chapters 1-6 Flashcards Preview

Money, Credit, & Banking > chapters 1-6 > Flashcards

Flashcards in chapters 1-6 Deck (71)
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1
Q

6 parts of the financial system?

A
  1. money 2. financial instruments 3. financial markets 4. financial institutions 5. regulatory agencies 6. central banks
2
Q

financial instruments? 4 examples?

A

used to transfer resources from savers to investors. stocks, bonds, mortgages, insurance etc.

3
Q

financial markets? one example?

A

allows the buying and selling of instruments. ex: new york stock exchange

4
Q

financial institutions?

A

provide access to financial markets and collection of info about prospective borrowers

5
Q

regulatory agencies?

A

making sure all elements safe and reliable.

6
Q

4 core principles of money and banking?

A
  1. time has value 2. risk requires compensation 3. info is the basis for decisions 4. markets determine prices & allocate resources
7
Q

money?

A

asset generally accepted as payment for goods and services or repayment of debt

8
Q

wealth?

A

value of assets minus liabilities

9
Q

3 characteristics of money?

A
  1. means of payment 2. unit of account 3. store of value
10
Q

what is a unit of account?

A

used to quote prices and record debts

11
Q

store of value?

A

retains its worth day-by-day

12
Q

anything that is a means of payment must be a…?

A

store of value.

13
Q

if something is a store of value its most likely a…?

A

unit of account

14
Q

liquidity?

A

measure of the ease with which as asset can be turned into a means of payment

15
Q

market & funding liquidity?

A

market - financial institutions ability to sell assets for money
funding - financial institutions ability to borrow money to buy securities or make loans

16
Q

payments system?

A

web of arrangements that allow the exchange of goods and services, as well as assets

17
Q

commodity monies? most common commodity money?

A

have intrinsic value. most common is gold

18
Q

fiat money?

A

value comes from government decree

19
Q

debit card?

A

provides bank with instructions to transfer funds from the cardholders account directly to a merchants account

20
Q

credit card?

A

promise by bank to lend a cardholder money

21
Q

electronic funds transfer?

A

movement of funds from 1 account to another

22
Q

automatic clearinghouse transaction?

A

generally used for recurring payments like paychecks and utility bills

23
Q

future of money in terms of means of payment, unit of account, and store of value?

A

won’t be a means of payment, will always be needed as unit of account, soon won’t be store of value

24
Q

2 reasons for changes in amount of money in economy?

A

changes in interest rates and economic growth

25
Q

inflation?

A

pace at which prices in general are increasing over time

26
Q

inflation rate?

A

measure of the process of inflation

27
Q

monetary aggregates?

A

measures of money: M1 - includes currency and various deposit accounts. M2 - all of M1 plus assets that can’t be used as means of payment

28
Q

direct finance?

A

borrower sells a security directly to a lender

29
Q

indirect finance?

A

institution stands between lender and borrower

30
Q

uses of financial instruments?

A

means of payment & stores of value. allow for transfer of risks

31
Q

how is complexity with financial instruments overcome?

A

standardization - most FI’s homogeneous

32
Q

counterparty?

A

person or institution on the other side of a contract

33
Q

underlying instruments? 2 examples

A

used by savers and lenders to transfer resources directly to investors and borrowers. ex: stocks and bonds

34
Q

derivative instruments?

A

their value and payoffs are derives from the behavior of underlying instruments

35
Q

4 characteristics influencing value of a financial instrument?

A
  1. size of payment 2. when promised payment is to be made 3. likelihood that payment will be made 4. circumstances under which payment is to be made
36
Q

3 examples of financial instruments?

A

bank loans, bonds, and home mortgages

37
Q

asset-backed securities?

A

shares in the returns or payments arising from specific assets

38
Q

futures contracts?

A

agreement between two parties to exchange fixed quantity of a commodity at fixed price on a set future date

39
Q

options?

A

prices based on the value of some underlying asset

40
Q

swaps?

A

agreements to exchange 2 specific cash flows at certain times in the future

41
Q

financial markets?

A

where financial instruments are bought and sold

42
Q

how must financial markets be designed?

A

in a way that keeps transaction costs low

43
Q

broker?

A

finds your counterparty

44
Q

dealer?

A

can act as the counterparty

45
Q

portfolio?

A

collection of assets held by prudent investor

46
Q

primary financial market?

A

borrower obtains funds from a lender by selling newly issued securities

47
Q

secondary financial market?

A

people buy and sell existing securities

48
Q

What is included in both M1 and M2?

A

currency

49
Q

currency includes…? (3)

A

paper, money, and coins

50
Q

if bad credit risks are the ones who most actively seek loans and, therefore, receive them from financial intermediaries, then financial intermediaries face the problem of…?

A

adverse selection

51
Q

the components of the US M1 money supply are demand and checkable deposits plus…? (2)

A

currency plus travelers checks

52
Q

securities are ______ for the person who buys them and ___________ for the individual or firm that issues them?

A

assets; liabilities

53
Q

what market are equity instruments traded in?

A

capital market

54
Q

how many prices would a trader of a particular good need to know in a barter economy with 100 goods?

A

4950

55
Q

purchasing tickets with your debit card is an example of what function of money?

A

medium of exchange

56
Q

considering the value of a financial instrument, the circumstances under which the payment is to be made influence the value because…

A

payments that are made when we need them are more valuable

57
Q

the correlation between inflation and the money growth rate is…?

A

positive and strong

58
Q

paper currency that has been declared legal tender but is not convertible into coins or precious metals is called….

A

fiat

59
Q

when money prices used to facilitate comparisons of value, money is said to function as a…

A

unit of account

60
Q

when should you prefer to be a lender?

A

when the interest rte is low and expected inflation is low

61
Q

100 basis points is what percentage?

A

1.00%

62
Q

when would you prefer to be borrowing?

A

when the interest rate and inflation rate is higher

63
Q

relationship between interest rate used to discount the promised payment from a bond & the value of the bond?

A

vary inversely

64
Q

how is the price of a coupon bond determined?

A

take present value of all of the bonds payments

65
Q

an investment pays $1500 half of the time and $500 half of the time. its expected value & variance respectively are…

A

expected value - $1000

variance - 250,000 dollars squared

66
Q

a country with volatile inflation would have…

A

volatile nominal interest rates

67
Q

price

A

current yield>coupon rate

68
Q

price=face value…?

A

current yield=coupon rate

69
Q

price>face value…?

A

current yieldyield to maturity.

current yield greater than coupon rate and YTM less than both.

70
Q

when rates go up, prices go…? and what is the result?

A

down. results in capital loss

71
Q

when rates go down, prices go…? and what is the result?

A

up. results in capital gain.