Chapter 8

Question 1

Who are the true loaners of funds?

Answer 1

consumers and businesses that save

Question 2

Who are the intermediaries and middlemen?

Answer 2

Banks

Question 3

What is interest rate in credit markets?

Answer 3

What extra has to be paid by the borrower for the lenders time

Question 4

What happens in credit markets?

Answer 4

People trade back and forth through time

Question 5

What happens with direct finance?

Answer 5

A borrower deals directly with the leader (no middlemen/bank)

Question 6

What else is included in direct finances?

Answer 6

When the government or a business “sells bonds” to consumer, businesses, and governments, they are also engaging in direct finance

Question 7

What is the structure of a bond?

Answer 7

The seller will pay $1000 on January 5th 2020

This is how U.S. government bonds look

Question 8

What is maturity?

Answer 8

The date that the payment will be initiated to the lender

Question 9

What is the face value?

Answer 9

The value paid at maturity (ex. $1000)

Question 10

What is a zero coupon bond?

Answer 10

because the seller makes no interest on the loan

Question 11

What is the coupon rate?

Answer 11

an interest rate quoted on a bond

Question 12

What is indirect finance?

Answer 12

It is when individuals and businesses use banks as middlemen for borrowing and lending

Question 13

Why are middlemen paid?

Answer 13

because they add value

Question 14

What are the four things that financial intermediaries do?

Answer 14

1) spread the risk on nonpayment
2) develop comparative advantages in credit evaluation and collection
3) divide denominations of loans
4) match time preferences

Question 15

What does it mean to spread the risk on nonpayment?

Answer 15

When lending to a borrower you run the risk of being repaid zero. However, when working with a bank, you have higher odds that you will not lose your money.

Question 16

What does it mean to develop comparative advantages in credit evaluation and collection?

Answer 16

Again, like number 1 you always runt he risk on not getting your money and that can cause you to go to court which will cost you even more money. Banks know how to make people pay because they have so much experience and they also have lawyers always on hand. The banks can evaluate borrowers and for the most part, we can not.

Question 17

What does it mean to divide denominations of loans?

Answer 17

When you are lending without a bank you may find multiple borrowers with multiple different amounts that do not add up to your sum. When going through a bank, the bank will pool your money with others to make all of these loans happen with borrowers.

Question 18

What does it mean to match time preferences?

Answer 18

The time in which you may want to loan might not work with potential borrowers and when you use a bank they constantly churn deposits and loans that match up savers and borrowers time preferences

Question 19

What is a usury law?

Answer 19

a government enacted price ceiling on interest rates

Question 20

What can the usury law do?

Answer 20

Create a shortage in the market if the line is below the equilibrium interest rate

Question 21

What is indirect crowding?

Answer 21

When an increase in government is financed through borrowing, private spending decreases due to rising interest rates

Question 22

What is direct crowding out?

Answer 22

When governments spend, they spend less because their ability to spend is taxed away

Question 23

What is a leveraged buyout?

Answer 23

where a firm can borrow in order to purchase another firm, then immediately sell the firm in whole, or in parts

Question 24

What does it mean when a business or firm is insolvent?

Answer 24

when it owes more than it owns

Question 25

What does it mean when a company is illiquid?

Answer 25

when it can’t pay its IMMEDIATE obligations

Question 26

What is the absolute priority role?

Answer 26

when creditors are ranked with regard to how long ago the company became indepted to them, then every penny is paid to the “senior” debt, before any less “senior” debt is paid

Question 27

What is the Community Reinvestment Act?

Answer 27

becoming a law in 1977, it instructed banks to make loans to poor people who could not get home loans before, because they could not pay (banks who did not follow were not penalized) however if banks wanted to merge they had to have enough loans out, so most began to lend some to poor people

Question 28

What are nonconforming loans?

Answer 28

loans made to risky borrowers who could not meet the old standards (The HUD directed the Fms to purchase these loans) so now the risk of loan to poor people became the Fms problem

Question 29

What did the Dodd Frank Bill create?

Answer 29

1) created new government regulatory agencies
2) created new regulations
3) directed regulators to write additional regulations

Question 30

What does Dodd Frank NOT do?

Answer 30

restrict the FMs in any way

Question 31

What does the Dodd Frank Bill do?

Answer 31

1) establish the financial stability oversight council
2) institute bailout insurance
3) created the consumer financial protection bureau to regulate consumer credit

Question 32

What are systematic risks?

Answer 32

risks to the entire financial system

Question 33

What is the normal unemployment rate?

Answer 33

4-5.5%

Question 34

What was the high unemployment rate in the 2008 crisis?

Answer 34

10%

Question 35

What is economic growth?

Answer 35

a healthy economys increased production of goods and services (at least around 3% a year)

Question 36

In recessions what is the economic growth?

Answer 36

negative