Ch. 8 class questions Flashcards
direct finance
saver lends directly
face value and maturity
face value is the amount to be paid back; maturity is the date it is to be distributed
why would anyone buy bond without interest rate
bought for less than face value, interest rate implied
indirect finance
savers lend to borrowers using intermediaries, such as banks
what ways do banks add value to the economy
spread risk of non-payment, divide denominations, match time horizons, specialize in evaluation of creditworthiness and collection
why do supply and demand for loanable funds have their shapes?
people willing to save more at higher interest rates, willing to borrow less a higher interest rate
usury law? its effect?
cap on interest rates, causes shortage of loanable funds
why are interest rates on credit cards high?
unsecured and required great admin cost due to expanding and contracting as borrowers charge more and pay down
if public decides to save less, what happens to supply and/or demand for funds? what happens to the interest rate?
sup of loanable funds falls and int rate rises
is people borrow more, what happens to supply and/or demand for funds? what happens to the interest rate?
demand for loanable funds rises and interest rate rises
besides savers, which other group can effect supply of loanable funds?
federal reserve
how does fed gov. (not fed) affect credit market?
fed gov is the largest borrower
t/f explain: if fed gov. increases borrowing by 500B, total amount of loans increase by 500B
false, fed gov. increase demand for loanable funds, increases interest, lowers incentive for consumption and business (crowding out)
t/f explain: credit markets of not create value, they move value around
measure value by willingness to pay false, like voluntary trade, borrowing and lending create value as resources flow to highest valued uses
bastiat says,” actually nobody borrows money for sake of having money”
we borrow for sake of good, services, and resources money is medium
what is the difference between stocks and bonds
stock owner has part of the company. bond is a creditor
how can leveraged buyout create value?
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
Illiquidity and insolvency
illiquidity means firm does not have enough spendable cash; cannot pay its immediate obligations
insolvency means that it owes more than it owns
t/f a 100M firm that goes bankrupt costs the economy 100M
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
absolute priority rule
highest ranked bank holders paid everything owed first with stockholders paid last
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
false, main objection was that guaranteeing loan for less creditworthy borrower means fewer funds for credit
Bastiat said to save is to spend, what did he mean?
dollars saved fuel investment and consumption saving is spending by another means
Fannie Mae was major player in secondary market for home lending what does that mean?
Fannie bought home loans from the bank and sold bonds to public backed by loan payment
what is a nonconforming loan?
loan borrower is high credit risk
