

c. Various types of financial institutions
l. Financial intermediaries are institutions (such as banks, insurance companies, mututal funds, pension funds, and finance companies that borrow funds from people who have saved and then make loans to others. m. Financial institutions are what make financial markets work. n. Types of financial intermediary

i. Depository institutions: commercial banks, savings and loans, assoiations, mutual savings banks, credit unions ii. Contractual savings institutions: Life insurance companies, fire and casualty insurance companies, pension funds, government retirement funds iii. Investment intermediaries: finance companies, mutual funds, money market mutual funds, o. The largest financial intermediaries are banks

p. Life insurance company is a contractual savings institution

d. Direct and indirect finance
q. Direct finance the borrowers borrow funds directly from lenders in financial markets by selling them securities (also called financial instruments) which are claims on the borrower’s future income or assets. r. Indirect finance involves a financial intermediary that stands between the lender-savers and the borrower-spenders and helps transfer funds from one to the other. A financial intermediary does this by borrowing funds from the lender-savings and then using these funds to make loans to borrower-spenders s. The process of indirect finance using financial intermediaries, called financial intermediation, is the primary route for moving funds from lenders to borrowers. t. Indirect finance, which involves the activities of financial intermedairies, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets. iv. Direct finance invoices the sale to households of marketable securities such as stocks and bonds. v. Indirect finance – person puts money in bank and another person or business or banks gets loan from...
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