Assets and Liabilities Flashcards

Question

Evolution of Money

Answer 1

Went from: - Commodities (Gold and Silver) - Commodity Money (That you can trade in for Silver and Gold) - Fiat Money - Cheques - E-Money and Exchange Payments

Answer 2

By tracking the growth of money and where it exists, particularly M1 + provides us with useful information on the future level of production in an economy. Broader aggregate measures and their growth provide us with useful information used to understand the rate of inflation.

Answer 3

- Currency Circulation (Money outside of Banks) - Chequable Deposits (TFSA, RSP, etc. this is anything we can pull our banks with ease) M1+ is the most liquid of all the organization strategies!

Answer 4

- Currency Circulation (Part of M1) - Chequable Deposits (Ppart of M1) - Non-Chequable Deposits M1++ is cash and deposits, it is mostly comprised of deposits

Answer 5

- Currency Circulation (Part of M1 and M1+) - Chequable Deposits (Part of M1 and M1+) - Non Chequable Deposits (Part of M1+) - Personal fixed-term Deposits - Money Market Mutual Funds - Non Money Market Mutual Funds - Others M2++ roughly 50% deposits and 40% Mutual Funds

Answer 6

Securities are financial instruments that have monetary value and can be traded. If you obtain a security you have a claim on the future assets of the issuer (or the seller of the security)

Answer 7

Done to Raise Funds

Answer 8

Done to Loan Funds

Answer 9

1. A Simple Loan 2. A Coupon Bond 3. A Fixed-Payment Loan (Such as a Mortgage) 4. A Discount Bond (AKA Zero Coupon Bond)

Answer 10

The Lender provides the Borrower with funds that must be paid at the maturity date alongside interest. Ex: I give Zain $100 today and expect 10% interest one year from now alongside my loan. I am entitled to $110 one year from today.

Answer 11

The borrower pays the holder a fixed interest payment at regular intervals until maturity. I buy a $1000 Treasury Bond from the Gov't of Canada for 10 years at 5%. Every year for the next 10 years I should expect $50 annually until maturity. This if a Coupon Bond.

Answer 12

This is the market interest rate!

Answer 13

This is something like a mortgage in which a fixed payment is paid by the borrower every period for a set number of periods in which the full amount of the loan is payed off. LV = FP/(1+i) + FP/((1+i)^2) +...+ FP/((1+i)^n)

Answer 14

Fixed Loan Payment has interest and principal payments built into its payment structure where as Coupon Bonds separate the interest and principal payments.

Answer 15

These are bonds where the price is sold below the face value. The face value is then repaid at the maturity date. To calculate interest/Yield to Maturity on a Discount Bond we can use P = F / (1+i) and thus i = F / P - 1 which is relatively close to the true equation F-P / P

Answer 16

PV = FV / (1+i) ^ n Which is approximately PV = FV / (1+i*n)

Answer 17

All Bonds have the same negative relationship with one another. If there is an increase in market interest rate, the price of bonds will fall. Conversely, if there is a decrease in the market interest rate, the price of bonds will rise.

Answer 18

If YTM > Coupon Interest Rate, Price of Bond Falls If YTM = Coupon Interest Rate, Price of Bond is the Same If YTM < Coupon Interest Rate, Price of Bond Rises

Answer 19

% Change in Price = (Old Yield - New Yield) * N

Answer 20

A Rate of Return is the gains or losses of an investment over a specified period of time, it is expressed as a percentage of the investments cost.

Answer 21

Expected Inflation and Nominal Interest tend to move together, which allows for the true interest rate to remain relatively stable over time. Real Interest Rate = Nominal Interest Rate - Expected Inflation

Answer 22

Real Interest Rate = Nominal Interest Rate - Expected Inflation

Answer 23

These are bonds that are adjusted for inflation such that the YTM is based around the real interest rate and not the nominal interest rate. Indexed Bonds are preferred to non indexed bonds. They should in theory protect against risks better.

Answer 24

All Markets are affected by the interest rate. Everything is affected by the interest rate.

Answer 25

The interest rate tends to increase during periods of recession.

Answer 26

Interest Rates tend to rise during recessionary phases Interest Rates tend to fall during expansionary phases

Answer 27

The federal government tries to curb lowering interest rates by buying many of the existing bond securities in the market. If effectively done, this should raise the money supply and stimulate economic growth.

Answer 28

If an economy is doing poorly and investors are looking for safe assets only. The government can try to curb this by purchasing existing bonds back, thus the MS of the economy rises, the interest rates fall and investors have more cash to play less safe investments with.

Answer 29

Q is self explanitory

Answer 30

He saw raising expected inflation as a growing problem, in order to curb that problem, he began drastically increasing the nominal interest rate to the point in which they both began to decline together as the demand for money fell and the money supply increased.

Answer 31

Bd + Md = Bs + Ms

Answer 32

Cetris Paribus: A raise in income increases the money demanded for people and effectively raises the interest rate.

Answer 33

Cetris Paribus: A raise in prices raises the money demanded for people and effectively raises the interest rate. You can also think of this as an extension of the fisher equation.

Answer 34

Cetris Paribus: An expected raise in the interest rate may actually raise the true interest rate simply out of expectation. You can also think of this as an extension of the fisher equation.

Answer 35

Cetris Paribus: An increase in the money supply tends to lower the cost of the interest rate

Answer 36

Increases in the money supply tend to lower the interest rate in the short term, however in the long term, the income, price level, inflation expectation ad fisher effects effectively raise the interest rate despite the initial effects of the money supply. Thus the result is that in the SR: Interest rate falls but in the LR, interest rate rises above the initial interest rate prior to an increase in money supply.

Answer 37

Looks at bonds with the same term to maturity but different interest rates and asks why? It looks to answer what are the risks associated with this difference? Usually it is credit risks, liquidity, tax treatment etc.

Answer 38

Looks at bonds with different yields to maturity but that come from the same place and asks why does the interest rate differ depending on length?

Answer 39

This is the result of corporate bonds suddenly becoming more risky. What happens is that the Demand for corporate bonds decreases while at the same time the Demand for government bonds increases. The price of Corporate bonds lowers and the interest rates go up to make them more appealing. The price of Government Bonds rises and rate of interest lowers due to their sudden raised demand. The difference in their interest rates is called the risk premium.

Answer 40

This is the difference in the interest rates between risky bonds and safe bonds.

Answer 41

The issuer of the bonds will default on their payment.

Answer 42

AAA - BBB- Bonds

Answer 43

BB+ - DDD - Bonds

Answer 44

The credit spread was at an all time high between 2007 and near the end of 2008. This was because corporations were doing so badly that it was more ideal for investors to put their money somewhere safer such as a government bond.