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Money And Banking > Chapter 2 > Flashcards

Chapter 2 Flashcards

0
Q

Who are primary lender-savers?

A

Borrow funds to finance actives
Households
Also business, and govt (state and local) foreigners and their government

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1
Q

What is the purpose of a financial market?

A

Channel funds from households, firms, and governments that have saved surplus funds by spending less than their income to those who have a shortage of funds because they wish to spend more than their incomes

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2
Q

Who are primary borrower-spenders?

A

Businesses and governments

Borrow to spend

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3
Q

What is he direct route?

A

Borrowers borrow finds direct from lenders by selling securities (financial instruments) claims on borrowers future income or assets

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4
Q

What is a bond?

A

A debt security promising to make periodic payments for specified period in time

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5
Q

What is a stock?

A

A security that entitles the owner to a share of the company’s profits or assets

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6
Q

Why are financial markets important?

A

They promote financial efficiency and allow money to transfer from someone with no investment opportunities to someone with them

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7
Q

What is the order of lender-savers?

A

Household
Business firms
Government
Foreigners

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8
Q

What is the order of borrower-spenders?

A

Business firms
Government
Household
Foreigners

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9
Q

What is a debt instrument?

A

Bond/mortgage
Contractural agreement by borrower to pay holder of the instrument fixed dollar amounts at regular intervals until a specified date when final payment is made

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10
Q

What is the maturity of debt?

A

Number of years until instruments expiration date

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11
Q

When is a debt instrument short-Term?

A

Maturity less than a year

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12
Q

When is a debt instrument long-term?

A

If it’s maturity is 10 years or longer

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13
Q

What is an intermediate term?

A

Debt instruments with maturity between 1 and 10 years

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14
Q

What is an equity?

A

Common stock
Claims to share in net income and asset of a business
Pay dividends periodically
Right to vote etc

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15
Q

What is a residual claimant?

A

Disadvantage to owning corporation’s equities
Must pay debt holders before equity holders
Benefit more from any success of the business

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16
Q

What is a primary market?

A

Financial market which issues new securities

Bonds or stocks

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17
Q

What is a secondary market?

A

Financial market in which securities that have been previously issued can be resold.

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18
Q

Who is an important part of the primary market?

A

Investment banks
Underwriting securities
Guarantees a price then sells to public

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19
Q

What are examples of secondary markets?

A 
New York a Stock Exchange 
NASDAQ 
Bonds market
Futures markets
Options markets
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20
Q

Who are brokers?

A

Agents of investors who match buyers won sellers of securities

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21
Q

Who are dealers?

A

Link buyers and sellers by buying and selling securities at a stated price

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22
Q

What are two functions of the secondary market?

A

Make it easier and quicker to sell financial instruments to raise cash
Make financial instruments more liquid
Make easier for firm to sell in primary market

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23
Q

What are two ways secondary markets can be organized?

