chapters 1-6 Flashcards
6 parts of the financial system?
- money 2. financial instruments 3. financial markets 4. financial institutions 5. regulatory agencies 6. central banks
financial instruments? 4 examples?
used to transfer resources from savers to investors. stocks, bonds, mortgages, insurance etc.
financial markets? one example?
allows the buying and selling of instruments. ex: new york stock exchange
financial institutions?
provide access to financial markets and collection of info about prospective borrowers
regulatory agencies?
making sure all elements safe and reliable.
4 core principles of money and banking?
- time has value 2. risk requires compensation 3. info is the basis for decisions 4. markets determine prices & allocate resources
money?
asset generally accepted as payment for goods and services or repayment of debt
wealth?
value of assets minus liabilities
3 characteristics of money?
- means of payment 2. unit of account 3. store of value
what is a unit of account?
used to quote prices and record debts
store of value?
retains its worth day-by-day
anything that is a means of payment must be a…?
store of value.
if something is a store of value its most likely a…?
unit of account
liquidity?
measure of the ease with which as asset can be turned into a means of payment
market & funding liquidity?
market - financial institutions ability to sell assets for money
funding - financial institutions ability to borrow money to buy securities or make loans
payments system?
web of arrangements that allow the exchange of goods and services, as well as assets
commodity monies? most common commodity money?
have intrinsic value. most common is gold
fiat money?
value comes from government decree
debit card?
provides bank with instructions to transfer funds from the cardholders account directly to a merchants account
credit card?
promise by bank to lend a cardholder money
electronic funds transfer?
movement of funds from 1 account to another
automatic clearinghouse transaction?
generally used for recurring payments like paychecks and utility bills
future of money in terms of means of payment, unit of account, and store of value?
won’t be a means of payment, will always be needed as unit of account, soon won’t be store of value
2 reasons for changes in amount of money in economy?
changes in interest rates and economic growth
inflation?
pace at which prices in general are increasing over time
inflation rate?
measure of the process of inflation
monetary aggregates?
measures of money: M1 - includes currency and various deposit accounts. M2 - all of M1 plus assets that can’t be used as means of payment
direct finance?
borrower sells a security directly to a lender
indirect finance?
institution stands between lender and borrower
uses of financial instruments?
means of payment & stores of value. allow for transfer of risks
how is complexity with financial instruments overcome?
standardization - most FI’s homogeneous
counterparty?
person or institution on the other side of a contract
underlying instruments? 2 examples
used by savers and lenders to transfer resources directly to investors and borrowers. ex: stocks and bonds
derivative instruments?
their value and payoffs are derives from the behavior of underlying instruments
4 characteristics influencing value of a financial instrument?
- size of payment 2. when promised payment is to be made 3. likelihood that payment will be made 4. circumstances under which payment is to be made
3 examples of financial instruments?
bank loans, bonds, and home mortgages
asset-backed securities?
shares in the returns or payments arising from specific assets
futures contracts?
agreement between two parties to exchange fixed quantity of a commodity at fixed price on a set future date
options?
prices based on the value of some underlying asset
swaps?
agreements to exchange 2 specific cash flows at certain times in the future
financial markets?
where financial instruments are bought and sold
how must financial markets be designed?
in a way that keeps transaction costs low
broker?
finds your counterparty
dealer?
can act as the counterparty
portfolio?
collection of assets held by prudent investor
primary financial market?
borrower obtains funds from a lender by selling newly issued securities
secondary financial market?
people buy and sell existing securities
What is included in both M1 and M2?
currency
currency includes…? (3)
paper, money, and coins
if bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of…?
adverse selection
the components of the US M1 money supply are demand and checkable deposits plus…? (2)
currency plus travelers checks
securities are ______ for the person who buys them and ___________ for the individual or firm that issues them?
assets; liabilities
what market are equity instruments traded in?
capital market
how many prices would a trader of a particular good need to know in a barter economy with 100 goods?
4950
purchasing tickets with your debit card is an example of what function of money?
medium of exchange
considering the value of a financial instrument, the circumstances under which the payment is to be made influence the value because…
payments that are made when we need them are more valuable
the correlation between inflation and the money growth rate is…?
positive and strong
paper currency that has been declared legal tender but is not convertible into coins or precious metals is called….
fiat
when money prices used to facilitate comparisons of value, money is said to function as a…
unit of account
when should you prefer to be a lender?
when the interest rte is low and expected inflation is low
100 basis points is what percentage?
1.00%
when would you prefer to be borrowing?
when the interest rate and inflation rate is higher
relationship between interest rate used to discount the promised payment from a bond & the value of the bond?
vary inversely
how is the price of a coupon bond determined?
take present value of all of the bonds payments
an investment pays $1500 half of the time and $500 half of the time. its expected value & variance respectively are…
expected value - $1000
variance - 250,000 dollars squared
a country with volatile inflation would have…
volatile nominal interest rates
price
current yield>coupon rate
price=face value…?
current yield=coupon rate
price>face value…?
current yieldyield to maturity.
current yield greater than coupon rate and YTM less than both.
when rates go up, prices go…? and what is the result?
down. results in capital loss
when rates go down, prices go…? and what is the result?
up. results in capital gain.
