Finance 4000 quiz 1

world population

8 billion

FOMC meets _____ times per year

8

National bankings system era problems

"run" on a bank: everybody attempts to withdraw money at once pyramiding of reserves: a bank was allowed to count as reserves money that it had on deposits at other banks, and the 2nd bank was allowed to count this money toward its required reserves. this allowed such dollars to be counted twice, so system wasn't as safe as it appeared. thus, a "run" on a first bank causes it to withdraw money from the 2nd bank, which causes it to withdraw from a 3rd bank, and so on. In this way, a "run" on one bank can result in a "run" on others

JP Morgan annual revenue

$120B (60X UGA revenue)

total US paper money outstanding

$2.2T

Student loan debt

$2.8T

Deposits FDIC-secured institutions insured

$250,000 per owner, $250,000 per co-owner (joint account) If a couple wants $1M FDIC insured, they would need to open 3 accounts: each spouse opens up a separate account and gets $250K of coverage each, and then they open a joint account and get $500k worth of coverage.

US GDP

$25T

US national debt / per citizen

$30T, $92K

Median home price

$440k

Fed balance sheet assets

$8T+

reserve requirement for 0 to $21.1 million deposits

0%

Top 6 types of financial intermediaries in terms of the amount of assets that they have

1. Commercial banks ($17T, 24%) 2. Mutual funds ($14T, 20%) 3. Gov't pension funds ($10T, 14%) 4. Private pension funds ($9T, 13%) 5. Gov't sponsored enterprises ($6T, 9%) 6. Life insurance companies ($6T, 9%)

Intermediation services: 5 categories

1. Denomination divisibility: able to pool small savings by SSUs to enable large investments 2. Currency conversion: maturities, from 1 day to 30 years or more, to both DSUs and SSUs 3. Maturity flexibility: savers can put their money into institutions from anywhere from 1-40 years, borrowers can borrow anywhere from 1-40 years 4. Credit risk: the probability that money is paid back, they don't risk depositors' money and use diversification when deploying their money 5. Liquidity: SSUs can get their money back immediately, but sacrifice a rate of interest

Top 5 countries in nominal GDP

1. US ($25T) 2. China ($20T) 3. Japan ($5T) 4. Germany ($4T) 5. India ($3T)

Risks faced by financial institutions

1. credit risk 2. interest rate risk 3. liquidity risk 4. foreign exchange risk 5. political risk

China population

1.4 billion

US population

1/3 of a billion (333 million)

1% of a trillion

10 billion

1% of a billion

10 million

1% of a million

10 thousand

reserve requirement for over $182.9 million deposits

10%

5 components of today's federal reserve system

12 districts and 12 district fed reserve banks, 3000 member commercial banks, 7-member board of governors (JPowell-chairman), 12-member FOMC, all kinds of advisory committees 7-12+12+12

There are ______ primary trading counterparties of the New York Fed in its implementation of open market operations

24

UGA annual revenue

2B

reserve requirement for $21.1 million to $182.9 million deposits

3%

total assets of financial intermediaries

3.5 x GDP

US coin in circulation

50 billion

Capital markets: debt vs. equity

55/45 split

Fed pays dividends of

6% per year

$100 bills make up _____% of US paper currency, and _____% of the $100 dollar bills are held outside the US

80%, 80%

Suppose a financial institution takes in $2 billion at 0.25% and lends it out at 4.5%. Annually, how many dollars are involved in the interest rate spread?

85M

Each bank has ____ members on its board

9 (3 from board of governors from DC, other 6 appointed from member banks in the district) 3 members from banking, 3 from business, 3 to represent public

Loan multiplier

=((1/k)-1)

systemically important bank

> $100B in total assets

call loan

A call loan may be "called in"—declared due and payable—by the lender at any time. Until 1913, call loans were once the common form of bank financing for agriculture and business, which caused issues if too many depositors demanded money back at once, banks would be forced to call in loans causing borrowers to default and causing businesses to fail

Bid price vs. ask price

Bid price: price at which a dealer is willing to buy security Ask price: opposite; price at which a dealer is willing to sell a security

Capital markets vs. money markets

Capital Markets: $90T, YTM <1 year (corporate bonds, municipal bonds, US treasury notes, mortgage-backed securities) Money Markets: $6T, YTM > 1 year (US Treasury bills)

Tier 1 leverage ratio

Capital/Total Assets >= 4%

Difference between corporate stock and debt instruments

Debt instruments are much more analytical in nature, less emotion and anxiety involved than stocks

Reserves in the Fed bank accounts are called ________________ on the Fed balance sheet

Depository institution balances

2021 GDP (PPP)

Everything priced the same in each country: 1. China ($30T) 2. US ($25T) 3. India ($11T) 4. Japan ($6T) 5. Germany ($5T) this means that China produces more goods and services than the US

Chair of board of governors is chair of the ________

FOMC, (JPowell)

1791-1811

First Bank of the US

1837-1863

Free Banking Era, money supply very unstable, no deposit insurance or capital requirements, no supervision over lending or accounting practices, many bogus banknotes, frequent bank failures

