Chapter10-11 Flashcards
Financial system
is a system that allows the transfer of money between savers and borrowers
Diversification and its advantage
The spreading out of investments to reduce risk, financial intermediaries help individual savers diversify their investments
The relationship of risk and return
They are related, The higher potential return of the investment, the greater the risk involved
What are the four types of risks
Liquidity risk, Inflation rate risk, credit risk, time risk
Return
is the money an investor receives above and beyond the sum of money initially invested
liquidity risk
you may not be able to convert the investment back into cash quickly enough for your needs
Inflation rate risk
inflation rates erode the value of your assets
credit risk
borrowers may not pay back the money that they borrowed or they may be late in making payments
time risk
you may have to pass up better opportunities for investment
financial assets
documents that confirm their deposit or bond purchase, such as passbooks or bond certificates, known as financial assets which represent claims on property or income of the borrower
corporate bonds
is a bond that a corporation issues to raise money as it expands its business
bonds
loans that represent debt that a government or corporation must repay to a investor
how are bonds related
rate bonds on a number of factors,
including the issuer’s ability to make future payments and to repay the
principal when the bond matures.
who does the rating for bonds
Standard & Poor’s and Moody’s
rank bonds from safest to riskiest
Savings Bonds - safest
Treasury Bonds, Bills, and Notes,
Municipal Bonds,
Corporate Bonds,
Junk Bonds - riskiest
bull market
the stock market rises steadily over time
bear market
the stock market falls over a period time
s&p 500
is an index that tracks the performance of 500
different stocks.
The Dow Jones Industrial Average
is an index that shows how stocks of 30 companies in
various industries have changed in value.
Mutual funds
pool money from investors to buy a range
of financial assets
junk bond
Junk bonds are lower-rated, potentially higher-paying bonds. These are
very high risk.
Municipal Bonds
are issued by state or local governments to finance such
improvements as highways, state buildings, libraries, police stations, and
schools.
savings bonds
Savings bonds are low-denomination ($50 to $10,000) bonds issued by the
United States government. Savings bonds are purchased below par value
(a $100 savings bond costs $50 to buy) and interest is paid only when the
bond matures.
stock split
the division of a single share of stock into more than one share
coupon rate
the interest rate
that the issuer will pay the bondholder.
maturity
the time when
payment to the bondholder is due.
par value
the amount that an
investor pays to purchase the bond and
that will be repaid to the investor at
maturity.
financial indeterminacy
accept funds from savers
and make loans to investors.
capital gain
is earned when a stockholder sells
stock for more than he or she paid for it. A
stockholder that sells stock at a lower price than the
purchase price suffers a capital loss.
flat money
Flat money, also
called “legal
tender,” has value
because the
government
decreed that is an
acceptable means
to pay debts.
six characteristics of money
portability, durability, divisibility, uniformity, limited supply, acceptability
representative money
Representative
money has value
because the holder
can exchange it for
something else of
value.
bank run
Widespread panic in which a
great number of people withdraw money
federal reserve system
as the nation’s first
true central bank. (Also known as the “Fed”)
causes of stock market crash
During the 20’s banks loaned large sums of money to many
high risk businesses
Farmers were unable to pay back loans due to crop failures
and hard times on farms
Stock Market crashed and caused widespread bank runs,
thousands of banks failed
Hawley-Smoot Tariff (June 1930) raised tariffs on 20,000
imported goods
FDIC
The Banking Act of 1933 created , the FDIC insures customers’
deposits up to $250,000.
gold standard
The U.S. was taken off of the gold
standard in August 1971. (Nixon)
Fractional Reserve System
a banking system that keeps
only a fraction of funds on hand and lends out the
remainder
three functions of money
medium of exchange,
unit of account,
store of value
mortgage
A mortgage is a specific type of loan that is used to purchase real estate.
certificate of deposits,
usually have a
slightly greater return but
liquidity is reducedare available
through banks, which use the
funds deposited in CDs for a
fixed amount of time.
credit union
Credit unions are cooperative lending associations for particular
groups, usually employees of a specific firm or government agency.
commercial banks
Commercial banks offer checking services, accept deposits, and make loans.
finance companies
Finance companies make installment loans to consumers.
