Coverage: chapter 1-5

Format: 45 multiple choice questions (90%) + 2 essay questions (10%) + 2 extra credit questions (10%)

Requirement: closed-book exam. You will need to bring your calculator to the exam.

Chapter 1: Introducing Money and the Financial System

Key components of the financial system 1. Financial assets a. Difference between financial and real assets 2. Financial institutions: examples; basic functions 3. The Federal Reserve and other financial regulators: basics about Fed.

Five key categories of financial assets: definition & basic features 1. Money 2. Stocks 3. Bonds 4. Foreign exchange 5. Securitized loans

The financial system matches savers and borrowers through two channels: 1. Banks and other financial intermediaries 2. Financial market: primary vs secondary markets

The financial system provides three services to savers and borrowers: 1. Risk Sharing, 2. Liquidity, 3. Information.

Chapter 2: Money and the Payments System

Features of good money

The Key Functions of Money 1. It acts as a medium of exchange. a. Commodity vs fiat money 2. It is a unit of account. 3. It is a store of value. 4. It offers a standard of deferred payment.

Do We Need Money? - Specialization; liquidity.

Measuring the Money Supply: what are included in M1, M2?

Quantity Theory of Money: A First Look at the Link Between Money and Prices * equation of exchange, MV = PY * % Change in M + % Change in V = % Change in P + % Change in Y. * Inflation rate = % Change in M – % Change in Y * Implication?

Chapter 3: Interest Rates and Rates of Return

The Interest Rate, Present Value, and Future Value * Opportunity costs of supplying credit: * Discounting: Present value calculation (one cash flow) * Compounding: future value calculation (one cash flow)

Debt Instruments and Their Prices: definition; pricing formula; simple calculation (one cash flow) 1. Simple loans 2. Discount bonds 3. Coupon bonds: coupon? Current yield? YTM? 4. Fixed-payment loans

Interest rate risk & the inverse relationship between bond prices and bond yields

Rates of Return: * Rate of return (coupon bond) = current yield +rate of capital gain

Nominal vs Real Interest…