Money background

Question 1

Money Market

Answer 1

A financial market in which only short-term debt instruments​ (generally those with original maturity of less than one​ year) are traded.

Question 2

Primary market

Answer 2

A financial market in which new issues of a​ security, such as a bond or a​ stock, are sold to initial buyers by the corporation or government agency borrowing the funds.

Question 3

Secondary market

Answer 3

A financial market in which securities that have been previously issued can be resold.

Question 4

Capital market

Answer 4

A market in which​ longer-term debt​ (generally those with original maturity of one year or​ greater) and equity instruments are traded.

Question 5

Debt market

Answer 5

A market where bonds or​ mortgages, which are contractual agreements by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals until a specified date when a final payment is​ made, are traded.

Question 6

What is the difference between a mortgage and a mortgage-backed security​?

Answer 6

Mortgages are​ loans, whereas​ mortgage-backed securities are​ bond-like debt instruments.

Question 7

What are the functions of secondary markets?

Answer 7

Determining the price of the security that the issuing firm sells in the primary market; Providing information to borrowers and lenders about expectations and attitudes of the economic climate; Providing liquidity to owners of existing financial instruments

Question 8

Agency Securities

Answer 8

These​ long-term bonds are issued by institutions such as Ginnie​ Mae, the Federal Farm Credit​ Bank, and the TVA. Many of these securities are guaranteed by the federal government.

Question 9

Government securities

Answer 9

These​ long-term debt instruments are issued by the U.S. Treasury to finance the deficits of the federal government.

Question 10

Mortgages

Answer 10

These are loans to households or firms to purchase​ housing, land, or other real​ structures, where the structure or land itself serves as collateral for the loans.

Question 11

Stocks

Answer 11

These are equity claims on the net income and assets of a corporation.

Question 12

Corporate bonds

Answer 12

These​ long-term bonds are issued by corporations with very strong credit ratings.

Question 13

Eurobonds

Answer 13

A bond denominated in a currency other than that of the country in which it is soldlong dash—for ​example, a bond denominated in US dollars sold in London.

Question 14

Foreign bonds

Answer 14

Bonds sold in a foreign country and denominated in that​ country’s currency.

Question 15

Eurodollars

Answer 15

US dollars deposited in foreign banks outside the United States or in foreign branches of US banks.

Question 16

Eurocurrency

Answer 16

Foreign currencies deposited in banks outside the home country.

Question 17

How do financial intermediaries benefit by providing risk-sharing services?

Answer 17

They are able to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold

Question 18

Financial intermediaries have a role to play in matching savers and borrowers for all of the following reasons

Answer 18

risk sharing; minimizing transaction costs; economies of scale

Question 19

How do conflicts of interest make the asymmetric information problem​ worse?

Answer 19

Competing interests may lead a financial institution to conceal information or disseminate misleading​ information, which prevents financial markets from channeling funds into the most productive investment opportunities.

Question 20

Moral Hazard

Answer 20

A situation where the borrower might engage in activities that are undesirable from the​ lender’s point of​ view, because they make it less likely that the loan will be paid back.

lack of incentive to guard against risk where one is protected from its consequences, e.g. by insurance.

Question 21

Adverse selection

Answer 21

Occurs when the potential borrowers who are the most likely to produce an undesirable​ are the ones who most actively seek out a loan and are thus most likely to be selected.

Adverse selection is when sellers have information that buyers do not have, or vice versa, about some aspect of product quality. It is thus the tendency of those in dangerous jobs or high-risk lifestyles to purchase life or disability insurance where chances are greater they will collect on it.

Question 22

Asymmetric information

Answer 22

A situation where one party often does not know enough about the other party to make accurate decisions.

when one party in a transaction is in possession of more information than the other

Question 23

Credit Union

Answer 23

These financial institutions are very small cooperative lending institutions organized around a particular​ group: union​ members, employees of a​ firm, and so forth. They acquire funds from deposits called shares and primarily make consumer loans.

Question 24

Commercial Banks

Answer 24

These financial intermediaries raise funds primarily by issuing checkable​ deposits, savings​ deposits, and time deposits. They then use these funds to make​ commercial, consumer, and mortgage loans and to buy U.S. government securities and municipal bonds.

Question 25

Mutual Funds

Answer 25

These financial intermediaries acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds.