As people want to protect from inflation will buy real estate instead of government bonds. But not everybody can make it.
Fixed Income (Overheating Economy)
If you are on a fixed income your purchasing power decreases.
What are the basic rules of the law of supply and demand?
Increase in prices leads to decrease in quantity demanded.
Decrease in prices increases the demand of a good or service.
When these two curves intersect we have equilibrium and the markets are efficient.
What makes the aggregate demand curve downward sloping?
The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
What makes the aggregate supply curve upward sloping?
The total supply of goods and services produced within an economy at a given overall price level and in a given time period. Normally there is a positive relationship between aggregate supply and the price level. Rising prices are usually signals for businesses to expand production to meet a higher level of aggregate demand, also known as "total output"
What is the definition of Elasticity?
Sensibility of the quantity emanded of a good or service when there is a variation in price. Elastic and Inelastic
Very sensitive, an increase in price result in a huge fall in the demand.
- When a good or service has a lot of substitutes.
- Relative amount spent in a good or service.
Not sensitive, big variations in pride do not result in big changes on quantity demanded. i.e. Oil.
Does not have subsitutives:
- Normal goods
- Inferior goods
What type of goods have positive income elasticity?
What type of goods have negative income elasticity?
What does the production possibilities frontier show?
Potential output of an economy
Combination of goods and services given the current set of resources
Shift: Depending on availability of resources, Technology
Economy: Allocation of Scarce resources among competing uses.
What is money?
Anthying that is widely used for making payments accounting for debt and credit.
What are the functions of money?
Medium of exchange: Avoid barter
Unit of account: Measure market value of goods and services and store value (use in future)
What are the two different types of money?
Commodity money or base money
What is commodity money/base money?
Is the money that is convertible on demand into a valuable commodity i.e. gold
What if Fiat Money?
Toke intrinsically worthless. The government gives the status of "legal tender". You need that fiat money to pay your taxes (i.O.U.) or cheque.
How was money created?
People deposited gold in the vault of goldsmith.
What is a bank?
Is any institution involved in financial intermediation (they accept deposits forms surplus units in the economy and make loans to deficits unites)
What is the function of the bank?
To connect savers with investors.
What is the monetary authority?
Why is banking a highly regulated industry?
Because of the capacity of the banking system to influence the money supply.
What is the Fractional Reserve Ratio?
One of the most important regulations enacted by monetary authority. Is the amount of money that banks must hold from depositors. Can not be lent to the public.
Describe five things about Central Banks.
In charge of regulating nations monetary systems
Lender of last resort
By Definition of its charter it is independent from the government
The reason is to prevent governments from printing money.
The objectives are to promote economic growth and price stability.
Lender of Last Resort
If a private bank defaults the central bank will respond from customers deposits
What are the three ways by which central banks influence money supply?
Open market operation
What is the Reserve Requirement?
If central banks increases money supply there less money can be "created or lend" by banks.
What is the Discount Rate?
Is the interest rate charged to member banks when borrowing short term from the central banks.
What is Open Market Operations?
The central bank buys government securities from selected firms increasing the "deposits" therefore allows bank to expand credit. The central bank sells securities catching deposits.
List five things about the Primary reserve currency in the US$
Purchase goods traded in US$
Reduce borrowing costs when backed by a strong currency
Manipulate their currency
$ hold in private hands abroad
Most import commodities (Oil, Gold, ...) are traded in US $
What are the financial management objectives?
The nature, purpose and scope of financial management
Organizational strategy and financial objectives
Maximizing and satisfying
The problems of multiple stakeholders
Shareholders as stake holders
What does intermediation refer to?
The process whereby potential borrowers are brought together with potential lenders by a third party, the intermediary.
Financial institution include what?
What is a financial market?
Is a "place" where people with surplus money and those required money can meet.
Name two types of financial markets
What is the Primary Market?
Deals with new issues of funds
What is the Secondary Market?
Allows existing holders of financial assets to sell them to other investors.
What are the functions of the bank?
Handling cheques, and account deposits
Lending out money in a variety of ways in order to achieve maximum return for their shareholders but with sufficient liquidity to repay customers as required.
What is the main liabilities of banks?
Their customers deposits.
Why must some assets include some liquid assets?
So not all deposits can be loaned.
Financial markets help investors to achieve what?
What is the difference between capital markets and money markets?
Capital markets deal with sources of long term finance (7 years+)
Money markets are sources of medium (1-7 years) and short term finance (up to one year) like treasury bills.
International capital markets include which two markets?
Foreign Bond Market
What does the eurocurrency market incorporate?
The short to medium term end of the euromarket
What are Eurobonds?
Bonds denominated in a currency different from that of the country of issue and sold internationally. Are long term loans usually 10-15 years, issued by international companies or other institutions which can be sold by one holder to another. The interest may be fixed or variable.
What is the basic function of the stock market?
To ensure a fair, orderly and efficient market for the transfer os securities.
Securities traded on the stock market are comprised of what?
Company securities (loan stock and ordinary and preference shares)
Public sector and foreign stock
Risk arises from what?
Variability of actual returns both below and above average return (or expected return)
What does risk return trade off mean?
That the expected return available on any type of investment is governed by the investment's perceived risk.
What is Capital Budget?
