Financial Assets - AP Macroeconomics

What is the primary function of a pension fund?

To manage retirement savings for individuals. Invests contributions to provide future retirement income.
What is an ETF?

An ETF is an Exchange Traded Fund, a collection of securities traded on an exchange. Combines diversification benefits with stock-like trading flexibility.
What is a mutual fund?

A mutual fund pools money from investors to purchase securities. Provides diversification and professional management for investors.
What is the formula for calculating the present value of a future sum?

$PV = \frac{FV}{(1 + r)^n}$ . Discounts future value by the interest rate compounded over time.
What is a credit default swap (CDS)?

A CDS is a derivative that provides protection against credit risk. Buyer pays premium to seller for protection against default events.
What does 'yield curve' represent?

A yield curve shows the interest rates of bonds with different maturities. Plots yield against maturity to show interest rate structure.
Define 'investment-grade' bond.

An investment-grade bond has a low risk of default. Rated BBB or higher by agencies like Moody's and S&P.
Identify a key benefit of holding a diversified portfolio.

Diversification reduces investment risk. Spreading investments across assets reduces overall portfolio risk.
State the formula for calculating bond price.

$Bond \, Price = \frac{C}{(1 + r)^1} + \frac{C}{(1 + r)^2} + ... + \frac{F}{(1 + r)^n}$ . Sum of present values of all coupon payments plus principal.
What is the difference between a stock and a bond?

Stocks represent ownership; bonds represent a loan. Equity holders own the company; bondholders are creditors.
What is the primary purpose of a financial market?

To facilitate the exchange of financial assets. Markets connect buyers and sellers for efficient price discovery.
What does the term 'liquidity' refer to in financial assets?

Liquidity refers to how easily an asset can be converted to cash. Higher liquidity means faster conversion without significant price loss.
Which type of financial asset represents ownership in a company?

Equity represents ownership in a company. Stockholders own a portion of the company and its assets.
Identify a common type of derivative.

Options are a common type of derivative. Options give the right to buy or sell at a specific price.
What is the primary risk associated with holding bonds?

Interest rate risk is the primary risk associated with bonds. Bond prices fall when interest rates rise, and vice versa.
Identify the risk of investing in stocks.

Market risk is the primary risk of investing in stocks. Stock prices fluctuate with overall market conditions and sentiment.
What is a callable bond?

A callable bond can be redeemed by the issuer before its maturity date. Gives issuer flexibility to refinance when rates decline.
What is the role of a clearinghouse in financial markets?

A clearinghouse ensures the smooth settlement of trades between buyers and sellers. Reduces counterparty risk by guaranteeing trade completion.
What is the definition of a financial asset?

A financial asset is a non-physical asset with value from a contractual claim. Unlike physical assets, they exist only as contracts or agreements.
What is the primary use of a futures contract?

To hedge or speculate on the future price of an asset. Standardized contracts traded on exchanges with margin requirements.
What is an interest rate swap?

An interest rate swap is a derivative contract where two parties exchange interest payments. Allows parties to manage exposure to interest rate fluctuations.
What is the difference between a forward contract and a futures contract?

Forwards are private agreements; futures are standardized and traded on exchanges. Standardization enables exchange trading with reduced counterparty risk.
What is the function of a financial intermediary?

To facilitate the channeling of funds between lenders and borrowers. Banks and brokers connect savers with those needing capital.
What is a 'dividend yield'?

Dividend yield is the ratio of a company's annual dividend compared to its share price. Calculated as annual dividend per share divided by stock price.
What does 'securitization' mean?

Securitization is the process of converting assets into tradable securities. Transforms illiquid assets into marketable investment instruments.
What is the difference between primary and secondary markets?

Primary markets issue new securities; secondary markets trade existing ones. IPOs occur in primary markets; subsequent trading in secondary markets.
What is a bond?

A bond is a fixed income instrument representing a loan to a borrower. The issuer promises to pay back principal plus interest over time.
State the formula for calculating equity value.

Equity value = Total assets - Total liabilities. Basic accounting equation showing shareholders' residual claim.
What is the definition of a derivative?

A derivative is a contract whose value derives from an underlying asset. Its price depends on the performance of the underlying asset.
Which financial asset typically offers dividends?

Stocks typically offer dividends. Companies distribute profits to shareholders as dividend payments.
What is the definition of a stock?

A stock is a type of security representing ownership in a corporation. Shareholders have voting rights and claims on company profits.
What is the role of a stock exchange?

A stock exchange provides a platform for buying and selling securities. Matches buyers and sellers while ensuring fair pricing and settlement.
Define 'capital gain'.

Capital gain is the profit from selling an asset at a higher price than its purchase price. Realized when the selling price exceeds the original purchase cost.
Define 'market capitalization'.

Market capitalization is the total market value of a company's outstanding shares. Calculated by multiplying share price by total outstanding shares.
Identify the key characteristic of financial assets.

Financial assets derive value from contractual claims. Unlike physical assets, their worth comes from legal agreements or contracts.
What is the formula for calculating the future value of an investment?

$FV = PV \times (1 + r)^n$ . Compounds present value by the interest rate over time periods.
What is a zero-coupon bond?

A zero-coupon bond pays no periodic interest and is issued at a discount. All return comes from appreciation between purchase and maturity prices.
Identify the main purpose of financial regulation.

To maintain stability and integrity in financial markets. Protects investors and ensures fair, transparent market operations.

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