chapters 1-6

Question 1

6 parts of the financial system?

Answer 1

1. money 2. financial instruments 3. financial markets 4. financial institutions 5. regulatory agencies 6. central banks

Question 2

financial instruments? 4 examples?

Answer 2

used to transfer resources from savers to investors. stocks, bonds, mortgages, insurance etc.

Question 3

financial markets? one example?

Answer 3

allows the buying and selling of instruments. ex: new york stock exchange

Question 4

financial institutions?

Answer 4

provide access to financial markets and collection of info about prospective borrowers

Question 5

regulatory agencies?

Answer 5

making sure all elements safe and reliable.

Question 6

4 core principles of money and banking?

Answer 6

1. time has value 2. risk requires compensation 3. info is the basis for decisions 4. markets determine prices & allocate resources

Question 7

money?

Answer 7

asset generally accepted as payment for goods and services or repayment of debt

Question 8

wealth?

Answer 8

value of assets minus liabilities

Question 9

3 characteristics of money?

Answer 9

1. means of payment 2. unit of account 3. store of value

Question 10

what is a unit of account?

Answer 10

used to quote prices and record debts

Question 11

store of value?

Answer 11

retains its worth day-by-day

Question 12

anything that is a means of payment must be a…?

Answer 12

store of value.

Question 13

if something is a store of value its most likely a…?

Answer 13

unit of account

Question 14

liquidity?

Answer 14

measure of the ease with which as asset can be turned into a means of payment

Question 15

market & funding liquidity?

Answer 15

market - financial institutions ability to sell assets for money
funding - financial institutions ability to borrow money to buy securities or make loans

Question 16

payments system?

Answer 16

web of arrangements that allow the exchange of goods and services, as well as assets

Question 17

commodity monies? most common commodity money?

Answer 17

have intrinsic value. most common is gold

Question 18

fiat money?

Answer 18

value comes from government decree

Question 19

debit card?

Answer 19

provides bank with instructions to transfer funds from the cardholders account directly to a merchants account

Question 20

credit card?

Answer 20

promise by bank to lend a cardholder money

Question 21

electronic funds transfer?

Answer 21

movement of funds from 1 account to another

Question 22

automatic clearinghouse transaction?

Answer 22

generally used for recurring payments like paychecks and utility bills

Question 23

future of money in terms of means of payment, unit of account, and store of value?

Answer 23

won’t be a means of payment, will always be needed as unit of account, soon won’t be store of value

Question 24

2 reasons for changes in amount of money in economy?

Answer 24

changes in interest rates and economic growth

Question 25

inflation?

Answer 25

pace at which prices in general are increasing over time

Question 26

inflation rate?

Answer 26

measure of the process of inflation

Question 27

monetary aggregates?

Answer 27

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

Question 28

direct finance?

Answer 28

borrower sells a security directly to a lender

Question 29

indirect finance?

Answer 29

institution stands between lender and borrower

Question 30

uses of financial instruments?

Answer 30

means of payment & stores of value. allow for transfer of risks

Question 31

how is complexity with financial instruments overcome?

Answer 31

standardization - most FI's homogeneous

Question 32

counterparty?

Answer 32

person or institution on the other side of a contract

Question 33

underlying instruments? 2 examples

Answer 33

used by savers and lenders to transfer resources directly to investors and borrowers. ex: stocks and bonds

Question 34

derivative instruments?

Answer 34

their value and payoffs are derives from the behavior of underlying instruments

Question 35

4 characteristics influencing value of a financial instrument?

Answer 35

1. 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

Question 36

3 examples of financial instruments?

Answer 36

bank loans, bonds, and home mortgages

Question 37

asset-backed securities?

Answer 37

shares in the returns or payments arising from specific assets

Question 38

futures contracts?

Answer 38

agreement between two parties to exchange fixed quantity of a commodity at fixed price on a set future date

Question 39

options?

Answer 39

prices based on the value of some underlying asset

Question 40

swaps?

Answer 40

agreements to exchange 2 specific cash flows at certain times in the future

Question 41

financial markets?

Answer 41

where financial instruments are bought and sold

Question 42

how must financial markets be designed?

Answer 42

in a way that keeps transaction costs low

Question 43

broker?

Answer 43

finds your counterparty

Question 44

dealer?

Answer 44

can act as the counterparty

Question 45

portfolio?

Answer 45

collection of assets held by prudent investor

Question 46

primary financial market?

Answer 46

borrower obtains funds from a lender by selling newly issued securities

Question 47

secondary financial market?

Answer 47

people buy and sell existing securities

Question 48

What is included in both M1 and M2?

Answer 48

currency

Question 49

currency includes...? (3)

Answer 49

paper, money, and coins

Question 50

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...?

Answer 50

adverse selection

Question 51

the components of the US M1 money supply are demand and checkable deposits plus...? (2)

Answer 51

currency plus travelers checks

Question 52

securities are ______ for the person who buys them and ___________ for the individual or firm that issues them?

Answer 52

assets; liabilities

Question 53

what market are equity instruments traded in?

Answer 53

capital market

Question 54

how many prices would a trader of a particular good need to know in a barter economy with 100 goods?

Answer 54

4950

Question 55

purchasing tickets with your debit card is an example of what function of money?

Answer 55

medium of exchange

Question 56

considering the value of a financial instrument, the circumstances under which the payment is to be made influence the value because...

Answer 56

payments that are made when we need them are more valuable

Question 57

the correlation between inflation and the money growth rate is...?

Answer 57

positive and strong

Question 58

paper currency that has been declared legal tender but is not convertible into coins or precious metals is called....

Answer 58

fiat

Question 59

when money prices used to facilitate comparisons of value, money is said to function as a...

Answer 59

unit of account

Question 60

when should you prefer to be a lender?

Answer 60

when the interest rte is low and expected inflation is low

Question 61

100 basis points is what percentage?

Answer 61

1.00%

Question 62

when would you prefer to be borrowing?

Answer 62

when the interest rate and inflation rate is higher

Question 63

relationship between interest rate used to discount the promised payment from a bond & the value of the bond?

Answer 63

vary inversely

Question 64

how is the price of a coupon bond determined?

Answer 64

take present value of all of the bonds payments

Question 65

an investment pays $1500 half of the time and $500 half of the time. its expected value & variance respectively are...

Answer 65

expected value - $1000 | variance - 250,000 dollars squared

Question 66

a country with volatile inflation would have...

Answer 66

volatile nominal interest rates

Question 67

price

Answer 67

current yield>coupon rate

Question 68

price=face value...?

Answer 68

current yield=coupon rate

Question 69

price>face value...?

Answer 69

current yieldyield to maturity. | current yield greater than coupon rate and YTM less than both.

Question 70

when rates go up, prices go...? and what is the result?

Answer 70

down. results in capital loss

Question 71

when rates go down, prices go...? and what is the result?

Answer 71

up. results in capital gain.