Exam 1 - Important stuff from slides Flashcards
What are financial markets?
Markets in which funds are
transferred from people and firms who have an excess of
available funds to people and firms who have a need of
funds
What do banks do (what are they)?
Accept deposits and make loans
What is the aggregate price level, and what is it measured by?
The average price of goods
and services in an economy, CPI, PCE deflator, GDP deflator
Foreign bonds
Sold in a foreign country and denominated in
that country’s currency
Eurobond
Bond denominated in a currency other than that of
the country in which it is sold
Eurocurrencies
Foreign currencies deposited in banks outside
the home country
Eurodollars
U.S. dollars deposited in foreign banks outside
the United States or in foreign branches of U.S. banks
What are the 2 asymmetric information problems?
Adverse selection, moral hazard
What is adverse selection?
One party in a transaction has more information than the other, leading to the selection of unfavorable risks, typically occurring before a contract is signed.
What is moral hazard?
One party changes their behavior to take on more risk after entering a contract, knowing they are protected from the consequences.
What is wealth?
The total collection of pieces of property that serve to store value
What is income?
Flow of earnings per unit of time
4 types of credit market instruments:
Simple loan, fixed payment loan, coupon bond, discount bond
For simple loans, the simple _____ _____ equals the _____ _____ _____
interest rate, yield to maturity
What is the equation for the loan value on a fixed-payment loan?
LV = FP/((1+i)^1) + FP/((1+i)^2) + … + FP/((1+i)^n)
FP = fixed yearly payment
n = number of years until maturity
What is the equation for the price of a coupon bond?
P = C/((1+i)^1) + C/((1+i)^2) + … + C/((1+i)^n) + F/((1+i)^n)
C = yearly coupon payment
F = face value of the bond
n = years to maturity date
When the coupon bond is priced at its face value, the yield to maturity equals the _____ _____
coupon rate
The price of a coupon bond and the yield to maturity are _____ly related.
negative
The yield to maturity is _____ (greater, less) than the coupon rate when the bond price is _____ (above, below) its face value.
greater, below
When there is excess demand for bonds, price will _____ (rise, fall) and interest rates will _____ (rise, fall)
rise, fall
If the market for money is in equilibrium, then the…
bond market is also in equilibrium
Money supply is controlled by the…
Fed
