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Financial markets and institutions > ch 1-5 - quiz 1 > Flashcards

ch 1-5 - quiz 1 Flashcards

1
Q

financial market

A

a market in which financial assets(securities: stocks/bonds) can be traded

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2
Q

surplus units

A

investors, participants who receive more money than they spend

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3
Q

deficit units

A

issuers, participants who spend more money than they earn

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4
Q

securities

A

represent a claim to the issure

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5
Q

debt securities

A

debt incurred by the issuer

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6
Q

equity securities

A

stocks, represent equity/ownership in the firm

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7
Q

primary markets

A

facilitate the trading of new securities

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8
Q

secondary markets

A

facilitate the trading of existing securities

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9
Q

liquidity

A

the degree to which securities can easily be liquidated(sold) without a loss of value

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10
Q

money markets

A

facilitate the sale of short-term debt securities by deficit units to surplus units

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11
Q

money market securities

A

debt securities that have a maturity of one year or less

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12
Q

capital markets

A

facilitate the sale of long-term securities from deficit units to surplus units

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13
Q

capital market securities

A

commonly issued to finance the purchase of financial assets

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14
Q

bonds

A

long term debt securities issued by the treasury, government agencies, and corporations to finance their operations

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15
Q

mortgages

A

long-term debt obligations created to finance the purchase of real-estate

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16
Q

subprime mortgages

A

offered to some borrowers who do not have sufficient income to qualify for prime mortgages or make the down payment

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17
Q

mortgage-backed security

A

debt obligation representing claims on a package of mortgages

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18
Q

derivative securities

A

financial contracts whose values are derived from the values of underlying assets

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19
Q

how to value a security?

A
  • measured as the present value of future cash flows, discounted at a rate that reflects the uncertainty surrounding the cash flows
  • information can affect cash flows and price
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20
Q

efficient market

A

securities are rationally priced

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21
Q

behavioral finance

A

the application of psychology to financial decision making

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22
Q

asymmetric information

A

when a firm’s manager possesses knowledge that isn’t public

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23
Q

Sarbanes-Oxley Act of 2002

A

firms that have publicly issued stock have to have their financial statements audited by independent auditors

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24
Q

foreign exchange market

A

facilitates exchanges involving different currencies

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25
Q

how is the exchange rate determined?

A

market-determined price(exchange rate) changes in response to supply and demand

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26
Q

jobs of depository institutions

A
  • accept deposits from surplus and provide credit to the deficit through loans and purchases of securities
  • willing to accept the risk of default on loans they provide
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27
Q

federal funds market

A

facilitates the flow of funds between depository institutions

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28
Q

credit unions

A
  • non profit enterprises
  • restrict their business to members, who share a common bond
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29
Q

finance companies

A

obtain funds by issuing securities and then those funds to individuals and small businesses

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30
Q

mutual funds

A

sell shares to surplus units and use the funds to purchase a portfolio of securities

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31
Q

jobs of securities firms

A
  • broker
  • dealer
  • underwriter
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32
Q

what does it mean for a securities firm to be a dealer?

A

making a market in specific security by maintaining an inventory of securities

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33
Q

underwriting

A

placing newly issued securities for corporations and government agencies involving the primary market

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34
Q

insurance companies role

A
  • provide insurance policies
  • charge fees(premiums) in exchange for the insurance
  • invest funds from premiums until the funds are needed
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35
Q

loanable funds theory

A
  • used to explain interest rate movements
  • determined by factors controlling the supply and demand for loanable funds
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36
Q

demand for loanable funds

A

collective borrowing activities of households, businesses, and the gov

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37
Q

what is the relationship between the interest rate and the quantity of loanable funds?

A

inverse relationship

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38
Q

how does a lower interest rate impact the demand for loanable funds?

A

businesses and households demand a greater quantity of loanable funds at lower interest rates

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39
Q

what determines foreign demand for US funds?

A

demand for US funds is inversely related to US interest rates

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40
Q

relationship for aggregate demand for loanable funds

A

Demand for loanable funds is inversely related to interest rates

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41
Q

what is the largest supplier of loanable funds?

