PRINCIPLE OF INVESTMENT 3 ACC. DR.

MOFIED MAHER

Principle of Investment - R. Sheet

Q.1 : ( Complete … )

1- The financial system consists of….

Ans.
the group of ins9tu9ons in the economy that help to match one
person’s saving with another person’s investment.

2- The financial system is made up of financial ins9tu9ons that ….

Ans.
coordinate the ac9ons of savers and borrowers.

3- Financial ins9tu9ons can be grouped into ….

Ans.
Two different categories ….
1- Financial markets
2- Financial intermediaries

4- Financial Markets CONTENTS OF ….

Ans.
1- Stock Market
2- Bond Market

5- Financial Intermediaries CONTENTS OF ….

Ans
1- Banks
2- Mutual Funds

6- Financial intermediaries are financial ins9tu9ons through which.

Ans (…. savers ) can
Ans (…. indirectly ) provide funds to

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

Ans (…. borrowers ).

7- sacrifice IS ….
Ans .
( The giving up of something important to us now (money or 9me) to
get something beSer in the future )

8- stock tables provide the following informa0on ….

Ans.
…. 1-Price (of a share)
…. 2- Volume (number of shares sold)
…. 3- Dividend (profits paid to stockholders)
…. 4- Price-earnings ra0o

9- The most banks opera9ons ….

Ans.

…. 1- Take deposits from people who want to save and use the deposits
to make loans to people who want to borrow… CR.
…. 2- Pay depositors interest on their deposits and charge borrowers
slightly higher interest on their loans… DEP.
…. 3- Help create a medium of exchange by allowing people to write
checks against their deposits.
A medium of exchange is an item that people can easily use to engage
in transac9ons.
…. 4- Facilitate the purchases of goods and services.

10- A mutual fund is

Ans.
An ins9tu9on that sells shares to the public and uses the proceeds to
buy a por[olio, of various types of stocks, bonds, or both.

11- Intermediaries financial ins9tu9on contents of …..

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

Ans.
…. 1- Credit unions
…. 2- Pension funds
…. 3- Insurance companies
…. 4- Loan sharks

12- Financial Intermediaries Important in Financial Markets because of

…
Ans.
1- Transac9on cost:
Refers to the 9me and money spent in carrying out financial
transac9ons.
2- Risk sharing:
Financial intermediaries sell assets with risk characteris9cs that people
are comfortable with and then use the funds to purchase other assets
that may have far more risk.
3- Asymmetric informa9on (i.e., where one party has more or beSer
informa9on):
Financial intermediaries are usually beSer at credit risk screening than
individuals, therefore reducing losses due to wrong investment decision
making.

13- Transac9on cost Refers to…

Ans.
the 9me and money spent in carrying out financial transac9ons.

14- Risk sharing in financial intermediaries sell assets with …

Ans.
risk characteris9cs that people are comfortable with and then use the
funds to purchase other assets that may have far more risk.

15- To value bonds and stocks we need to…

Ans.

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

A- Es0mate future cash flows, size (how much) and 9ming (when)
B- Discount future cash flows at an appropriate rate

16- A bond IS …
Ans.
Debt issued by a corpora0on or a governmental body

17- A bond represents …

Ans.
a loan made by investors to the issuer.

18- Money Markets….

Ans.
The financial markets for short-term debt instruments (generally those
with original maturity of one year or less).

19- Capital Markets ….

Ans.
The financial market for longer-term debt (generally those with
maturi0es greater than one year) and equity (common stock).

20- Direct Finance ….

Ans.
Funds that directly flow lenders to borrowers with the assistance of
ins0tu0ons that provide brokerage services (research and advice,
re0rement planning, tax 0ps, execu0on of trades)

21- Indirect Finance …

Ans.
Funds that flow through financial intermediaries, such as depository
ins0tu0ons, insurance companies and mutual funds

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

Q. 2 : T – F
1- A bond is a certificate of indebtedness that specifies
obligations of the borrower to the holder of the bond. (.
)
2- Credit Risk is the probability that the borrower will fail
to pay some of the interest or principal. (. )

3- Stock represents a claim to partial ownership in a firm

and is therefore, a claim to the profits that the firm
makes. (. )

4- The sale of stock to raise money is called equity

financing. (. )

5- Compared to bonds, stocks offer both higher risk and

potentially higher returns. (. )

6- Mutual funds allow people with small amounts of

money to easily diversify. (. )

7- Y = C + I + G + NX (. )

8- National saving is the total income in the economy

that remains after paying for consumption and
government purchases. (. )

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

9- Private saving is the amount of income that

households have left after paying their taxes and paying
for their consumption. (. )

10- Savings is the portion of current income not spent on

consumption. (. )

11- Investing is the purchase of assets with the goal of

increasing future income. (. )

12- Future Value Refers to the amount of money to which

an investment will grow over a finite period of time at a
given interest rate. (. )

13- There is no different between trade and investment. (.

