Name_
Foundations of Finance: BUS 132
Test 1 Sample Solutions
You have 70 minutes to complete the exam. Make sure you answer the easier
questions first before getting bogged down on the tougher ones.
There are 3 pages and 2 parts in the exam. Make sure yo
Name_
Foundations of Finance: BUS 132
Test 1 - Sample
You have 70 minutes to complete the exam. Make sure you answer the easier
questions first before getting bogged down on the tougher ones.
There are 3 pages and 2 parts in the exam. Make sure you have a
Name_
Foundations of Finance: BUS 132
Test 1 - Solutions
You have 70 minutes to complete the exam. Make sure you answer the easier
questions first before getting bogged down on the tougher ones.
There are 4 pages and 2 parts in the exam. Make sure you hav
Name_
Foundations of Finance: BUS 132
Test 1 Sample
You have 70 minutes to complete the exam. Make sure you answer the easier
questions first before getting bogged down on the tougher ones.
There are 3 pages and 2 parts in the exam. Make sure you have all
Name_
Foundations of Finance: BUS 132
Test 1
You have 70 minutes to complete the exam. Make sure you answer the easier
questions first before getting bogged down on the tougher ones.
There are 3 pages and 2 parts in the exam. Make sure you have all 3 page
Name_
Foundations of Finance: BUS 132
Test 2 Sample
You have 70 minutes to complete the exam. Make sure you answer the easier
questions first before getting bogged down on the tougher ones.
There are 3 pages and 2 parts in the exam. Make sure you have all
Name_
Foundations of Finance: BUS 132
Test 2 Sample Solutions
You have 70 minutes to complete the exam. Make sure you answer the easier
questions first before getting bogged down on the tougher ones.
There are 3 pages and 2 parts in the exam. Make sure yo
Overview of Financial
Economics
What is finance?
Finance: decisions on resource allocation
over time
Costs and benefits are:
Spread out over time
Not know with certainty in advance
Financial system
Financial markets
Financial institutions
2
Why study fina
Firm and Financial System
Firm
Firm: an entity whose primary function is to
produce goods and services
Small workshops; big corporations
Firms are organized into different forms
Sole proprietorship
Partnership
Corporations
The goal of a corporation
2
Fina
The Time Value of
Money
Future Value - Amount to which an investment
will grow after earning interest.
Compound Interest - Interest earned on
interest.
Simple Interest - Interest earned only on the
original investment.
Example - Simple Interest
Interest e
Bond Valuation
Terminology
Bond - Security that obligates the issuer to make
specified payments to the bondholder.
Coupon - The interest payments made to the
bondholder.
Face Value (Par Value or Maturity Value) - Payment
at the maturity of the bond.
C
Risk Management
Risk uncertainty that matters to
peoples welfare. Not all uncertainty
matters
Deviation from the expected value;
downside and/or upside
All risks are ultimately borne by people in
their capacity as consumers, stakeholders
or taxpayers
Risk
Name_
Foundations of Finance: BUS 132
Test 1 Sample Solutions
You have 70 minutes to complete the exam. Make sure you answer the easier
questions first before getting bogged down on the tougher ones.
There are 3 pages and 2 parts in the exam. Make sure yo
Stock Valuation
Primary Market - Place where the sale of
new stock first occurs.
Initial Public Offering (IPO) - First offering
of stock to the general public.
Seasoned Issue - Sale of new shares by a
firm that has already been through an IPO
Common Stock
The Agency Conflict: Stockholders Versus Managers and Why it holds Interest to us
Between the two primary agency relationships that compose of The Agency Conflict, our
group holds a stronger interest in the Stockholders versus Managers aspect. Demonstrate
Readings
Sample Tests
Material discussed
Bonds:
Bond Pricing
PV= cpn/(1+r)^1, cpn=coupon
Current Yields
Current Yield - Annual coupon payments dividend by bond price
Yield to Maturity (%) - Interest rate for which the present value of the bonds payments
CHAPTER 4: Part 2
Allocating Resources Overtime: Time Value of
Money
KEY CONCEPTS AND SKILLS
Be able to compute the future value of
multiple cash flows
Be able to compute the present value of
multiple cash flows
Be able to compute loan payments
Be abl
Overview of Financial
Economics
What is finance?
Finance: decisions on resource allocation
over time
Costs and benefits are:
Spread out over time
Not know with certainty in advance
Financial system
Financial markets
Financial institutions
2
Why study fina
Principle of Market
Valuation
Value and Price
An assets value is the price it would fetch
if sold in a competitive market
Price can temporarily deviate from
fundamental value security analysts
Identify mispricing profit opportunities
Value assets accurate
Saving and Investment
Decisions
Life Cycle of Savings and Consumption
An example:
You are 35 years old, expect to retire in 30 years
when 65, and live for another 15 years till 80.
You make $30,000 per year until age 65. Interest
rate is 3% per year.
How
The Time Value of
Money
Future Value - Amount to which an investment
will grow after earning interest.
Compound Interest - Interest earned on
interest.
Simple Interest - Interest earned only on the
original investment.
Example - Simple Interest
Interest e
Bond Valuation
Terminology
Bond - Security that obligates the issuer to make
specified payments to the bondholder.
Coupon - The interest payments made to the
bondholder.
Face Value (Par Value or Maturity Value) - Payment
at the maturity of the bond.
C
Capital Market
Equilibrium
To
capture the equilibrium prices in the
markets for risky assets
Derived in the 1960s; led to the rising of
index funds
Provides a way of estimating expected rate
of return used in financial decision making
Assumptions
Mark
Financial Structure of the Firm
INTERNAL VS. EXTERNAL
FINANCING
INTERNAL FINANCING
RETAINED EARNINGS, ACCRUED
WAGES, ACCOUNT PAYABLES
EXTERNAL FINANCING
FUNDS RAISED FROM OUTSIDE
LENDERS OR INVESTORS
BONDS; STOCKS
THE PROCESS OF EXTERNAL FINANCING
IS M
Financial Portfolio
Portfolio Selection
A persons portfolio includes:
Assets: stocks, bonds, real estate, pension
benefits etc.
Liabilities: auto loans, home mortgage, etc.
There is no single portfolio selection
strategy that is best for all people
Some g
Option Markets
Call
Option
Right to buy asset at specified exercise price on or
before specified expiration date
Strike
Price
Price set for calling/putting asset
Premium
Purchase price of option
Put
Right to sell asset at specified exercise price on o
Forward and Future
Markets
Forward
contract: an agreement between two
parties for delivery of an item on a specified
future date for an agreed-upon price
The party who agrees to buy is taking a long
position; the party who agrees to sell is taking a
sho
CHAPTER 1
BODIE, MERTON, AND CLEETON
FINANCIAL ECONOMICS
KEY CONCEPTS AND SKILLS
Why Study Finance? Allocating Scarce Resources
over time: intertemporal and uncertainty
dimensions
Financial Decisions of Households and Firms
Know the financial implicati