macro economics chapter 8-12

bond

a formal contract to repay borrowed money with interest at fixed intervals

market for loanable funds

a market in which savers supply funds to those who want to borrow. trading in the market for loadable funds determines the equilibrium

Securitization

a pool of loans is assembled and shares of that pool are sold to investors

commercial banks

depository institutions that historically make short-term loans primarily to businesses

Calculating labor force

employed + unemployed

An investment tax credit offered during a recession is most likely to be temporary so that

firms have an incentive to invest quickly.

Regulators and policymakers

for a long time were unaware of the importance of the shadow banking system

mutual fund

fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets

patience

is a major factor in determining the supply of savings

owner's equity

is the value of the asset minus the dept associated with it.

insolvent firm has

liabilities in excess of its assets

T-bills

mature in 2 days to 26 weeks, pay interest only at maturity

Federal Depost Insurance Corporation (FDIC)

only deposits are insured up to $250,000

lower interest rate

results in less savings (because people will take advantage of the less interest rate)

If a company's profits are relatively high

shareholders benefit not bondholders!

shortage of loanable funds

the interest rate will increase, the borrowers will bid the rate up

Time Preferences for Consumption

the preference of consumers for current consumption as opposed to saving for future consumption

insolvent

unable to pay debts owed

the market for loanable fund is the market

where suppliers of funds with demanders of funds.

Which statement is TRUE?

Cyclical unemployment can turn into structural unemployment if workers remain unemployed for too long.

when interest rates rise, bond prices fall

because interest rate and bond prices have a negative relationship

passive investing

outperforms most mutual funds

collateral

something pledged as security for repayment of a loan, to be forfeited in the event of a default.

Unemployment formula

# of unemployed/labor force (#empl+#unemp)

Suppose a homeowner owes $300,000 on a house that is worth $330,000. What is the homeowner's leverage ratio?

$300,000 ÷ $30,000 = 10. debt/the difference= the leverage ratio

Rate of Return Formula

((Revenue from Project - Cost of Project)/ Cost of Project) x 100

Function of Financial Intermediaries

1) Minimize transaction costs--cost of searching, divisibility 2) Diversification 3) INFORMATION PRODUCTION -mobilize savings toward productive uses

leverage ratio

the ratio of debt to equity, D/E

default risk

the risk that the borrower will not pay the face value of a bond on the maturity date

Efficient Market Hypothesis

the theory that asset prices reflect all publicly available information about the value of an asset

owner equity

the value of the asset minus the debt, E=V-D

unemployed

16 years or older not institutionalized (ex. not in prison) a civilian and looking a job

Suppose there are 200 stock market investors trying to predict whether the market will go up and down, and each year exactly half of them guess right. How many of these investors, on average, will be right three years in a row? ex. 500 stocks exactly half after 9 years

200 × (0.5)3 = 200 × 0.125 = 25. ex. 500 × (0.5)power to 9 = 500 × 0.002 ≅ 1.

T-bonds

30-year bonds; they pay interest every 6 months.

stock

A share of ownership in a company

Diversification

Spreading out investments to reduce risk

arbitrage

The practice of buying and selling equivalent goods to take advantage of a price difference

fire sale

The precipitous fall in the price of assets that takes place when financial institutions must sell their assets quickly in the midst of a crisis

Technical Analysis

Uses price and volume data to determine past trends, (patterns) which are expected to continue into the future

If consumers decide to borrow more

demand for funds in the loanable funds market will increase

employment-at-will doctrine

says an employee may quit and an employer may fire an employee at any time and for any reason. (There are many exceptions to the at-will doctrine, but it is the most basic U.S. employment law)

Technical Analysis

Uses price and volume data to determine past trends, which are expected to continue into the future

labor force participation rate is equal to

[(unemployed + employed) ÷ adult population] × 100.

Financial intermediation may fail if any of the following occur except

an increase in equilibrium interest rate MAY FAIL - insecure property rights -controls on interest rates -politicized lending

one of the benefits of stock markets is that

are a source of capital for businesses.

T-notes

coupon debt with original maturity between 2 and 10 years they pay interest every 6 months.

increase in government borrowing

crowds out private consumption and investment

zero coupon bond or discount bonds

they pay only at maturity

Finacial Intermediaries

they reduce the costs of moving savings from savers to borrowers and investors (eg. banks, bond markets, and stock market)

buy and hold

buy stocks and then hold them for the long run, regardless of what prices do in the short run

Shadow Banking

The shadow banking system includes investment banks, hedge funds, and money market funds, as well as a variety of other complex financial entities.

crowding out

a decline in private expenditures as a result of an increase in government purchases/borrowing

Initial Public Offering (IPO)

selling a corporation's stock on public markets for the first time

If David invests $1,000 and wants to turn it into $4,000 within 20 years, at what approximate interest rate does he need to invest it? ex. If David invests $1,000 and wants to turn it into $8,000 within 21 years, at what approximate interest rate does he need to invest it? ex. If David invests $1,000 at 5 percent annual interest, approximately how long will it take before his investment is worth $4,000?

Getting from $1,000 to $4,000 requires doubling twice. To do this in 20 years, it must double every 10 years. 70 ÷ x = 10 gives x = 7 percent. ex. Getting from $1,000 to $8,000 requires doubling three times. To do this in 21 years, it must double every 7 years. 70 ÷ x = 7 gives x = 10 percent. ex. 70 ÷ 5 = 14 years to double one time. So, doubling twice will take 14 × 2 = 28 years.

Malique invests in a passive mutual fund. What can he expect?

It mimics a broad stock market index.

minimum wage regulations and unions

Minimum wage regulations and unions increase unemployment by making labor more expensive for firms.

shadow banking

Parts of the financial market which have some banking-like functions but which are much less regulated (NOT insured by FDIC)

Active investing Vs. Passive Investing

Passive investing is buying a stock and leaving it on the other hand active investing is buying it, selling it next week, re-buying it and so on.

which event would cause the equilibrium quantity of savings to increase?

a downward shift in the supple of loanable funds