Ch. 8 class questions

Question 1

direct finance

Answer 1

saver lends directly

Question 2

face value and maturity

Answer 2

face value is the amount to be paid back; maturity is the date it is to be distributed

Question 3

why would anyone buy bond without interest rate

Answer 3

bought for less than face value, interest rate implied

Question 4

indirect finance

Answer 4

savers lend to borrowers using intermediaries, such as banks

Question 5

what ways do banks add value to the economy

Answer 5

spread risk of non-payment, divide denominations, match time horizons, specialize in evaluation of creditworthiness and collection

Question 6

why do supply and demand for loanable funds have their shapes?

Answer 6

people willing to save more at higher interest rates, willing to borrow less a higher interest rate

Question 7

usury law? its effect?

Answer 7

cap on interest rates, causes shortage of loanable funds

Question 8

why are interest rates on credit cards high?

Answer 8

unsecured and required great admin cost due to expanding and contracting as borrowers charge more and pay down

Question 9

if public decides to save less, what happens to supply and/or demand for funds? what happens to the interest rate?

Answer 9

sup of loanable funds falls and int rate rises

Question 10

is people borrow more, what happens to supply and/or demand for funds? what happens to the interest rate?

Answer 10

demand for loanable funds rises and interest rate rises

Question 11

besides savers, which other group can effect supply of loanable funds?

Answer 11

federal reserve

Question 12

how does fed gov. (not fed) affect credit market?

Answer 12

fed gov is the largest borrower

Question 13

t/f explain: if fed gov. increases borrowing by 500B, total amount of loans increase by 500B

Answer 13

false, fed gov. increase demand for loanable funds, increases interest, lowers incentive for consumption and business (crowding out)

Question 14

t/f explain: credit markets of not create value, they move value around

Answer 14

measure value by willingness to pay false, like voluntary trade, borrowing and lending create value as resources flow to highest valued uses

Question 15

bastiat says,” actually nobody borrows money for sake of having money”

Answer 15

we borrow for sake of good, services, and resources money is medium

Question 16

what is the difference between stocks and bonds

Answer 16

stock owner has part of the company. bond is a creditor

Question 17

how can leveraged buyout create value?

Answer 17

badly managed firm owns assets that worth more than stock value. another firm borrows, buys stock, sells assets to these willing to pay more for assets, because they can better manage them

Question 18

Illiquidity and insolvency

Answer 18

illiquidity means firm does not have enough spendable cash; cannot pay its immediate obligations
insolvency means that it owes more than it owns

Question 19

t/f a 100M firm that goes bankrupt costs the economy 100M

Answer 19

false; any bankrupt firm likely has some valuable assets. true economic loss was in badly managing the asset the bankruptcy at worst distributes the asset higher valued uses

Question 20

absolute priority rule

Answer 20

highest ranked bank holders paid everything owed first with stockholders paid last

Question 21

t/f Bastiat said only reason the government should not get involved in guaranteeing loans to less creditworthy is that taxpayers are on the hook

Answer 21

false, main objection was that guaranteeing loan for less creditworthy borrower means fewer funds for credit

Question 22

Bastiat said to save is to spend, what did he mean?

Answer 22

dollars saved fuel investment and consumption saving is spending by another means

Question 23

Fannie Mae was major player in secondary market for home lending what does that mean?

Answer 23

Fannie bought home loans from the bank and sold bonds to public backed by loan payment

Question 24

what is a nonconforming loan?

Answer 24

loan borrower is high credit risk

Question 25

what was the intent of the community reinvestment act?

Answer 25

to encourage banks to lean to poor people

Question 26

relationship between the department of housing and urban development and Fannie Mae is?

Answer 26

HUD directed Fannie Mae to purchase nonconforming loans

Question 27

what was the fed’s role in housing crisis of the 2000’s?

Answer 27

increase money supply keeping interest rates low, resulted in expansion of lending