Ch. 15 - The Financial Sector (Banks, Bonds, & Stocks) Flashcards
(27 cards)
What 5 functions do banks provide?
- Banks pool savings from many savers
- Banks spread the risk of lending money across many borrowers
- Banks solve information problems
- Banks provide payment services
- Banks create long-term loans from short-term deposits
What is a bank run?
When many bank customers try to withdraw their savings at the same time
(can cause a bank to collapse, likely to happen whenever people believe a bank run is likely)
What is deposit insurance?
A guarantee that you won’t lose the money you deposit in your bank
What are shadow banks?
Financial firms that are similar to banks, but are not regulated like banks
What is a bond?
An IOU, specifically a promise to pay back a loan with interest
What are the 4 functions of the bond market?
- Channels funds from savers to borrowers
- Funds government debt
- Spreads risk
- Creates liquidity
What is liquidity?
The ability to quickly and easily convert your investments into cash, with little or no loss in value
What are the 3 risks of bonds?
- Default risk
- Term risk
- Liquidity risk
What is a default risk?
The risk that your loan won’t be paid
What is a term risk?
The risk that arises from uncertainty about future interest rates
What is a liquidity risk?
The risk that if you need to sell an asset quickly, you may not be able to get a good price for it
What are dividends?
A share of profits that a company pays its shareholders
What are retained earnings?
The profits that a company chooses not to give to its shareholders
What are the 2 ways you stand to benefit from owning stocks?
- Dividends
- The value of your shares can rise
What are the 3 key functions of stocks
- Stocks channel funds from savers to investors
- Stocks spread risk
- Stocks reallocate control
What is an initial public offering?
When a company first sells stock directly to the public
What is the stock market?
A market where people buy & sell existing stocks
What is fundamental value?
The present value of the future profits that a company will earn
What is a fundamental analysis?
A framework for assessing an asset’s fundamental value
What is a relative valuation?
An assessment of the value of an asset by comparing it to similar assets
What is the efficient markets hypothesis?
A theory that at any point in time, stock prices reflect all publicly available information about a company’s fundamental value
What is a random walk?
When a price follows an unpredictable path
What are mutual funds?
A fund that buys a portfolio of stocks (& sometimes bonds) on your behalf
What does it mean to be actively managed?
When a fund is managed by stock pickers
