Chapter 8 Flashcards
Interest Rate
Savers (lenders) are paid for delaying consumption until future, by borrowers, who wish to consume or invest more in present and will later pay for privilege
Direct Finance
Borrower deals directly with lender
Maturity
Date that payment will be made to lender
Face Value
Value paid at maturity
Zero Coupon Bond
Someone buys bond, can redeem bond at later date
Coupon Rate
Interest rate quoted on corporate bonds (interest payments twice per year until maturity)
Indirect Finance
When individuals and businesses use middlemen, such as banks, for borrowing and lending
Usury Law
Puts price ceiling on interest rates
True suppliers of loanable funds are …
Consumers and businesses that save
Higher interest rates, greater rewards encourage more savings,
larger amount of loanable funds supplied.
Higher interest rates, higher cost of early consumption and investment discourages barrowing,
lower amount of loanable funds demanded
Borrowers prefer lower rates,
lenders prefer higher rates
loans to US gvt usually have lowest interest rate
about 2.25%
Mortgage loans interest rates
4%
Public saves more, supply of loanable funds increase,
decrease in interest rates, encourages investment
Indirect Crowding Out
Increase in government spending is financed through borrowing, private spending decreases due to higher interest rates
Direct Crowding Out
When government spends, private markets spend less because their ability to spend is taxed away
Leveraged Buyout
Firm borrows in order to purchase another firm, then immediately sells in whole or in parts
Insolvent
Firm whose value is negative; owes more than it owns
Illiquid
Cannot pay its immediate obligations
Absolute Priority Rule
Creditors are ranked with regard to how long ago company became indebted, every penny is paid to “senior” debt, then paid to next senior, and so on. Stockholders and owners are last on list.
Community Reinvestment Act
Instructed banks to more loans to poor people
Nonconforming Loans
Loans that banks made to risky borrowers who cold not meet old standards
Dodd-Frank bill of 2010
- Created new government regulatory agencies
- Created new regulations
- Directed regulator to write additional regulations
Systemic Risks
Risks to the entire financial system
Normal unemployment rate
4-5.5%
Economic Growth
Increased production of goods and services
Paul Volcker caused
1980 recession.
Credit institutions can make it easier for…
borrowers and lenders to find each other
Lending depends on …
available resources
to save is
to spend
