Chap 8 Flashcards
Who are the true suppliers of loans?
consumers/businesses that save
Who is the middleman?
banks
What is the interest rate?
price for delaying consumption for the future
What is direct finance?
when the borrower deals directly with the lender
What is indirect finance?
when the borrower lends through a middleman
What is the face value?
the value paid at maturity?
What is maturity?
the date the payment will be made to the lender
How does the government engage in direct finance?
selling bonds to consumers and businesses. those who buy bonds are lending to the government
What is a zero coupon bond?
when the seller makes no interest payments
What is the coupon rate?
the interest rate noted on the bond
4 reasons why bankers provide value to consumers/businesses
- spread the risk of non payment
- develop comparative advantages in credit evaluation
- divide denominations of loans
- match the preferences
Who would prefer lower/higher interest rates?
borrowers - lower and lenders - higher
Why do supply and demand have their shape?
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
What is a usuary law? Who do they usually benefit?
a law that puts a price ceiling on interest rates. rich people.
How do usuary laws affect the market?
causes a shortage if the ceiling is below the equilibrium rate
What happens to the interest rate if people decide they want to save?
it falls
What happens to interest rates if people see a bright future and demand more loans?
it rises, along with amount saved and borrowed
Who are two major players besides companies and people?
U.S. government and U.S. Fed Reserve
If the U.S. government is involved and borrows, how does that affect the demand for loanable funds?
it goes up
What is crowding out?
An increase in government spending financed through borrowing and private spending decreases due to rising interest rates. the government crowds out the private sector.
Why doesn’t the equilibrium of funds increase by the amount borrowed by the government?
interest rates rise so powerful private businesses who were borrowing are no longer doing so
What is a value of credit markets?
People can partner to increase value creation abilities now and pay interest out of them later. one partner with creativity, one with dolla$$
How does a leveraged buyout help the economy?
allocating valuable scarce resources in a better way. more jobs, higher quantities of production.
Insolvent vs. Illiquid
Insolvent-their value is negative, they owe more than they own. Illiquid-they cannot pay their immediate obligations
What is the absolute priority rule?
debtors are ranked with regard to contracts with the company and then paid off in the order of senior debt
Who is the last to be paid off during bankruptcy?
stockholders (the holders)
What is Fannie Mae and why was it created?
Federal National Mortgage Association. to restart the lending on housing after the bank crisis in the Great Depression
What happened to Fannie Mae in the ’60s?
it was privatized, encourage banks to lend more
What was the Community Reinvestment Act?
it instructed banks to make loans to poor people that could not have afforded them before
What is TARP?
The Troubled Asset Relief Program. The Fed bought back all the bad mortgage backed bonds
What did the Dodd Frank bill of 2010 do?
- create new government regulatory agencies
- create new regulations
- direct regulators to write additional regulations
