D076 PA study set question and answer

In which way is accounting different from finance? - Accounting is backward looking, while finance is focused on the future What is the main question that both individuals and companies must consider when making financial decisions to reach a goal? - Will the benefits of the action outweigh the costs? A financial manager at a company is trying to determine weather to issue new stocks or new bonds to cover the costs of a project the company is doing the next year. Which main task in business finance is this situation an example of? - Making financial decisions How can investing help a person reach personal financial goals? - It provides access to potential revenue or increases in value to help meet goals faster A sign company is planning to have an initial public offering (IPO). In which type of market will its stock first be sold to the public? - Primary market Which type of economic indicator changes after the economy changes and helps identify trends in the long term? - Lagging indicator How does an investment institution, such as a mutual fund, facilitate the circulation of money in the economy? - By providing individuals and firms access to financial markets to buy or sell financial securities Which type of economic indicator is used by governments and policymakers to implement or alter policies in an effort to avoid or minimize the effects of an economic downturn? - Leading indicator Suppose an individual does not eat chocolate because eating chocolate goes against personal beliefs. Which type of standard is this? - Moral What should a potential bondholder (lender) do to prevent a company (borrower) from taking on risky projects? - Set strict covenants that the company cannot uphold if it chooses a risky project What is the term for an individual's belief concerning what is and is not acceptable to personally do? - Morals Which factor contributes to the inflation of the prices of goods and services over time? - Increase in demand for goods and services Why can compounding interest be a good tool but also a significant detriment? - Compounding interest can be a good tool because it allows a lender to gain interest on interest, but it is a detriment because it causes a borrower to pay interest on interest Which component of the required rate of return takes into account the loss of potential gain from other alternatives? - Opportunity cost How is inflation calculated? - Inflation is calculated by determining the rate at which the average price level of particular goods and services increases over a period of time in an economy Standard deviation - A measure of dispersion that tells us how much scores in a sample differ from the mean of the sample What is the relationship between risk and return? - The higher risk an investor takes, the higher return the investor expects to receive An investor is considering purchasing stock in a certain company, but the investor's financial advisor suggests purchasing stocks in multiple companies instead of just one. Which risk management technique is this financial advisor suggesting? - Risk diversification