)

14- In market we briefer gambling vs investment. (. )

15- Primary Financial Market IS The financial market in

which new issues of a security, such as a bond or a stock,
are sold to initial buyers by a corporation or a
government. (. )

16- The financial market in which securities that have

been previously issued can be resold (. )

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

17- Secondary markets provide liquidity for previously

issued securities . (. )

18- Money Markets ( The financial markets for short-term

debt instruments (generally those with original maturity
of one year or less). (. )

19- Capital Markets ( The financial market for longer-term

debt (generally those with maturities greater than one
year) and equity (common stock). (. )

20- Indirect Finance ( Funds that flow through financial

intermediaries, such as depository institutions, insurance
companies and mutual funds.) (. )

21- Direct Finance( Funds that flow directly lenders to

borrowers with the assistance of institutions that provide
brokerage services (research and advice, retirement
planning, tax tips, execution of trades) . (. )

22- Value of financial securities = PV of expected future

cash flows (. )

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

23- Savings is the portion of current income not spent on

consumption. (. )

24- Investing is the purchase of assets with the goal of

increasing future income. (. )

25- Risk = The chance that the value of an investment

will decrease.(. )

26- Return= The profit or yield from an investment. (. )

27- Liquidity=The ability of an investment to be

converted into cash quickly without loss of value.(. )

28- Future value ( FV ) refer to the amount of money to

which an investment will grow over a finite period of time
at a given interest rate.(. )

29- future value is the cash value of an investment at a

particular time in the future. (. )

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

30- Functions of Financial Markets provides financial

signals to market participants such as Interest rates,
stock prices, exchange rates . (. )

31- We can use financial market signals as a leading

indicator of economic activity. (. )

32- Stock prices and interest rates may tell us something

about the market’s assessment of companies, financial
institutions, and even overall financial markets (. )

33- Primary Financial Market is the financial market in

which new issues of a security, such as a bond or a stock,
are sold to initial buyers by a corporation or a
government. (. )

34- Secondary Financial Market is the financial market in

which securities that have been previously issued can be
resold. (. )

35- Liquidity refers to the ease of conversion of a

financial asset into cash (prior to maturity if there is a

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

maturity date) and how stable the price of the asset is

while being held in a form other than cash. (. )

Ans.
From 1 to 35 ( True )

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

Q.3: Draw Circular Flow of Income in A Simple

Economy

Ans.

Q.4: Draw Flow of Funds Through a Financial System

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

• Q.5:
Invest sum OF ( 1000 LE ) over years ( 2 Y ) ,
how much will it be worth?
• Find :
1- Terminal Value ?
Ans.
TVn = P (1 + r )
n

if r1 = r2 = … = rn
2
• 1000 (1.1) = 1210
2- Discounted Present Value?
A:
TVn 1210
DPV = = = 1000
(1 + r )
n 2
1.1
B:
Discounting is the inverse or mirror
image of compounding.

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

Q. 6:
If you in charge in a project proposal with
current data 11-2023
CF1 = 1100
CF2 = 1210
R= % 10
KC=2100
A- Should you invest ?
Ans.
Total CF = 1100+1210= 2310
KC= 2100
• ( TOTAL CF )2310 > ( KC ) 2100
• Invest
B- Find NPV ? AND Explain Your
Design Opinion?
Ans.
CF1 CF2 1100 1210
DPVCF = + = + = 2000
(1 + r ) (1 + r ) 1.1 (1.1)
2 2

• KC = 2100
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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

• DPV ( 2000 ) – KC ( 2100 ) = ( -100 ) < 0

• Do not invest, because opportunity
cost of capital not compensated for
Equivalently.

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

Q.7: Consider a zero-coupon bond, with a

face value of $1,000, maturing in 5 years.
Suppose that the appropriate discount
rate is 8%. What is the current value of the
bond?
Ans.
This is a simple TVM problem:

Use the above PV equation to solve:

PV = F / (1 + r)T = 1,000 / (1.08)5 = $(. )

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 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

Q8: Suppose 6 months have past. What is the bond

value now?

Ans.
use the above PV equation to solve:
PV = F / (1 + r)T = 1,000 / (1.08)4.5 = (. _. )$

Note:
As we get closer to maturity(T), the z.c. bond
value increases (PVm), since we have to wait
less time to receive $1,000

Q.9: Compare between ( Saving and

Investment ) according to …
1- Risk, 2- Return, 3- and Liquidity
Ans.

• Savings • Investments
1- Low risk 1- High
2- Low risk
return 2- High
3- High return
liquidity - 16 -
3- Low
liquidity
 PRINCIPLE OF INVESTMENT 3 ACC. DR. MOFIED MAHER

Q.10 Why are Financial Intermediaries Important in Financial

Markets?
Ans.
1- Transaction cost:
Refers to the time and money spent in carrying out financial
transactions.
Financial intermediaries can substantially reduce transaction costs
because they have developed expertise in lowering them, and because
their large size allows them to take advantage of economies of scale.
2- Risk sharing:
Financial intermediaries sell assets with risk characteristics that
people are comfortable with and then use the funds to purchase
other assets that may have far more risk.
This process of risk sharing is called asset transformation, i.e., risky
assets are turned into safer assets for investors. Another way of risk
sharing provided was through diversification; financial intermediaries
invest in a collection of assets whose return do not always move
together, with the result that overall risk is lower than for individual
assets.
3- Asymmetric information (i.e., where one party has more or better
information):
Financial intermediaries are usually better at credit risk screening
than individuals, therefore reducing losses due to wrong investment
decision making.
They have developed expertise in monitoring the parties they lend to,
thus reducing losses due to moral hazard.

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