money and banking test 1
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. What would you like to do?
what is a debt security?
contract to pay a certain amount of money to the owner at certain time
what is an equity security?
contract that makes the owner of a security a part owner of the comapny that issued the security
who issues debt securites?
households, business firms, foreigners, governments, and financial intermediaries
who issues equity securties?
domestic and foreign business firms and financial intermediaries
who investes in debt securities?
financial intermediaries, households, business firms, governments, foreigners
who invests in equity securities?
financial intermediaries, households, governments, foreigners
what is maturity
the time until borrowed funds are repaid
what is principal
the original amount invested in a security
what is interest?
a payment (or series of payments) made by the borrower to the investor in a debt security in addititon to repayment of the principal
what is a dividend
the periodic payment made on an equity security
why do securities differ from each other in so many ways?
because borrowers have different needs, as do investors, also investors differ in their desires, so bborrowers provide different securities for different investors. Borrowers design securities they issue to make them attractive to investors.
look @ table 2.1
look @ table 2.1
WHAT IS THE ORDER OF MONEY WHEN A COMPANY GOES BANKRUPT?
- 1st employees
- 2nd debt owners
- 3rd equity owners
what is direct finance and give an example
when savers buy securities directly from borrowers. example, selling bonds directly to investors in the bond market
what is indirect finance and give an example.
when savers invest through financial intermediaries which buy securities from borrowers. Example a company goes to a financial intermediary to lend funds to investors.
name the types of financial intermediaries and uses of the these intermediaries.
commercial banks, savings institutions, credit unions, life insurance companies, mutual funds, pension funds, and finance companies.
uses- accepting deposits from households of all sizesand make loans to individuals families and small businesses
what are the functions of intermediaries?
help savers diversify
taking short term deposits and making them long term loans( this may be dangerous because in order to maintain a mortgage, you must always be looking for pp; to submit short term loans.
reduce the cost of transacting
what is a financial market?
place or mechanism by which borrowers, savers, and financial intermediaries trade securities
what is a primary market
the market in which a security is initially sold to an investor by a borrower
what is the secondary market
the market in which a security is sold from one investor to another.
what of great importance is added by secondary markets?
sales in primary market generate funds for issuer of security
look @ figures 2.7 and 2.8
how are the financial system and economic growth important?
for an economy to grow a company must be able to buy capital goods by either using retained earnings, or new borrowing. New firms have no old profit so they must look for new funds. The ability to to borrow is essential for firms to grow, which is shy financial intermediation is vital for economic growth.
to what extent does the strength of a nations financial system correlate with its real economic growth rate?
countries with efficient financial ssytems end to grow faster than countries whose financial systems do not work as well
what happenned in te asia crisis?
many ppl pulled their investments out of asia because of government regulation, incosistent plans for monetary policy and exchange rates, weak banking systems, and poor debt management. Most importantly, lack accounting rules. ppl found out that many of the investments they thought were making money were actually not.
what happenned during the savings and loans crisis?
S&L's began failing in large numbers when inflation rose to double digit levels in the late 70's and early 80's, at the time, S&L's were making long term mortgage loans financed with short term deposit accounts. Inflation caused interest payments to rise sharply, but the mortgages were fixed at low rates so they lost lots of money
what hapenned to mortgages and housing worldwide
in the us u only need 10 percent down to buy a house, but in some other countries, u need 20 percent this means that ppl in other countries buy houses much later in life, that are much smaller and have less cost
what happenned during the financial crisis of 2008
2000 house prices went up sharply because of subprime lending, they then took a drastic fall in 07 this hurt because many of the sub prime mortgages were rolled into mbs, which were all over the world.
five determinants of investors decisions
- expected return
- current yield
- capital gain
- capital gains yield
why is it so important to to manage the amount of money in the economy
to keep inflation in check
to what economic variables is money supply related
- level of prices
- rate of inflation
why is it so hard to do without money?
medium of exchange - def the function that money serves when ppl exchange money for goods and services
transaction costs- costs of trading such as time spent shopping and negotiating.
unit of account- the function that money serves when prices are denoted in terms of money
standard of deferred payment - the function that money serves when ppl buy something one day and pay for it later and the repayment is denoted in terms of money
what happens when ppl lose faith in the nations money?
society starts to slowly fall apart economy starts to fail
what is key to aceptance for medium of exchange?
in terms of counting money, what should be counted
how much money ppl have
how have monetary aggregates changed over time?
in past 2 decades ppl planning to make large transactions in the future do not keep the money in their checking accounts, they keep money in accounts that earn more interest.
what is M1?
coins, paper currency, amounts in checking accounts, and travelers checks money that can be spent quickly and easily
what is M2
money that incorporates funds in other accounts that can be accessed quickly for spending but are not quite as liquid as the items in M1. includes M1 plus savings accounts, money market mutual funds and small time deposits,passbook savings, money market deposit, cds, treasury securities, and commercial paper
what is a yield curve?
diagram of interest rates on short term bonds
when yield curve is inverted what does that mean?
interest rates on long term bonds are lower than interest rates short term bonds
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