Economics Chapter 11 Test Questions – Flashcards
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investment
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the act of redirecting resources from being consumed today so that they may create benefits in the future; the assets to earn income or profit
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financial system
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the network of structures and mechanisms that allows the tramsfer of money between savers and borrowers
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financial asset
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a claim on the property or income of a borrower
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financial intermediary
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an institution that helps channel funds from savers to borrowers
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mutual fund
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an organization that pools the savings of many inidividuals and invests this money in a variety of stocks, bonds, and other financial assets
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hedge fund
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a private investment organization that employs risky strategies to try to make huge profits for investors
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diversification
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the stragety of spreading out investments to reduce risk
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portfolio
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a collection of financial assets
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prospectus
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an investment report that provides information to potential investors
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return
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the money an investor receives above an beyond the sum of money initially invested
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coupon rate
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the interest rate that a bond issuer will pay to the bondholder
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maturity
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th time at which payment to a bondholder is due
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par value
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a bond's stated value, to be paid to the bondholder at maturity
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yield
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the annual rate of return on a bond if the bond if held to maturity
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savings bond
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a low-denomination bond issued by the US gov
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inflation-indexed bond
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a bond that protects the investor against inflation by its linkage to an index or inflation
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municipal bond
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a bond issued by a state or local gov or a municipality to finance a public project
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corporate bond
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a bond issued by a corporation to help raise money for an expansion
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junk bond
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bond with high risk and potentially high yield
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capital market
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a market in which money is lent for periods longer than a year
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money market
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a market in which money is lent for periods of one year or less
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primary market
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a market for selling financial assets that can be redeemed only by the original holder
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secondary market
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a market for reselling financial assets
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share
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a portion of stock
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captial gain
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the difference between the selling price and purchase price that results in a financial gain for the seller
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stock split
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the division of each single share of a company's stock into more than one share
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stockbroker
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a person who links buyers and sellers of stock
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brokerage firm
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a business that specializes in trading stocks
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stock exchange
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a market for buying and selling stock
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futures
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contracts to buy or sell commodities at a particular date in the future at a price specified today
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options
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contracts that give investors the right to buy or sell stock and other financial assets at a particular price until a specified future date
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call option
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a contract for buying stock at a particuar price until a specified future date
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put option
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a contract for selling stock at a particular price until a specified future date
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bull market
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a steady rise in the stock market over a period of time
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bear market
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a steady drop or stagnation in the stock market over a period of time
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speculation
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the practive of making high risk investments with borrowed money in hopes of getting a big return
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Capital loss
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The difference between the selling price that results in a financial loss for the seller
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Future
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An investment is something brought for _________________ financial benefit
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Growth ; wealth
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Investment promotes economic _____________________ and contributes to nation's ___________________
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Investing
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Is an essential part of the free enterprise system
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Financial system
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For an investment to take place, an economy must have a ...
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Savers and borrowers
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The financial system allows the transfer of money between _______________ and __________________
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Lending funds to others
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When people save, they are actually ...
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Savers ; financial institution ; investors
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_______________ makes deposits to _____________________ __________________________ that make loans to _________________
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1.banks 2. Saving and loans associations 3. Credit unions 4. Finance companies 5. Mutual funds 6. Hedge funds 7. Life insurance companies 8. Pension funds
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Financial intermediaries include [8]
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Mutual funds
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It allows people to invest in a broad range of companies in the stock market. It's less risky than purchasing the stock of only one or two companies that might do poorly
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Hedge funds
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They are not regulated by the SEC and have not had to reveal information about themselves
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Life insurance companies
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The function of this is to provide financial protection for the family or other people named as beneficiaries of the insured. For they do not pay the deceased debts
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Pension
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Is income that some retirees receive after working a certain number of years or reaching a certain age. Also a injured worker on the job can gain it
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Diversification; mutual funds
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Financial intermediaries allow investors to cut down risk through ___________________ and by buying ________________ ___________
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Liquidity
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Financial intermediaries also provide information and give investors more ________________
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Liquidity; risk
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Return is closely linked to ______________ and ____________
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In debt
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When you buy bonds you are _____ _________ to the seller of the bond
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Coupon rate Maturity Par value
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Three basic parts of a bond
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Maturity
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Not all bonds are held to _________________ over their lifetime they may be sold or bought and their price will change
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Interest
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Investors earn money from ____________ on the bonds they buy.
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Discount from par
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Investor may earn money by buying bonds at a discount, it is called ...
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Rank
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Standard & poor's and Moody's _________ bonds, which is how investors know how to buy bonds
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1. To make future interest payments 2. To repay the principal when the bond matures
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Standard & poor's and Moody's rank bonds according to the issuers abilities to [2]
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Little
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Bond holders with high ratings face ___________ risks of losing their investment, unlike bond holders with low ratings
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1. Once the bond is sold, the coupon rate for that bond is will not go up or down 2. Bond holders do not own part of the company, they do not get share profits
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Advantages of bonds to the issuer [2]
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1. The company must make fixed interest payments, even in bad years. 2. It cannot change its interest payments even when interest rates have gone down 3. If firm does not maintain financial health, bond rates go down
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Disadvantages of bonds to the issuer [3]
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Fixed interest payments
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Companies must make ____________ __________________ _______________________ on bonds they sell
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1. Saving bonds 2. Treasury bonds(bills and notes) 3. Municipal bonds 4. Corporate bonds 5. Junk bonds
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Five type of bonds [5]
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default ; repay
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Saving bonds has no risk of ____________, or failure to _________ the loan
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Treasury bonds
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These bonds are among the safest investments in terms of default risk, but the purchase price and return are governed by changing interest rates and market conditions
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Income taxes
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Municipal bonds are not subject to ______________ __________ at federal level or in issuing states
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Moderate risks ; junk bonds
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Corporation bonds have ________________________ ________, not as high as __________ ___________. -watched closed by independent rating firms and SEC
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1. Certificates of deposit (most common form of investment) 2. Money market mutual funds
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Two types of financial assets are
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Money market mutual funds
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Are special types of mutual funds, intermediaries buy short term financial assets, investors receive higher interest, and it is not covered by the FDIC
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1. Capital markets 2. Money markets
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Two type of financial asset markets
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1. Dividends 2. Capital gain
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Two ways stockholders make a profit
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Profit
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A stock price usually goes up if the company makes a ___________
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1. Income stocks (gets dividends) 2. Growth stocks (no to few dividends) 3. Common stocks (voting owners of the company) 4. Preferred stocks (nonvoting owners)
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Four types of stocks
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New York stock exchange (NYSE)
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The country's largest and most powerful exchange. It handles stock and bond transactions for the top companies in the United States and in the world.
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Blue chip stocks
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The largest most financially sound, and best known firms listed on the NYSE. Often in high demand
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Nasdaq
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Is the second largest securities market in the country and the largest electronic market for the stocks
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Dow jones industrial average
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A measure of stock performance
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Sarbanes-oxley act
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Congress passed this which was aimed at reforming lax accounting practices. As a result of this, top corporate leaders now have to verify that financial reports are accurate or face criminal charges
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Ordinary income
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The interest on corporate bonds is taxed as ....
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Securities and exchange commission (SEC)
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An independent government agency that regulates financial markets and investment companies