Re-appointed Fed chairs

Greenspan, Bernanke, JPowell Janet Yellen was not re-appointed You must resign from the board after your term

3 categories economic units

Households, business firms, governments

Liquidity vs. Marketability

Liquidity: converting an asset into cash without sacrificing value Marketability: ease with which a financial asset can be sold at a fair price (selling a house would not be a marketable asset)

importance of marketability

Marketability is how fast an asset can be turned into cash (saleability), but could occur at a loss of value. Liquidity is how fast an asset can turn into cash at its fair price; just because an asset is illiquid doesn't mean it's non-marketable ex: If the DSU need its money back from the SSU in 3 years but the SSU can only pay back in 20 years, this would kill the deal unless the SSU could somehow take the security to a financial market and sell it to another investor. with marketability the maturity mismatch is not fatal and the deal can go through

Why is demand so high for $100 bills and why is it growing?

Nobody ever objects to having US money, people around the world make payments in $100 bills all the time

If a bank needs to borrow $30M at the discount window, what changes on the B/S?

On assets side: loans to depository institution balances increases On L+E side: depository institution balances: increases

Direct financing

SSUs and DSUs meet up and agree on terms without a middleman

1816-1832

Second Bank of the US

Capital

retained earnings + the amount of member banks paid for the stock when they purchased it

Purpose of a central bank

Supervise a nation's money supply and payment system, act as the chief regulator of the nations financial institutions, be the lender of last resort when there's liquidity problems, implement nation's monetary policy, act as the national gov't fiscal agent (AKA be the bank for the US gov't)

For any period in time, an economic unit's budget will be in a __________, ___________, or ______________ position

Surplus (income>spending), deficit (income<spending), or balanced (income=spending)

1914-present

The Federal Reserve, created to ensure everyone's voices were heard

If the Fed buys $2B of US treasuries from Citi, what items on the balance sheet will change?

Us treasury securities +$2B, Depository institution balances +$2B

Indirect financing

Uses a financial intermediary (like a bank) to match up SSUs and DSUs, majority of financing done this way

economic unit

a unit of the economy that conducts economic activity over a period of time and has a budget over that period of time

7-member board of governors

appointed by president, confirmed by senate, no 2 governors from same district, staggered 14-year terms, terms are non-renewable

A financial claim is a ________ to a lender and a __________ to a borrower

asset, liability

University endowments

big investors in LT projects like PE, VC, hedge funds, and timber

a financial claim is a claim on the issuer's __________ or ____________. The issuer ___________, and the holder ______________.

broad category, a claim on the issuer's assets or income. there's an issuer and a holder. Issuer remains the same, but the holder can change many times

brokers vs. dealers

brokers match up buyers and sellers, make money by charging commissions and fees dealers "make markets," or take ownership positions, by at anytime for inventory or sell at anytime from inventory if the price is right, make money by buying low and selling high

bank panics /contagion

caused by call loans, which eventually causing regional/national recessions contagion: people see bank panics at their neighbor's bank, then worry about their own. without protections, can bring the whole system down.

Opening a bank account in the free-banking era

could take gold, silver, a US gov't bond, or another bank's banknotes to a bank. that bank would figure out its value and say that's how much you have in your account, a cash withdrawal or loan from a bank came in the form of banknotes from that bank.

Central bank independence vs. inflation

countries with the lowest inflation had it's central banks separate from the government

When the Fed buys securities, it _______ the dealer's reserves at the Fed. When the Fed sells securities, it ______ the dealer's reserves at the Fed

credits, debits

What does the FOMC do

decides when to expand or contract money supply, instructs NTY Fed to conduct open market operations

DSU

deficit spending units, have spending for the period that exceeds income, results in borrowing (borrower)

Casualty insurance vs. life insurance

difference involves predictability: Since casualty claims less predictable, a greater proportion of a casualty insurance company's investments must be in highly marketable securities, with life insurance they have a better sense of who's gonna die each year

The Fed does/doesn't regulate all depository institutions without regard to membership

does

12-member FOMC

federal open market committee, the most important committee in our economy. 8 permanent members, 4 rotating. 7 governors are permanent members, and the president of the NY Fed has a permanent seat

While financial claims held by SSUs from an intermediary score ____________ on liquidity, financial claims held by a financial intermediary from DSUs are typically ________________

high, not liquid b/c they're for a much longer period of time

Fed B/S: loans to depository instituions

institutions that borrowed from the discount window

The Fed is / isn't an agency of the federal government

isn't

Why does the NY fed get more attention

it carries out trading directives carried out by the FOMC

fully loaned up

k=20%

Fed bank accounts: Member banks vs. non-member banks

members banks have to have a bank account at the Fed which they can hold money in the reserve (the 10% that cannot be lended out) Nonmember banks still have to hold back money in the reserve, but not at the Fed directly, rather at a member bank

1863-1914

national banking system era, 1863-1914, restore more order to the national banking system, all banks urged to become federally chartered and move toward a more uniform currency. state chartered banks had to pay a 10% annual tax on their banknotes, federally chartered national banks could issue banknotes without being taxed but must be printed in the US mint to prevent counterfeiting, banknotes had to be backed by US gov't bonds, banks had to maintain min reserve requirements

credit unions

on the up-swing, non-profit and tax-exempt organizations, take in money from depositors like a regular bank but when they lend it out it only makes consumer loans to members. To become a member, open up an account and make a deposit. Mutual ownership structure meaning that its owned by the depositors or the "members," since no dividends/taxes to be paid, they can charge higher interest rates on deposits and lower interest rates on loans. to keep its deposits, there must be some common bond amongst members (some commonality like UGA grads, veteran, etc.)

