PRINCIPLES OF FINANCE, CHAPTER 1 1.

Finance is the study of how individuals, institutions, government, and businesses acquire, spend, and manage money and other financial assets. 2. The three areas of finance are institutions and markets, investments, and financial management. 3. Entrepreneurial finance is the study of how growth-driven, performance-focused, early-stage firms raise financial capital and manage their operations and assets. Personal finance is the study of how individuals prepare for financial emergencies, protect against premature death and property losses, and accumulate wealth. 4. The six principles of finance are 1) money has time value, 2) higher returns are expected for taking on more risk, 3) diversification of investments can reduce risk, 4) financial markets are efficient at pricing securities, 5) manager and stockholder objectives may differ, 6) reputation matters. 5. Ethical behavior is how an individual or organization treats others legally, fairly, and honestly. 6. Several reasons for studying finance include 1) to make informed economic decisions, for example, knowing what to look for in politicians who affect the economic system. 2) To make informed personal and business decisions by better managing financial resources and accumulating wealth. 3) It also helps you to make informed career decisions based on a basic understanding of business finance. 7. Some career opportunities available to business graduates include financial management, loan analyst, bank teller, research analyst, real estate agent, stockbroker, etc. 8. An effective financial system includes policy makers, a monetary system, financial institutions, and financial markets. 9. Creating money is important for economic growth. Accumulating savings enables a financial institution to loan and invest money in large amounts. 10. Money must perform three basic functions, serving as a medium of exchange, a store of value, and a standard of value. 11. The barter system has many drawbacks including the difficulty in finding someone who has excess to trade with. The need for a simpler means of exchange led to the development of money. 12. All gold and silver coins are full-bodied money because their metal content was worth the same as their face values. Coins with face values higher than the value of their metal content are called token coins. 13. Representative full-bodied money is paper money backed by an amount of precious metal in value to the face amount of the paper money. Federal Reserve Notes, which are not backed by either gold or silver, are called fiat money because the government decreed the notes to be legal tender. 14. Deposit money, is money backed by the creditworthiness of the depository institution that issued the deposit. 15. Debit cards use a debit account in a bank. When someone wants to take out money, the money s/he gets is from his/her account. It is another way of paying cash without actually carrying the cash in your pockets.

PRINCIPLES OF FINANCE, CHAPTER 1 16. The M1 money supply consists of currency, travelers checks, demand deposits, and other checkable deposits at depository institutions. Currency is important, travelers checks less so, demand deposits and other checkable deposits account for 24% each of the M1. 17. The M2 money supply includes M1 plus highly liquid financial assets. Money market mutual funds issue shares to customers and invest the proceeds in highly liquid, very short maturity, interest-bearing debt instrument. 18. The M3 money supply includes M2 plus large time deposits and institutional money market mutual funds. 19. Monetarists believe the amount of money in circulation determines the GDP. Too much money can cause inflation, and vice versa. 20. Keynesians believe that a change in money supply changes interest rate levels which then alters the demand for goods and services. 21. The international monetary system was tied to the gold standard until a breakdown in gold standard during World War 1 led to less formal exchange systems. In 1944, world economic leaders agreed to an international monetary system tied to the US dollar or gold via fixed or pegged exchange rates.