Is a programme of capital expenditure over a number of years updated every year
Before authorizing capital expenditure what should you do to the proposed spending?
What are the three appraisal methods?
Net Present Value
Interna Rate of Return
What is the Payback Period?
Measures of time taken to recover the initial outlay (a shorter payback period being preferential).
What are the advantages of the Payback Period method?
Sector (technology intensive)
Favors projects with a quick return
What are the disadvantages of the Payback Period method?
Cash flows ignored after payback period
What payback period is acceptable
What is the Net Present Value Method?
Is the value obtained by discounting all the cash flows relating to a proposal investment at the cost of capital to the business.
What is cost of capital?
Is the minimum return the business should make to rcover the cost of funding?
What are the assumptions of the Net Present Value Method?
Cash outlay occurs in Year 0
Cash flow occur all at once at the end of the year.
What is the Internal Rate of Return Method?
Is the discount rate which gives a NPV of zero
Allows the risk associated to an investment project to be assessed
Allows firms to assess weather an investment would yield a better return based on internal standards of return
Allows comparison for projects with different initial outlays
Set the cash flow to different discounting rate
What is Globalization?
Is the "worldwide trend of businesses expanding beyond their domestic boundaries"
What are the four Regional Trade Agreements?
North American Free Trade Agreement
Association of South East Asian Nations (ASEAN)
What does the European Union allow European countries?
Free movement of goods and services
What countries are included in the North American Free Trade Agreement?
What is the objective of the Association of South East Asian Nations (ASEAN)?
To accelerate growth.
What countries do the ASEAN include?
List seven reasons for why international.
Gain access to new customers
Obtain access to valuable natural resources
Help achieve lower costs
CApitalize on core competencies
Spread business risk across wider market base
Extend life cycle of product
Why go international?
Increase size of potential market
Increase in scale of operations
What are the risks of going international?
Political and economic risks
Management risks (cross-cultural differences)
What is the local responsiveness solution to the key dilemma of local vs. global?
Customize organizations and products to country or regional differences.
What is the global integration solution to the key dilemma of local vs. global?
Reduce costs with worldwide standardized products, uniform promotional strategies and distribution channels
Seek lower costs or higher quality anywhere in the value chain and in the world.
What are some components of the Local Strategy?
Local markets are linked within a region.
Gives top priority to local responsiveness issues
A form of the differentiation strategy
Not limited to large multinationals
What are the two top priority goals of Global Strategy?
Seek location advantages
Gain economic efficiencies from worldwide
What are the Benefits of Global Strategy?
Higher quality of products
Customer satisfaction - can obtain and service product anywhere
Increased competitive power
What are the Risks/Problems with Globalization
Loss of identity - need to denationalize local operations for a common culture
More vulnerable to environmental risk
Difficult to manage - requires coordination of divergent cultures
Lack of local flexibility and responsiveness
Research shows that companies feel regionalization is more manageable and less risky
What are the locations of where to enter and the advantages of each?
Singapore - ideal stopping point for air and sea traffic connecting Europe/Asia and East Asia/Australia
Austria - MNE headquarters for Central/Eastern Europe
Turkey - great launch for Middle East and Asia
Miami - good location for companies coming North or going South
List four factors about location
Seeking natural resources
Market seeking firms - go after countries for highest price and highest demand
When it comes to participation strategies, what are the choices of how to enter each international market?
Foreign direct investment
How is exporting the easiest?
Low risk, minimal investment, and fast withdrawal
What is passive exporting?
Treating and filling overseas orders like domestic orders
What is active export strategies?
Indirect through Export Management Companies
What is international licensing?
Is a contractual agreement between a domestic licensor and a foreign licensee
What are the licensing distinctions?
Patent - legal protection for new inventions
Trademark - legal protection for symbols, picture [Nike Swoosh]
Trade Secret - coco cola formula etc
What is the International Strategic ALliance?
Cooperative agreements between two or more firms from different countries.
Why do we have the International Strategic Alliance?
To gain access to specific markets
Strategic alliances with Eastern European companies
To increase market share
To avoid import barriers, licensing requirements, and other protectionist legislation
What does the Foreign Direct Investment (FDI) mean?
That companies own and control directly a foreign operation. Symbolizes the highest stage of internationalization.
Why do we have the Foreign Direct Investment?
To extract raw materials
To find low cost sources of labor, components, parts, or finished goods
To penetrate new markets
What are the Advantages of FDI?
Lower costs of supplying host country
Avoid import quotas
Greater opportunity to adapt product to the local market
Better local image of the product
What are the disadvantages of FDI?
Increased capital investment
Increased investment of managerial and other resources
Greater exposure of the investment to political and financial risks
What are the specific functions (mostly micro-economic) of money?
Unit of account (abstract)
Common measure of value (abstract)
Medium of exchange (concrete)
Means of payment (concrete)
Standard for deferred payments (abstract)
Store of value (concrete)
What are the general functions (mostly macro-economic and abstract) of money?
Framework of the market allocative system (prices)
A causative factor in the economy
Controller of the economy
For what reasons were commodities chosen as preferred barter items?
Some because they were conveniently and easily stored
Some because they had high value densities and were easily portable
And some because they were durable
Want to see the other 122 Flashcards in Finance Midterm Exam?JOIN TODAY FOR FREE!