Fi363 Week 3 Quiz

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
Money markets are wholesale markets. . . Sold in large denominations . . low risk . . Matures in one year or less and usually less than 120 days . . Primary money market players: US Treasury, Federal Reserve banks, businesses, investments

l. Capital markets . Capital market is a financial market in which longer term debt (maturity of greater than one year) and equity instruments are traded 20. . Capital market comprises of the bond market, the mortgage market and stock market. . IPO is primary market . primary issuers of capital markets securities are federal and local governments and corporations. . Largest purchasers of capital market securities are households. Household use funds to purchase capital market instruments such as bonds and stock. . Includes both primary and secondary markets as capital markets are trading in both of these markets. . OTC – over the counter exchange and organized exchanges are two types of exchanges . Organized exchange has a building where securities trade. OTC deals in smaller size stock companies and no actually building where securities are trading, rather the trading is done in multiple locations with various traders on phone or computer and basically the OTC
5. The financial system is among the most heavily regulated sectors of the economy. i. 6. Only large, well-established corporations have easy access to securities markets to finance their activities. j. 7. Collateral is a prevalent feature of debt contracts for both households and businesses. k. .8. Debt contracts typically are extremely complicated legal documents that place substantial restrictions on the behavior of borrower. l. Transaction costs and economies of scale – the reduction in transaction costs per dollar of investment as the size (scale of transactions increases. m. Asymmetric information: Adverse selection and moral hazard. Influence these have on markets n. Agency theory is a form of asymmetric information problems that affect economic behavior is called agency theory. This theory here to explain why financial structure takes the form it does, thereby explaining the facts outlined at the beginning of the chapter. o. The lemon Problems is how adverse selection influences financial structure. Lemons in the stock and bonds market and tools that help to solve adverse selection problems. Private production and sale of