macro ch 10

the date on which the loan repayment is due

maturity date

indirect finance

occurs when savers deposit funds into banks, which then loan these funds to borrowers

indirect

-Sami receives a bank loan to buy a motorcycle. -Carolyn buys shares of McDonald's stock from another McDonald's stock owner.

What are some of the options the U.S. government has when it needs to raise funds?

-selling U.S. Treasury securities to domestic firms, households and governments -selling U.S. Treasury securities to foreign firms, households and governments

Firms need funding to build and buy the resources they use to produce their goods and services. Some firms must interact with the financial intermediaries such as banks to acquire financing for investment. Not all firms have the ability to avoid financial intermediaries and go directly to savers for investment funds.

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In the loanable funds market, savers supply funds to borrowers either directly or indirectly. A direct method is to buy stocks and bonds. The most common indirect method is to deposit money with banks, which, in turn, make loans to borrowers.

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Securitization is the creation of a new security by combining otherwise separate loan agreements. What is a common loan agreement that is often securitized?

Mortgages and student loan debt are commonly repackaged and sold in the secondary market.

secondary market

Secondary markets act as a mediator between sellers and buyers of securities. The ease of resale is valuable to the potential buyer of the bond. Though the securities sold in this market are pre-owned, the market allows for the quick resale and therefore the securities are worth a higher price.

The existence of a secondary market for stocks and bonds results in which of the following?

Stocks and bonds become more desirable. The cost of borrowing drops.

bonds sold by the U.S. government to pay for the national debt

U.S. Treasury securities are considered very safe investments, because the U.S. government is not expected to default on debt payment.

Direct Financing

With direct financing, savers lend money to borrowers directly, with no intermediary.

a type of financial intermediary that provides indirect financing

bank

a security that represents a loan

bond

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

default risk

Borrowers and savers interact without middlemen.

direct finance

the amount paid for a bond at purchase

dollar value

The price of a bond and its rate of return, the interest rate, are always inversely related.

true

the amount to be repaid at maturity

face value

a forum where direct and indirect financing takes place

financial market

Savers deposit funds into banks, which in turn make loans.

indirect financing

face value minus dollar price, as a percent of dollar price

interest rate

a security that represents part ownership

stock

What is the purpose of the Dow Jones Industrial Average (DJIA)?

to provide a CPI-like index of stock prices