Chapter 15: Finance Flashcards
what do banks do
- pool savings from many savers
- Spread the risk of lending money across many borrowers
- solve information problems
- Provide payment services
- create long-term loans from short term deposits
what is maturity transformation
using short-term loans to make long-term loans
what are bank runs
when people withdraw more money than the bank is able to free up
what are important facts about a bank run
- can cause the bank to collapse
- is likely whenever people believe that a bank run is likely
- can be contagious
- deposit insurance makes bank runs much less likely
what is deposit insurance
you know that your savings are safe no matter what other people do
what are shadow banks and what are the key information about them
shadow banks perform banking functions but aren’t regulated as banks, lets them do risky funding and have no deposit insurance
if there is a shadow bank run, it leads to fire sales, which can cause shadow bank runs to spread (rush to sell assets to pay out customers, rapid sell of assets causes the price of these assets to decrease, panicking other customers of other shadow banks, who will then try to pull out their money)
shadow banks are opaque, depositing money with a shadow bank infected with bad loans may put you in financial distress, if you know know which shadow banks have bed debts and there is no deposit insurance, you dont want to lend your money to any of them.
what is a bond
an IOU, a piece of paper that spells out the terms of the loan
includes borrower, principal, maturity date and coupons (interest it has promised to pay)
the bond market performs 4 key functions, what are they
- channel funds from savers to borrowers
- funds gov’t debt (gov’t issued bonds)
- spread risks (having multiple lenders rather than a few)
- creates liquidity (can sell your bond to other investors)
bonds have risks, what are the 3
- default risk (risk of not getting paid, companies have credit rating you can look at to see their risk levels)
- term risk (risk from uncertainty about future interest rates, the more uncertain you are the higher the risk, the longer the term the more interest rates might change and so the higher the risk)
- liquidity risk (when bonds will be hard to sell, might not be able to find a buyer quickly enough for a good price)
true or false: gov’t bonds are the safest
true
there are two ways you can make money from the stock market, what are they
dividends or selling for a profit
the stock market performs 4 key functions, what are they
- channels funds from savers to investors
- stocks spread risks (across many shareholders, reducing the risk any one person faces)
- reallocate control (each share has a vote)
what are the key differences between stocks and bonds
- bonds pay certain annual interest payments, stocks pay uncertain dividends
- bondholders get paid before stockholders if a company declares bankruptcy
- stockholders help control how a company is run
define these attributes in stock market data
stock price
opening price
high price
low price
stock price chart
market capitalization
price earnings ratio
Stock Price:
The current stock price
Opening Price:
the price at which the stock started trading at the beginning of today
High Price:
the highest price at which the stock traded today
Low Price:
the lowest price at which the stock traded today
Stock Price Chart:
A stock price chart shows the ups and downs of a stock’s price over a period
Market Capitalization:
the value of the entire company, calculated by multiplying the total number of stocks by the current stock price.
Price-Earnings Ratio:
measures the ratio of a company’s current share price relative to its per-share earnings.
How do you determine the fundamental value of a single stock?
A: Divide the fundamental value of the company by the total number of shares outstanding.
