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Finance Chapter 1
Finance Chapter 1
89
Finance
Undergraduate 4
09/08/2014

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Term
1. Finance is the study of how individuals, institutions, and businesses acquire, spend and manage money and
other financial resources.
Definition
T
Term
2. Financial markets provide the mechanism for allocating financial resources or funds from savers to
borrowers
Definition
T
Term
The primary goal of the financial manager in a profit-seeking organization is to maximize the owners’
wealth.
Definition
T
Term
The secondary securities markets are involved in creating and issuing new securities, mortgages, and other
claims to wealth.
Definition
F
Term
Money markets are the markets where generally short-term assets are traded.
Definition
T
Term
One of the most significant functions of the financial system is the creation of money, which serves as a
medium of exchange.
Definition
T
Term
Personal finance is the study of how growth-driven performance-focused, early-stage firms raise financial
capital and manage operations and assets.
Definition
F
Term
Personal finance is the study of how individuals prepare for financial emergencies, protect against
premature death and property losses, and accumulate wealth.
Definition
T
Term
An effective financial system is a complex mix of government and policy makers, a monetary system,
financial institutions, and financial markets that interact to expedite the flow of financial capital from savings
into investment.
Definition
T
Term
Capital markets are markets where equity securities and debt securities with maturities of greater than
one year are traded.
Definition
T
Term
Money markets are markets where equity securities and debt securities with maturities of greater than
one year are traded.
Definition
F
Term
The six principles of finance include (1) Money has a time value, (2) Higher returns are expected for
taking on more risk, (3) Diversification of investments can reduce risk, (4) Financial markets are efficient in
pricing securities, (5) Manager and stockholder objectives may differ, and (6) Reputation matters.
Definition
T
Term
The principle of finance that "money has a time value" implies Money in hand today is worth less than
the promise of receiving the same amount in the future because a sum of money today could be invested and
grow over time.
Definition
F
Term
The principle of finance that "lower returns are expected for taking on less risk" implies that rational
investors would choose a risky investment only if they feel the expected return is high enough to justify the
greater risk.
Definition
T
Term
The principle of finance that "financial markets are efficient in pricing securities" implies that the prices
of securities reflect some information available to the public and that when new information becomes available,
prices change over time to reflect that information.
Definition
F
Term
The principle of finance that "management objectives may differ from owner objectives" implies that
owner returns may suffer as a result of manager objectives.
Definition
T
Term
The principle of finance that "management objectives may differ from owner objectives" can be
resolved by increasing manager salaries.
Definition
F
Term
The principle of finance that "reputation matters" implies that for institutions or businesses to be
successful, they must have the trust and confidence of their customers, employees, and owners, as well as the
community and society within which they operate.
Definition
T
Term
The principle of finance that "reputation matters" sometimes is harmed by the different objectives of
owners and managers.
Definition
T
Term
While the financial press chooses to highlight examples of unethical behavior, most individuals exhibit
sound ethical behavior in their personal and business dealings and practices.
Definition
T
Term
The U.S. Treasury Department is primarily responsible for the amount of money that is created in
the U.S. economy.
Definition
F
Term
Financial system functions include accumulating savings and lending funds.
Definition
T
Term
Three financial system components are the U.S. Treasury, financial institutions, and financial
markets.
Definition
F
Term
Individuals and businesses hold money for purchases or payments they expect to make in the near
future.
Definition
T
Term
Money markets are where debt securities with maturities of one year or more are issued and
traded.
Definition
F
Term
Derivative securities may be used to speculate on the future price direction of the underlying
financial assets or to reduce price risk associated with holding the underlying financial assets.
Definition
T
Term
Because the relative values of currencies may change, firms cannot use the currency exchange
markets to reduce the risk of holding too much of certain currencies.
Definition
F
Term
Entrepreneurial finance is the study of how individuals prepare for financial emergencies, protect
against premature death and property losses, and accumulate wealth.
Definition
F
Term
The six principles of finance include (1) Money has a time value, (2) Higher returns are expected for
taking on less risk, (3) Diversification of investments can increase risk, (4) Financial markets are inefficient in
pricing securities, (5) Manager and stockholder objectives may differ, and (6) Reputation matters.
Definition
F
Term
The principle of finance that "money has a time value" implies Money in hand today is worth more than
the promise of receiving the same amount in the future because a sum of money today could be invested and
grow over time.
Definition
T
Term
The principle of finance that " higher returns are expected for taking on more risk " implies that rational
investors would choose only safe investment because they generally do not feel that a higher return enough to
justify taking greater risk.
Definition
F
Term
The principle of finance that "financial markets are efficient in pricing securities" implies that the prices
of securities reflect all information available to the public and that when new information becomes available,
prices quickly change to reflect that information.
Definition
T
Term
The principle of finance that "financial markets are inefficient in pricing securities" implies that the
prices of securities reflect all information available to the public and that when new information becomes
available, prices quickly change to reflect that information.
Definition
F
Term
The role of financial institutions in a country’s financial system is to accumulate and invest savings.
Definition
T
Term
The role of financial markets in a country’s financial system is to accumulate and invest savings.
Definition
F
Term
The primary goal of the financial manager of a profit-seeking organization is to:
Definition
maximize the owners’ wealth
Term
Finance has its origins in:
Definition
accounting and economics
Term
Finance is:
Definition
the study of how individuals, institutions, governments, and businesses acquire, spend, and manage money and other financial assets
Term

