Chapter 2 - FM environment Flashcards
What is fiscal policy concerned with?
Government spending and taxation
What is monetary policy concerned with?
Money supplies and interest rates
What are the aspects of financial intermediation?
- Maturity transformation
- Aggregation of funds
- Pooling of losses
What does maturity transformation mean?
Institutions borrow money on a shorter term than the length of lending
How do discount instruments work?
They are discounted and paid back at nominal value e.g. firm buys debt for $95 and borrower pays back $100
What are the interest bearing instruments?
- Money market deposits
- Certificates of deposit
- Repo
What are the discount instruments?
- Treasury bill
- Bank bill
- Commercial paper
- Bill of exchange
Give examples of derivatives
- Futures
- Options
- Swaps
What is the reverse yield gap?
When dividend yield is lower than bond yield. Investors can be willing to accept lower current returns in anticipation of higher returns in future.
What is the eurobond market?
Long-term foreign currency investments or loans
How do interest-bearing instruments work?
They pay interest and the investor receives face value plus interest at maturity
How do derivatives work?
They derive their value from the value of another asset or variable e.g. exchange rates
What are money market deposits?
Very short term loans between banks
What are certificates of deposit?
A certificate of receipt for funds deposited for a specific term and paying interest. Can be traded.
What is a repurchase agreement?
Agreement in which one party agrees to sell a financial instrument to the other on an agreed date for an agreed price and buy back the instrument at a later date for a higher price.
