Review Sheet for the 1st Test

October 10th 2012

1.  What is money? What are the functions of money? What are desirable qualities of money?

2.  What does liquidity mean? Can you classify assets by their level of liquidity?

3.  What are financial assets? What are financial intermediaries?

4.  What is the difference between direct and indirect financing? What is a primary market? A secondary market? A capital market? A money market?

5.  What are the advantages and disadvantages of debt vs. equity as forms of finance for borrowers and lenders?

6.  Can you read various tables from the flow of funds accounts and tell what they are referring to? If you had to, could you try to explain what is happening to various instruments on the market and why?

7.  Can you distinguish between a simple loan, a discount bond, a coupon bond and a fixed payment loan?

8.  What does the concept of present value mean? Why is it useful? Can you write out the general formula for the present value for a future dollar?

9.  What is yield to maturity? Do you know the equations to calculate the YTM for the four different classes of assets in question 6?

10.  How are bond yields and prices related? Can you explain clearly why this is the case?

11.  What are the three types of risk facing any asset? Can you give examples of these types of risk

12.  What is the total rate of return on an asset? Can you calculate this?

13.  Can you use a graph to describe the bond market? Do you know what goes on each axis and why the demand for bonds is downward sloping while its supply is upward sloping? Can you explain how, from a situation of an excess supply or demand for bonds, you can get to the equilibrium?

14.  Do you know the determinants of the demand for and supply of bonds?

15.  Can you use the bond market and loanable funds markets curves to explain what will happen to bond prices and the interest rate when factors shift?

16.  What is a yield curve and what does it show?

17.  What is the money market? Can you explain what is meant by the terms discussed in PowerPoint 331_5 and how each of these instruments work?