Crucial elements of the financial environment and well-developed financial system include:

 

a. financial institutions
b. financial markets
c. investments and financial management

d. all of the above

Definition
a. financial institutions b. financial markets c. investments and financial management
Term
An area of finance that involves the sale or marketing of securities, the analysis of securities, and the
management of investment risk through portfolio diversification is referred to as:
Definition
investments
Term
The issuing of new securities, mortgages, and other claims to wealth takes place in the:
Definition
primary market
Term

An effective financial system must have:

 

a. several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies

b. an efficient monetary system for creating and transferring money

c. financial markets that facilitate the transfer of financial assets amongst individuals, institutions, and businesses

d. all of the above

 

Definition

 

a. several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies

b. an efficient monetary system for creating and transferring money

c. financial markets that facilitate the transfer of financial assets amongst individuals, institutions, and businesses

Answer:d. all of the above

Term
An area of finance that refers to the physical locations or electronic forums that facilitate the flow of funds
among investors, businesses, and governments is called:
Definition
a. financial management
b. investments
c. financial institutions
d. financial markets
Answer : none of the above
Term
An area of finance that involves financial planning, asset management and fund-raising decisions to enhance
the value of businesses is called:
Definition
financial management
Term
An area of finance that involves the study of organizations or intermediaries that help the financial system
operate efficiently and transfer funds from savers and investors to individuals, businesses, and governments that
seek to spend or invest the funds in physical assets (inventories, buildings, and equipment) is called:
Definition
financial institutions
Term

An area of finance that involves the study of government institutions and their involvement in rescuing private firms is called:

 

a. financial management

 

b. investments

 

c. financial institutions

 

d. financial markets

 

e. none of the above

 

Definition
none of the above
Term
The ______________ is a term used to describe the financial system, institutions, markets, businesses,
individuals, and global interactions that help the economy operate efficiently
Definition
financial environment
Term
The primary securities markets are
Definition
the markets where financial assets such as stocks and bonds are initially issued
Term
Finance has its origins in:
Definition
economics and accounting
Term
Economists use a ___________________ framework to explain how the prices and quantities of goods and
services are determined in a free-market economic system.
Definition
supply-and-demand
Term
____________________ provide the record-keeping mechanism for showing ownership of the financial
instruments used in the flow of financial funds between savers and borrowers and record revenues, expenses,
and profitability of organizations that produce and exchange goods and services.
Definition
Accountants
Term
________________________________________ are crucial elements of the financial environment and well-developed financial systems.

a. Businesses and the federal government
b. International organizations such as the World Bank and International Monetary Fund
c. Well-developed barter systems
d. Financial institutions, financial markets, and investment and financial management
Definition
Financial institutions, financial markets, and investment and financial management
Term
___________________ are intermediaries, such as banks, insurance companies, and investment companies
that engage in financial activities to aid the flow of funds from savers to borrowers or investors.
Definition
Financial Institutions
Term
____________________ in business involves making decisions relating to the efficient use of financial
resources in the production and sale of goods and services.
Definition
Financial management
Term
Maximizing _____________________ is accomplished through effective financial planning and analysis,
asset management, and the acquisition of financial capital.
Definition
the owners’ wealth.
Term
Successful businesses typically progress through a series of life-cycle stages—from the idea stage to exiting
the business; these five stages include the:
Definition
development stage, startup stage, survival stage, rapid growth stage, and maturity stage.
Term
_______________ is the study of how growth-driven, performance-focused, early-stage (from development
through early rapid growth) firms raise financial capital and manage their operations and assets.
Definition
Entrepreneurial finance
Term
_______________ is the study of how individuals prepare for financial emergencies, protect against
premature death and the loss of property, and accumulate wealth over time.
Definition
Personal finance
Term
Reasons we study finance include all of the following except:

a. To make informed economic decisions
b. To make informed personal and business investment decisions
c. To make informed career decisions based on a basic understanding of business finance
d. To make informed medical decisions
e. all of the above about reasons to study finance.
Definition
To make informed medical decisions
Term
The six principles of finance include all of the following except:
Definition
a. Money has a time value.
b. Higher returns are expected for taking on more risk
c. Diversification of investments can reduce risk
d. Financial markets are efficient in pricing securities
Answer: all of the above are included in the six principles.
Term
Among the six principles of finance, all are included except:
Definition
All decisions are ultimately financial decisions.
Term
Which statement best describes the six principles of finance?
Definition
Money has a time value; Higher returns are expected for taking on more risk; Diversification of investments can reduce risk; Financial markets are efficient in pricing securities; Manager and stockholder objectives may differ; Reputation matters.
Term
An effective financial system needs:

a. an efficient monetary system
b. to be able to create capital by channeling savings into investment
c. markets in which to buy and sell claims to wealth
d. all of the above
Definition
a. an efficient monetary system
b. to be able to create capital by channeling savings into investment
c. markets in which to buy and sell claims to wealth
Answer: all of the above
Term
Crucial elements of well-developed financial systems include all of the following except:

a. government control of the economy
b. financial intermediaries (institutions)
c. financial markets
d. all of the above
Definition
government control of the economy
Term
Financial functions in the U.S. financial system include:
Definition
a. transferring financial assets
b. creating money
c. accumulating savings
Answer: all of the above
Term
$1,000 invested today at 6% interest would be worth ________ one year from now
Definition
$1,060
Term
If the interest rate is greater than 0%, then a dollar today is worth
Definition
more than a dollar tomorrow
Term
If the interest rate is equal to 0%, then a dollar today is worth
Definition
the same as a dollar tomorrow
Term
A basic requirement for an effective financial system is a monetary system that performs which of the
following financial functions?

a. formation and transferring of money
b. storing gold and silver to back up money
c. creating jobs
d. transferring real assets
Definition
formation and transferring of money
Term
Rational investors would consider an investment in a risky business venture only if they feel the expected
return is high enough to justify the
Definition
greater risk.
Term
Two risky assets can be combined to lower the overall risk of a portfolio. This principle is commonly
referred to as
Definition
diversification
Term
In the United States, most money is created by:
Definition
depository institutions
Term
Basic requirements of an effective financial system include:
Definition
a. creating money
b. transferring money
c. accumulating savings
Answer: all of the above
Term
The theory of ___________________ implies that information is quickly embedded in prices making it
difficult for investors to "beat the market."
Definition
efficient markets
Term
The basic requirements for an effective financial system in a developed economy include:
Definition
a. a monetary system
b. a savings-investment process
c. markets for the transfer of financial assets
Answer: all of the above
Term
The possible conflict between managers and owners is sometimes called the
Definition
principal-agent problem
Term
______________ behavior refers to how an individual or organization treats others legally, fairly, and
honestly.
Definition
Ethical
Term
Career opportunities in finance involving both treasury and control functions are generally associated with:
Definition
business financial management
Term
Intermediaries that help the financial system operate efficiently and transfer funds from savers and investors
to individuals, businesses, and governments that seek to spend or invest the funds are known as:
Definition
financial institutions
Term
An economy’s _____________________ is the interaction of policy makers, a monetary system, financial
institutions, and financial markets to expedite the flow of financial capital from savings into investment:
Definition
financial system
Term
An efficient ______________ that is comprised of a central bank and a banking system that is able to create
and transfer a stable medium of exchange called money.
Definition
monetary system
Term
An effective financial system must have
Definition
a. financial markets that facilitate the transfer of financial assets among individuals, institutions, businesses, and governments.
b. financial institutions or intermediaries that support capital formation either by channeling savings into investment in physical assets or by fostering direct financial investments by individuals in financial institutions and businesses.
c. an efficient monetary system that is comprised of a central bank and a banking system that is able to create and transfer a stable medium of exchange called money.
d. several sets of policy makers who pass laws and make decisions relating to fiscal and monetary policies.
Answer: all of the above are required
Term
________________ facilitate the transfer of financial assets among individuals, institutions, businesses, and
governments.
Definition
Financial markets
Term
The _________________ is primarily responsible for the amount of money that is created, although most of
the money is actually created by depository institutions.
Definition
Federal Reserve System
Term

Functions of the monetary system include all of the following except

 

a. creating money

 

b. transferring money

 

c. accumulating savings

 

d. all of the above are included as functions of a monetary system

 

Definition
accumulating savings
Term
What are some examples of career choices in Financial Management?
Definition
-Cash Management Analyst
-Capital Expenditures analyst
-Credit analyst
-financial analyst
-cost analyst
-tax analyst
Term
What are some examples of career choices in Depository Financial Institutions?
Definition
-loan analyst
-bank teller
-investments research analyst
Term
What are some examples of career choices in Contractual Savings and Real Property Organizations?
Definition
-insurance agent or broker
-research analyst
-real estate agent
-mortgage analyst
Term
What are some examples of career choices in Securities Markets and Investment Firms?
Definition
-stockbroker
-account executive
-security analyst
-investment banking analyst
-financial planner assistant
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