#1
What is the role of a financial intermediary?
To transfer funds from savers to borrowers
ExplanationFacilitates the movement of money between those who have excess funds and those in need of capital.
#2
What is the purpose of a '401(k)' retirement plan?
To allow employees to contribute a portion of their salary to a retirement account on a pre-tax basis
ExplanationEnables employees to save for retirement with pre-tax income contributions.
#3
What is the purpose of 'diversification' in investment?
To spread investment across different assets or securities to reduce risk
ExplanationMinimizing risk by distributing investments across various assets.
#4
Which of the following best describes the concept of 'time value of money'?
The idea that money available now is worth more than the same amount in the future
ExplanationMoney's potential to earn interest or increase in value over time.
#5
What is a 'call option' in financial terms?
A contract that gives the holder the right to buy a specified amount of an underlying security at a specified price within a specified time frame
ExplanationProvides the option to purchase a financial instrument at a predetermined price within a set timeframe.
#6
What is 'liquidity' in financial terms?
The ability to convert an asset into cash quickly with minimal impact on its price
ExplanationThe ease with which an asset can be turned into cash without significant loss in value.
#7
What is the difference between 'simple interest' and 'compound interest'?
Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal amount and any accumulated interest
ExplanationSimple interest accrues solely on the initial amount, while compound interest includes interest on previous interest.
#8
What is 'capital gains tax'?
A tax on the profits from the sale of assets such as stocks, bonds, or real estate
ExplanationTax levied on the financial gains realized from selling assets.
#9
Which of the following is a characteristic of a 'floating interest rate'?
The interest rate is tied to a benchmark rate and can fluctuate over time
ExplanationInterest rate that changes in relation to a benchmark, providing flexibility.
#10
What is the purpose of a 'credit default swap' (CDS)?
To insure against the risk of default on a particular loan or other credit instrument
ExplanationInsurance against the possibility of a borrower defaulting on a loan or credit.
#11
What is 'arbitrage' in financial markets?
The process of buying and selling securities to profit from price differences in different markets
ExplanationExploiting price discrepancies in various markets for profit through buying and selling.
#12
What is 'net present value' (NPV) in finance?
The value of an investment in today's dollars, taking into account its expected future cash flows and the time value of money
ExplanationCurrent value of an investment, factoring in future cash flows and the time value of money.
#13
What is 'collateralized debt obligation' (CDO)?
A type of investment that pools together various debts and repackages them into new securities
ExplanationInvestment combining multiple debts repackaged into new securities for investors.