Exam 1 Flashcards
What is LIRE?
Liquidity of other assets, Income, Riskiness of other assets, Expected return of other assets
How much of currency is backed by gold?
3%
Flight to Quality
Occurs when investors shift their asset allocation away from riskier investments into safer ones
Expectations Theory
Interest rate on long-term bond equals average of the short-term interest rates people expect to occur over the life of the long-term bond; identical bonds with different maturities are perfect substitutes
Market Segmentation Theory
Borrowers have preferences for certain yields when they invest in fixed-income securities; bonds of different maturities are not perfect substitutes
Preferred Habitat Theory
Suggests different investors prefer a particular maturity length over another, likely to prefer short-term bonds over long-term
What does price discovery segment market into?
Primary and secondary
Eurobond
Bond issued offshore by governments or corporates denominated in a currency other than that of the issuer’s country
Eurocurrency
Currency held on deposit by governments or corporations operating outside of their home market
What do collateral and net worth tools do?
Reduce adverse selection
Properties of Money
Medium of exchange, store of value, unit of account
What does FDIC do?
Regulates all state banks, mutual savings, savings and loans that are not members of the federal reserve
Wealth
Total collection of piece of property that serve to store value
Income
Flow of earnings per unit of time
Elements of M1
Currency, traveler’s checks, demand deposits, other checkable deposits
Elements of M2
M1 + small denomination deposits, savings/money market deposits, money market mutual fund shares
Equation of Exchange
M * V = P * Y
Theory of Portfolio Choice
Method that maximizes overall returns within an acceptable level of risk
Keynesian Liquidity Preference
Total spending in the economy effects output, employment, and inflation
Income Effect
Higher level of income causes demand for money at each interest rate to increase
Price-Level Effect
A rise in price level causes demand for money at each interest rate to increase
Risk Structure of Interest Rates
Bonds with same maturity have different interest rates due to outside risks
Liquidity
The relative ease with which an asset can be converted into cash
Term Structure of Interest Rates
Bonds with identical risk, liquidity and tax characteristics may have different interest rates because time to maturity is different
Direct Finance
Borrowers borrow funds directly from lenders by selling them securities
Foreign Bonds
Sold in a foreign country and denominated in that country’s currency
Adverse Selection
Trying to avoid risky borrower by gathering information about them
Office of Comptroller of the Currency
Examines books of federally chartered commercial banks and institutions
Commodities Futures Trading Comission
Regulates trading in futures markets
Free-Rider Problem
Inefficient distribution of goods or services that occurs when some individuals are allowed to consume more than their fair share of the shared resource or pay less than their fair share of the costs
Tools to solve adverse selection
Private sale of info, collateral and net worth
Tools to hedge against moral hazard
Monitoring of information, debt contracts
