Exam 1 Flashcards
Which of the following is an example of financial intermediation?
Saver makes a deposit in credit union; credit union makes loan to a member for a new car.
People, in general, do not lend money to one another to buy a house or a car because:
All of the above. (Information problems, Do not know about the effort other people will provide to repay their debts, Do not know the capacity of other people to repay their debts).
Which of the following can be described as involving indirect finance?
You buy shares in a mutual fund.
When I purchase _______, I own a portion of a firm and have the right to vote on issues important to the firm and to elect it’s directors.
Stock
Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which it is sold are known as:
Eurobonds
Financial intermediaries provide customers with liquidity services. Liquidity services…
Make it easier for customers to conduct transactions.
An example of the problem of _____ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of it’s employees and their families.
Moral hazard
Which of the following is not a contractual savings institution?
A savings and loan association
Increasing the amount of information available to investors helps reduce the problems of _____ and _____ in the financial markets.
Adverse selection; moral hazard
In order to reduce risk and increase the safety of financial institutions, commercial banks and other depository institutions are prohibited from…
Owning common stock
Currency includes…
Paper money and coins
_______ is the relative ease and speed with which an asset can be converted into a medium of exchange.
Liquidity
A _____ is bought at a price below it’s face value and the _____ value is repaid at the maturity date.
Discount bond; face
There is _____ for any bond whose time to maturity matches the holding period.
No interest-rate risk
If you expect the inflation rate to be 15 percent next year and a one-year bond has a YTM of 7%, then the real interest rate on this bond is…
-8%
In the bond market, the bond demanders are the _____ and the bond suppliers are the _____.
Lenders; borrowers
The interest rate falls when either the demand for bonds _____ or the supply of bonds _____.
Increases; decreases
Which of the following bonds would have the highest default risk?
Junk bonds
Buying a US Treasury bond from your friend is an example of…
Secondary Market
Buying shares of UBER when they went public is an example of the…
Primary Market
Financial intermediary’s lower transaction costs by providing what two things?
Economies of scale + Liquidity services
Why is financial regulation probably necessary?
Asymmetrical information + Systemic risk
What is the key advantage of commodity money?
Universally accepted
What is the key disadvantage of commodity money?
Can’t control supply
What is the key advantage of fiat money?
Can control supply
What is the key disadvantage of fiat money?
Easy to abuse and cause inflation
What is the solution to the key disadvantage of fiat money?
Independent central banks
List 3 functions money must fulfill.
Unit of account, medium of exchange, store of value
Controls the money supply
Central banks
Claim on issuers future income or assets
Financial security
Price of impatience
Interest rate
Connects savers with borrowers
Financial intermediary
Accepts deposits
Commercial banks
Buyer of capital
Investor
Growth in money from waiting
Nominal interest rate
Cost in goods from borrowing
Real interest rate
Government spending and taxes to affect economy
Fiscal policy
Development of new financial products and services
Financial innovation
Where funds are exchanged
Financial markets
Deal in short-term debt instruments
Money market
Currency + Bank Reserves + Checking Accounts
M1
Consumes less than their income
Saver
Has intrinsic value
Commodity money
An increase in wealth affects supply or demand? And shifts it left or right?
Demand + Right
An increase in risk affects supply or demand? And shifts it left or right?
Demand + Left
An increase in liquidity affects supply or demand? And shifts it left or right?
Demand + Right
An increase in expected profitability of investment opportunities affects supply or demand? And shifts it left or right?
Supply + Right
An increase in government deficits affects supply or demand? And shifts it left or right?
Supply + Right
An increase in technology that makes it possible to buy and sell bonds with more ease will….
Shift demand right, increase borrowing and lending, and decrease interest rates.
When bond issuers become more risky…
Demand will shift left, borrowing and lending will decrease, and interest rates will increase.
When consumers have a decrease in the desire to consume…
Demand will shift right, borrowing and lending will increase, and interest rates will decrease.
When there is an increase in the expectations of the inflation rate…
Demand will shift left, supply will shift right, bond prices decrease, and nominal interest rates increase.
As a result of strict banking regulations, the United States has:
Many more smaller banks when compared to other industrialized countries
Expectation theory of interest rates:
All interest rates added together/number of rates
If you are confident interest rates will fall…
Prices will increase and you should buy the 30 year bond
If you are confident that interest rates will rise…
Prices will decrease and you should buy the 1 year bond
