AFM 121 MIDTERM EXAM QUESTIONS AND ANSWERS
WITH COMPLETE SOLUTIONS GRADED A++
Capital
- money, savings of individuals, corporations, governments
Direct Investments
- assets that generate wealth
Financial Assets: stocks, bonds, treasury bills
- Companies and governments issue these assets and receive funds
- take these funds and invest them directly
- Investors buy these assets to generate a return (ie. make more money than originally
invested)
Efficient Allocation of Capital
- those who have capital will only transfer/invest if it is easy, cheap, good return
Capital flows depend on:
- political environment
- economic trends
- fiscal policy
- monetary policy
- investment opportunities
Sources of Capital
, - retail, institution, foreign investors
- individuals
- institutional investors (pension funds, mutual funds)
- foreign investors
Purposes of Capital
- not used by individuals
- businesses earn money and then reinvest it in products, markets, machinery, etc.
Financial Instruments: Debt
- funds borrowed, paid at maturity date, interest payments in between
Financial Instruments: Equity
- represented by stocks/shares in a company
- as an equity investor, you own part of the company
- annual meetings and voting privileges
- may also receive regular dividend payments
Financial Markets: Efficient
- fast (minimal delays with buying and selling), cheap, liquid
- buying/selling homes may not be efficient, but buying/selling stocks should be
Financial Markets: Primary Markets
- securities (shares/bonds) sold by issuers for first time
- received money from this sale
- may be IPO or subsequent equity offering
Financial Markets: Secondary Markets
WITH COMPLETE SOLUTIONS GRADED A++
Capital
- money, savings of individuals, corporations, governments
Direct Investments
- assets that generate wealth
Financial Assets: stocks, bonds, treasury bills
- Companies and governments issue these assets and receive funds
- take these funds and invest them directly
- Investors buy these assets to generate a return (ie. make more money than originally
invested)
Efficient Allocation of Capital
- those who have capital will only transfer/invest if it is easy, cheap, good return
Capital flows depend on:
- political environment
- economic trends
- fiscal policy
- monetary policy
- investment opportunities
Sources of Capital
, - retail, institution, foreign investors
- individuals
- institutional investors (pension funds, mutual funds)
- foreign investors
Purposes of Capital
- not used by individuals
- businesses earn money and then reinvest it in products, markets, machinery, etc.
Financial Instruments: Debt
- funds borrowed, paid at maturity date, interest payments in between
Financial Instruments: Equity
- represented by stocks/shares in a company
- as an equity investor, you own part of the company
- annual meetings and voting privileges
- may also receive regular dividend payments
Financial Markets: Efficient
- fast (minimal delays with buying and selling), cheap, liquid
- buying/selling homes may not be efficient, but buying/selling stocks should be
Financial Markets: Primary Markets
- securities (shares/bonds) sold by issuers for first time
- received money from this sale
- may be IPO or subsequent equity offering
Financial Markets: Secondary Markets