A

the household sector

42
Q

what are the largest demanders for loanable funds?

A

businesses and governments

43
Q

what is the relationship between the interest rate and the supply of loanable funds?

A

direct relationship

44
Q

is supply or demand more elastic?

A

demand

45
Q

equilibrium interest rate

A

the rate that equates the aggregate demand for funds with the aggregate supply of loanable funds

46
Q

what are the five sectors that demand and supply loanable funds?

A

households, businesses, the federal government, municipal government, and foreign demand

47
Q

is supply or demand higher when interest rates are extremely low?

A

demand is higher than supply

48
Q

is supply or demand higher when interest rates are extremely high?

A

supply is higher than demand

49
Q

what happens to interest rates when demand is greater than the supply of loanable funds?

A

interest rates should rise

50
Q

what does economic growth do to interest rates?

A

puts upward pressure on interest rates

51
Q

fisher effect

A

relationship between the nominal and real interest rates and expected inflation

52
Q

the formula for nominal interest rates?

A

i = E(INF) + iR, where:
- i = nominal rate of interest
- E (INF) = expected inflation rate
- iR = real interest rate

53
Q

real interest rate

A

the difference between the nominal interest rate and the expected inflation rate

54
Q

how does the fed use monetary policy to affect interest rates?

A

Fed can affect the supply of loanable funds by increasing/decreasing the total amount of deposits held at commercial banks to other depository institutions

55
Q

how does the federal budget deficit impact interest rates?

A

A higher federal government deficit increases the number of loanable funds demanded which increases interest rates

56
Q

net demand for funds formula

A

ND = Da - Sa = (Dh + Db + Dg + Dm + Df) - (Sh + Sb + Sg + Sm + Sf)

57
Q

how does credit(default) risk affect the structure of interest rates?

A

a higher degree of credit risk = credit risk premiums(higher yield above treasury bond yield)

58
Q

how does liquidity affect the structure of interest rates?

A

securities that are less liquid must offer a higher yield to attract investors

59
Q

how does tax status affect the structure of interest rates?

A

taxable securities must offer a higher before-tax yield than do tax-exempt securities

60
Q

after-tax yield formula

A

Yat = Ybt (1 - T), where:
- Yat = after-tax yield
- Ybt = before-tax yield
- T = investors marginal tax rate
- Ybt = Yat / (1-T)

61
Q

how does term to maturity affect the structure of interest rates?

A

generally the longer time to maturity the longer the interest rates are

62
Q

the formula for modeling the yield to be offered on a debt security

A

Yn = Rf,n + CP + LP + TA, where:
- Yn = annualized yield of an n-year debt security
- Rf,n = annualized yield(return) pf an n-year treasury(risk-free) security with the same term to maturity as the debt security of concern
- CP = credit risk premium to compensate for credit risk
- LP = liquidity premium to compensate for less liquidity
- TA = adjustment due to the difference in tax status

63
Q

pure expectation theory

A

the term structure of interest rates is determined solely by expectations of interest rates

64
Q

what happens to supply and demand if interest rates are expected to increase?

A
  • supply increases in short-term markets and decreases in long-term markets
  • demand increases in long-term markets and decreases in short-term markets
65
Q

what happens to supply and demand if interest rates are expected to decrease?

A
  • supply increases in long-term markets and decreases in short-term markets
  • demand increases in short-term markets and decreases in long-term markets
66
Q

forward rate

A

commonly estimated and assumed to represent the market’s forecast of the future interest rate

67
Q

liquidity premium theory

A

investors may prefer to own short-term securities because a shorter maturity represents greater liquidity

68
Q

segmented markets theory

A

investors/borrowers choose securities with maturities that satisfy their forecasted cash needs

69
Q

what are the implications of the segmented markets theory?