OTC

over the counter, means going through a dealer that buys low and sells high, no central location like organized exchanges and spread out throughout the country, vast majority of debt securities are bought and sold OTC

Which governor is to be chair is determined by the _________, appointed to _____ year terms, and can/can't be reappointed

president, 4, can

Benefit of fed membership

prestige, stock (6% div.), getting to vote

Fed extends 3 types of credit

primary credit rate (discount rate), secondary credit rate (50 BP higher), season credit (revolver) stigma associated w/ primary and secondary, no stigma w/ seasonal b/c it's normal in agricultural and touristic areas

How did printing money work during the free-banking era

private banks issued "bank notes" which could be used as money, they would promise to redeem for bullion (gold/silver) at any time, carried the default risk of the bank that issued it, there was a point where there were 15,000 different banks issuing banknotes made commerce difficult

discount books

published by dealers who dealt in banknotes listing what they would pay for a given banknote

required reserves

reserve ratio * total deposits

total reserves

reserves at fed + vault cash

pension funds

retirement planning, similar to life insurance companies due to high predictability of inflows vs. outflows, can invest in long-term projects like PE, hedge funds, VC, and timber

Financial intermediation means ________ financial claims to SSUs with one set of characteristics, and ________ financial claims from DSUs with another set of characteristics

selling, buying

3 tools of monetary policy

set reserve requirements, direct open market operations, establish discount rate

All fed member commercial banks must own _________

stock in the Federal Reserve Bank of its district, they get a 6% dividend per year on paid in capital, amounts to about $2B per year total

Panic of 1907

stock market closed down 50%, large NYC banks ran into liquidity issues, meaning they couldn't meet all of their withdrawal requests. This caused a loss of confidence by depositors across the country, so everyone began to pull their money which caused banks to fail across the country. no central bank to inject liquidity. This was seen as the last straw, a meeting occurred shortly after on Jekyll island and the plan was written for the creation of the Fed

currency in domestic use

sum of coin and bills in use, than 2% of GDP and is in decline

SSU

surplus spending unit, have income for the period that exceeds spending, results in savings (lender)

Thrift institutions/"savings and loans"

take in deposits, but only lend it out in the form of mortgages S&L crisis 1986-1995: gov't had to bail out similar to '08, still some around but not as many

reserve ratio

the % of deposits that banks hold as reserves

Why is direct financing difficult?

the DSU and SSU must agree on: -denomination (amount) -maturity -risk -liquidity of financial claim -any other important characteristics *Any problem with these terms is a dealbreaker

If a bank needs to meet liquidity requirements and can't find another bank to borrow from overnight, it must borrow from:

the discount window, part of the Fed's lender of last resort function, charges higher rate than Fed Funds market. Must post collateral to borrow at the discount window

meaning of "reserves"

the fraction of deposits that is held in cash at the bank or deposited in an account at the central bank, money that the bank has immediately available to meet withdrawal requests (10%=typical)

Depository institution balances

the total amount of money that member banks have in their bank accounts in the federal reserve system

The Federal Reserve act of 1913 purpose

to create a central banking system designed to assure that no region or group had an unfair say, to provide for an "elastic" standardized currency in the form of Fed Reserve notes that could be adjusted in amount to meet the needs of a changing economy, to provide more vigorous supervision of banks, to serve as a lender of last resort, to improve payments system (check clearing)

excess reserves

total reserves - required reserves

A financial intermediary __________ the characteristics of financial claims

transforms

Money market mutual funds

uninsured substitutes for deposit accounts, they invest their inflows in very safe money market instruments and are usually able to pay a slightly higher interest rate than a commercial bank

Fed prints $5,000

week 0: assets: reserves=5000, liabilities: deposits=5000 week 1: assets: reserves=5000, liabilities: deposits=5000 week 1: k=20% so only 80% can be lent out assets: reserves=1000, loans=4000 Liabilities: deposits=5,000 week 2: 4,000 in new loans create 4,000 more in deposits enabling 3,200 more in loans assets: loans=7200 reserves: 1800 liabilities: deposits=9,000

illiquidity vs. insolvency

when a bank doesn't have enough money to meet withdrawal requests vs. when liabilities exceed assets

Primary market

where new stocks and bonds are bought and sold for the first time, create production capacity, jobs, and employment. an economy needs a healthy primary market to keep growing.

Secondary market

where people buy and sell existing financial claims, doesn't create jobs, people are more likely to buy a financial claim in the primary market if there's a secondary market because it provides liquidity for financial claims

legal tender

you'll find this on all paper money, people have to accept paper money as re-pmt for debt