A

Exchanges and over the counter market

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24
What is exchanges?
Where buyers and sellers of securities meet in one central location to conduct trades Ex) New York Stock Exchange
25
What is the over the counter market?
Dealers at different locations have an inventory of securities stand ready to buy and sell securities over the counter to anyone willing to accept their price Computers make this very competitive
26
What is the money market?
Financial market in which only short-term debt instruments are traded Generally less than 1 year Traded more often and are more liquid Smaller fluctuations, safer investment
27
What is the capital market?
The market in which long term debt and equity instruments are traded Greater than 1 year Usually held by intermediaries
28
What are money market instruments?
Short terms to maturity, least price fluctuations, less frisky investment U.S. Treasury bills Negotiable bank certificates of deposit Commercial paper Federal funds and security repurchase agreements
29
What are US treasury bills?
Short term debt instruments 1, 3, 6 month maturities to finance the federal government No interest payments Bought at a discount
30
What is prime rate?
Base interest rate on corporate bank loans | Indicator of the cost of business borrowing from banks
31
What is the federal funds rate?
Interest rate charged on overnight loans in the fed funds market Sensitive indicator of the cost to banks of borrowing funds from other banks and the stance of monetary policy
32
What is treasury bill rate?
The interest rate on US treasury bills | Indicator of general interest rate movements
33
What is libor rate?
British bankers association avg of interbank rates for dollar deposits in the lord market
34
What is the most liquid of all money market instruments?
``` US treasury bills Most actively traded Also safest, no possibility of default U.S. Gov can always pay because it can raise taxes or issue currency Held by banks ```
35
What is a negotiable bank certificate of deposits ?
CD, debt instrument sold by a bank to depositors that pays annual interest of a given amount and at maturity pays back original purchase price Sold in secondary market Funds for commercial banks
36
What is commercial paper?
Short term debt instrument issued by large banks and well known corporations Growing fast
37
What are repurchase agreements?
``` Short term loans Less than 2 weeks Treasury bills serve as collateral Source of bank funds Most important lenders are large corporations ```
38
What are fed funds?
Overnight loans between banks of their deposit and the federal reserve By banks to other banks
39
What is the federal firms rate?
Interest rate on fed funds Closely related to credit market conditions in the banking system and stance of monetary policy High, banks stopped for funds Low, banks' credit needs are low
40
What are capital market instruments?
Debt and equity instruments with maturities of greater than one year Wider price fluctuations Risky investments ``` Corporate stocks Residential mortgages Corporate bonds US government securities US government agency securities State and local government bonds Bank commercial loans Commercial and farm mortgages ```
41
What are stocks?
Equity claims on net income of a corporation Largest in capital market Individuals hold 1/2
42
What are mortgages and mortgage backed securities?
Loans to households or firms to purchase land, housing, or other real structures in which structure is the collateral Largest debt market Primarily residential
43
What is a mortgage back security?
Bond like debt instrument backed by a bundle of individual mortgages, who's interest and rpm piles are paid to holders of securities
44
What are corporate bonds?
Long term bonds issued by corporations with strong credit ratings Send holder interest payment twice a year to pay off face value when bond matures
45
What is a convertible bond?
Corporate bonds that can be converted to a specified number of shares of stock at maturity date Reduce interest payments Life insurance companies
46
What federal agencies are a part of mortgage market?
Federal national mortgage association Fannie Mae Government national mortgage association ginnie Mae Federal home loan mortgage corporation Freddie Mac Sell bonds to buy mortgages Not liquid
47
What are US government securities?
Long term debt instruments issued by Us treasury to finance deficit of fed government Most widely traded bonds Most liquid security traded in capital market
48
What are Us government agency securities?
Long term bonds issued by various government agencies (ginnie mae) to finance personal items like mortgages
49
What are state and local government bonds?
Municipal bonds Long term debt instruments issued by state and local governments to finance schools, roads, and large programs Inters payments exempt from federal income tax and state tax Commercial banks, biggest buyer
50
What are consumer and bank commercial loans?
Loans to consumer and businesses made principally by banks or finance company's
51
Why have international financial markets grown?
Increase in pool of savings | Deregualtion of finically markets
52
What are foreign bonds?
Traditional instruments in the international bond market Sold in foreign country, denominated in that country's currency
53
What is a Eurobond?
Bond denominated in a currency other than that of the country it is sold in Larger than US corporate bonds
54
What are eurocurrencies?
Foreign currencies deposited in banks outside home country
55
What are Eurodollar?
Most important Eurocurrency | US dollars deposited in foreign banks outside US or foreign branches of US banks
56
What is true of world stock markets?
US not necessarily the largest anymore | Now mutual funds that concentrate on trading foreign markets
57
How does the secondary market work?
Borrow funds from lender savers and then use to make loans to borrower spenders
58
What is financial intermediation?
Primary route for moving funds from lenders to borrowers
59
What are transaction costs?
Time and money spent in carrying out Funchal transactions | Problem for people with excess funds
60
Why can finial intermediaries reduce transaction costs?
Expertise in lowering them and they can take advantage of scale
61
What are economies of scale?
Reduction in transition cost per dollar as the size of transitions increase
62
What is liquidity services?
Services that make it easier for costumers to conduct transactions
63
What is risk?
Uncertainty about returns investors will earn on assets | Low transaction cost reduce exposure to risks
64
What is risk sharing?
Done by intermediaries Create and sell assets with risk characteristics that people are comfortable with Asset transformation Risky asset turned into safer ones
65
What is diversification?
Entails investing in a portfolio of assets whose return do not always move together, therefore lowering risk
66
What is asymmetric information?
One party does not know enough about the other to make accurate decisions
67
What is adverse selection?
Problem created by asymmetric information before transaction occurs
68
What is moral hazard?
Asymmetric information after transaction
69
What do financial intermediaries help with?
Provide liquidity services Promote risk sharing Solve information problems
70
What are economies of scope?
Lower cost of information production for each service by applying one information resource to many different services
71
What is conflict of interests?
Economies of scope Too many objectives May withhold some info
72
What are categories of financial intermediaries?
Depository institutions Contractual savings institutions Investment intermediaries
73
What are depository institutions?
Banks | Accept deposits from individuals and make loans
74
What is a thrift institution?
Saving and loan association, mutual savings bank, and credit union
75
What is a commercial bank?
Raise funds by issuing check able deposits, savings deposits, time deposits Use funds to buy commercial, consumer, and mortgage loans Largest intermediary, most diverse assets
76
What are savings and loan associations and mutual savings banks?
Depository institutions Saving, time, and check able deposits Used to use for residential housing loans
77
What is a credit union?
Money from shares, make consumer loans
78
What are contractual savings institutions?
Acquire funds on periodic intervals on a contractual basis | Long term securities
79
Life insurance companies
Annuities, annual income payments upon retirement | Acquire funds from premiums
80
What does government regulate financial markets?
Increase information available investors, ensure soundness of financial system
81
What is financial panic?
Widespread collapse of financial intermediaries

Money And Banking (5 decks)

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