Chap 8

Question 1

Who are the true suppliers of loans?

Answer 1

consumers/businesses that save

Question 2

Who is the middleman?

Answer 2

banks

Question 3

What is the interest rate?

Answer 3

price for delaying consumption for the future

Question 4

What is direct finance?

Answer 4

when the borrower deals directly with the lender

Question 5

What is indirect finance?

Answer 5

when the borrower lends through a middleman

Question 6

What is the face value?

Answer 6

the value paid at maturity?

Question 7

What is maturity?

Answer 7

the date the payment will be made to the lender

Question 8

How does the government engage in direct finance?

Answer 8

selling bonds to consumers and businesses. those who buy bonds are lending to the government

Question 9

What is a zero coupon bond?

Answer 9

when the seller makes no interest payments

Question 10

What is the coupon rate?

Answer 10

the interest rate noted on the bond

Question 11

4 reasons why bankers provide value to consumers/businesses

Answer 11

1. spread the risk of non payment
2. develop comparative advantages in credit evaluation
3. divide denominations of loans
4. match the preferences

Question 12

Who would prefer lower/higher interest rates?

Answer 12

borrowers - lower and lenders - higher

Question 13

Why do supply and demand have their shape?

Answer 13

Demand slopes down because people are willing to save more at higher interest rates and supply slopes up because people buy more at lower interest rates

Question 14

What is a usuary law? Who do they usually benefit?

Answer 14

a law that puts a price ceiling on interest rates. rich people.

Question 15

How do usuary laws affect the market?

Answer 15

causes a shortage if the ceiling is below the equilibrium rate

Question 16

What happens to the interest rate if people decide they want to save?

Answer 16

it falls

Question 17

What happens to interest rates if people see a bright future and demand more loans?

Answer 17

it rises, along with amount saved and borrowed

Question 18

Who are two major players besides companies and people?

Answer 18

U.S. government and U.S. Fed Reserve

Question 19

If the U.S. government is involved and borrows, how does that affect the demand for loanable funds?

Answer 19

it goes up

Question 20

What is crowding out?

Answer 20

An increase in government spending financed through borrowing and private spending decreases due to rising interest rates. the government crowds out the private sector.

Question 21

Why doesn’t the equilibrium of funds increase by the amount borrowed by the government?

Answer 21

interest rates rise so powerful private businesses who were borrowing are no longer doing so

Question 22

What is a value of credit markets?

Answer 22

People can partner to increase value creation abilities now and pay interest out of them later. one partner with creativity, one with dolla$$

Question 23

How does a leveraged buyout help the economy?

Answer 23

allocating valuable scarce resources in a better way. more jobs, higher quantities of production.

Question 24

Insolvent vs. Illiquid

Answer 24

Insolvent-their value is negative, they owe more than they own. Illiquid-they cannot pay their immediate obligations

Question 25

What is the absolute priority rule?

Answer 25

debtors are ranked with regard to contracts with the company and then paid off in the order of senior debt

Question 26

Who is the last to be paid off during bankruptcy?

Answer 26

stockholders (the holders)

Question 27

What is Fannie Mae and why was it created?

Answer 27

Federal National Mortgage Association. to restart the lending on housing after the bank crisis in the Great Depression

Question 28

What happened to Fannie Mae in the ’60s?

Answer 28

it was privatized, encourage banks to lend more

Question 29

What was the Community Reinvestment Act?

Answer 29

it instructed banks to make loans to poor people that could not have afforded them before

Question 30

What is TARP?

Answer 30

The Troubled Asset Relief Program. The Fed bought back all the bad mortgage backed bonds

Question 31

What did the Dodd Frank bill of 2010 do?

Answer 31

1. create new government regulatory agencies
2. create new regulations
3. direct regulators to write additional regulations