FIN-350 EXAM 1 Study Guide (GCU) Questions & Answers Already Passed!!

"Banking Act of 1933," referred to as the Glass-Steagall Act of 1933 - was passed during the Great Depression.This act provided for the separation of commercial banking activities and investment banking activities in the United States. 2 Types of assets - real assets: include the direct ownership of land, buildings or homes, equipment, inventories, durable goods, and precious metals. financial assets: money, debt securities and financial contracts, and equity securities that are backed by real assets and the earning power of the issuers 3 areas of finance within the financial environment - institutions and markets, investments, and financial management 3 basic Functions of money - 1. serving as a medium of exchange: the basic function of money 2. a store of value-money: held for some period of time before it is spent, and a 3. standard of value: a function of money that occurs when prices and debts are stated in terms of the monetary unit 3 basic ways to clear a check through the U.S. banking system - 1. Bank to bank 2. Through a bank clearinghouse 3. Through a Federal Reserve Bank 3 types of Banking Risk - liquidity risk, credit risk, interest rate risk liquidity risk- likelihood that a bank will be unable to meet depositor withdrawal demands and other liabilities when due credit (default) risk - the chance of nonpayment or delayed payment of interest or principalinterest rate risk- possible price fluctuations in fixed rate debt instruments associated with changes in market interest rates. (EQUATIONS: Common equity capital ratio, Tier 1 ratio, Total capital ratio) 4 Financial Institutions Categories - depository institutions, contractual savings organizations, securities firms, finance firms 4 major components of the U.S. financial system - policy makers: pass laws and make decisions relating to fiscal and monetary policies (president, congress, and the U.S. Treasury, the Federal Reserve Board). monetary system: composed of a central bank and a banking system that is able to create and transfer a stable medium of exchange called money. CREATING AND TRANSFERRING MONEY. financial institutions: or intermediaries, that support capital formation either by channeling savings into investment in real assets or by fostering direct financial investments by individuals in financial institutions and businesses. ACCUMULATING & LENDING/INVESTING SAVINGS financial markets: facilitate the transfer of financial assets among individuals, institutions, businesses, and governments. MARKETING AND TRANSFERRING FINANCIAL ASSETS 6 principles of finance (sixth is ethical based, others are economic based) - 1. Money has a time value 2. Higher returns are expected for taking on more risk. 3. Diversification of investments can reduce risk 4. Financial markets are efficient in pricing securities (Efficient is open to public knowledge). 5. Manager and stockholder objectives may differ. 6. Reputation matters.