savings and investment quiz Flashcards
positive capital inflow
if Foregin citizens save more money in US than Americans in other nations
increase domestic investment
negative capital inflow
if Americans save more in other nations than foreign citizens save in US
decrease domestic investment
three tasks of financial system
reducing transaction costs
reducing risk
providing liquidity
reducing transaction cost
banks and other financial services companies make it easier and less costly for firms to engage in financial transactions like borrowing to make investments
reducing risk
sale stock in company to reduce total risk by engaging in diversification
diversification
investing in several assets with unrelated, or independent risk
providing liquidity
ease by which an asset (financial or physical) can be converted into cash
financial system providing liquidity in different ways
issuing loans, bonds, or stocks
financial sector
network of institutions that link borrowers and lenders
includes banks, mutual funds, pension funds, and other financial intermediaries
asstets
anything tangible or intangible that has value
claim to future income
interest rate
the amount a lender charges borrowers for borrowing money
the price of a loan
interest bearing assets
assets that earn interest over time
ex) bonds
financial assets
a paper claim that entitles the buyer to future income from the seller
example of financial assets
stocks, bonds, loans, bank deposits
physical assets
a claim on a tangible object that gives the owner the right to dispose of the object they wish
ex) house or car
liabilites
a requirement to pay money in future
ex) a loan
who is the liability and asset in a loan
borrower= liability
lender = asset (due to loan repaid with interest)
loans
a lending agreement between an individual lender and individual borrow
upside of loans
loans are good for individuals and small businesses
they are tailored to your needs
downside of loans
loans require a lot of transactions costs
negotiating terms of loan
credit history
ability to repay
not liquid (easy to resell)
bonds
IOU issued by borrower
who is the liability and asset in a bond
owner = asset
issuer = liability (due to paying back fixed interest each year plus principle)
upside of bonds
no negotiations with bonds so no transaction cost inquired
borrow large sums of money
easy to resell (liquid)
bonds are related on risk so you know what your getting into
downside of bonds
higher default risk on bond = higher interest rate bond pays to attract investors
bond prices and interest rates relationship
inversely related
stocks
a share in the ownership of a company
large companies issue stock to reduce risk
who is the liability and asset in a stock
owner = asset
company = liability (they have to share profit)
upside of stock
stocks have higher rate of returns than bonds
downside of stocks
stocks are riskier than bonds
stocks are a hope, bonds are a promise
bonds are
securities, loans
no ownership of company
stocks are
equities
ownership of corporation
loan backed securities
an asset created by pooling individual loans and selling shares in that pool
example of loan backed securities
mortgage backed securities
upside of loan backed securities
easy to trade
provides for diversification
more liquid than loan
downside to loan backed securities
not always safe (2008 recession)
three types of financial intermediaries
mutual funds
pension funds
life insurance companies
banks
mutual funds
creates a stock portfolio by buying and holding shares in companies and then selling shares of the stock portfolio to individual investors
pension funds
nonprofit institutions that collect the savings of their members and invest those funds in a wide variety of assets (retirement)
life insurance companies
guarantee payment to policyholder’s beneficiaries when the policy holder dies
improves welfare by reducing risk
banks
provide liquid assets in form of a bank deposit to lenders and use those funds to finance liquid investment spending needs of borrowers
bank deposits
a claim on a bank that obliges the bank to give the depositor their cash when demanded