A

the preference for articular maturities can affect the prices and yields of securities with different maturities

70
Q

federal reserve district banks and their operations

A
  • commercial banks that have become members of the fed
  • ops: clearing checks, replacing old currency, and providing loans to depository institutions in need of loans
71
Q

member banks

A

commercial banks that can elect to become member banks if they meet specific requirements

72
Q

board of governors(federal reserve board)

A
  • 7 members appointed by the prez
  • 14-year nonrenewable terms
  • set margin and reserve requirements
73
Q

FOMC

A

goals: achieve stable economic growth and price stability
- 7 board members + the presidents of 5 fed district banks

74
Q

advisory committees

A
  • federal advisory council
  • community depository institutions advisory council
  • community advisory council
75
Q

federal advisory council

A
  • an advisory committee
  • one member from each federal reserve district
  • meets with the board of governors at least 4 times a year and makes recommendations about economic and banking issues
76
Q

Community depository institutions advisory council

A
  • an advisory committee
  • 12 members who represent savings banks, savings and loan associations, and credit unions
  • Meets with the board of governors 2 times per year
77
Q

Community advisory council

A
  • an advisory committee
  • 15 members
  • Emphasis on low- and moderate-income populations
  • Meets with the board of governors 2 times per year
78
Q

consumer financial protection bureau

A
  • an advisory committee
  • responsible for regulating financial products and services
79
Q

FOMC decision process

A
  • meets 8 times per year
  • actions are taken to implement monetary policy
  • 2 weeks before the meeting members receive the beige book
80
Q

beige book

A

a consolidated report of the regional economic conditions in each of the 12 districts

81
Q

how the fed actually changes monetary policy

A
  • the decision is forwarded to the trading desk(open market desk) at the NY fed reserve district bank
  • managers instruct traders on the amount of T securities to buy/sell
82
Q

when instructed to lower the federal funds rate…

A
  • purchase T securities(mostly T bills) in 2nd market
  • money is transferred from the fed to bank balances of dealers(increases supply)
  • places downward pressure on the federal funds rate
83
Q

When instructed to increase the federal funds rate…

A
  • Sell government securities to dealers
  • Money is transferred from dealers to the Fed(decreases supply)
  • places upward pressure on the federal funds rate
84
Q

Dynamic open market operations

A

reducing or increasing the federal funds rate

85
Q

defensive market operations

A

intended to offset the impact of temporary conditions on the amount of funds in the banking system

86
Q

M1

A

currency and checking deposits at depository institutions

87
Q

M2

A

M1 + savings deposits, MMDAs(money market deposit accounts)

88
Q

M3

A

M2 + large time deposits, money market mutual funds

89
Q

reserve requirement ratio

A

the proportion of depository institution’s deposit accounts that must be held as reserves

90
Q

what is the result of a reduction in the reserve requirement?

A

banks hold a smaller proportion of their new deposits as reserves→ make more loans

91
Q

how does the fed implement quantitative easing?

A
  • purchasing specific types of debt securities
  • increase liquidity in specific markets for risky debt securities and reduce long-term interest rates
92
Q

Composite index

A

combines various indexes to indicate economic growth across sectors

93
Q

Leading economic indicators

A

used to predict future economic activity

94
Q

Coincident economic indicators

A

tend to reach their peaks/troughs at the same time as business cycles

95
Q

Lagging economic indicators

A

tend to rise or fall a few months after business cycle expansions and contractions

96
Q

producer price index

A

reflects prices at the wholesale level

97
Q

consumer price index

A

reflects prices paid by consumers

98
Q

what is “core” inflation/

A

Excludes food/energy prices because they tend to be very volatile

99
Q

Demand-pull inflation

A

occurs as a result of excessive demand(spending) that pulls up prices of products/services

100
Q

why might stimulative monetary policy fail?

A
  • fed’s limited ability to control long-term interest rates
  • limited credit provided by banks
  • Low returns on savings
  • Adverse effects on inflation
  • Lagged effects of monetary policy
101
Q

credit crunch

A

if the fed increases the level of bank funds during a weak economy, banks may be unwilling to extend credit to some

Financial markets and institutions (8 decks)

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