ECN 352 Exam 1

commodity money

a good used as money that also has value independent of its use as money

primary market

a market in which newly issued claims are sold to buyers by borrowers

yield curve

a plot of the interest rates on default - free government bonds with different terms to maturity

bond rating

a single statistic that summarizes a rating agency's view of the issuer's likely ability to make the required payments on its bonds

direct finance

a transaction between two parties where one party lends directly to the other party

unit of account

a way of measuring value in an economy in terms of money

real interest rate

adjust for inflation

Standard and Poor's Corporation

assigns widely - followed bond ratings

when prices rise, the purchasing power of money

falls

why do bonds that have the same maturities often have different interest rates

interest rates may vary due to liquidity, interest rates may vary due to info costs and costs from taxation, interest rates may vary due to risk

according to the liquidity premium theory

investors prefer shorter to longer maturities

indirect finance

involves three parties: the borrower, the lender, and a third party (bank)

every financial asset _____ a financial security

is not

when a company whose ability to repay its obligations in full is uncertain

it must offer investors higher yields to compensate them for the risk they take in buying their bonds or making loans

the price of a financial asset equals the

present value of all future payments

monetary policy goals

price stability, economic growth, and high employment

checks

promises to pay, on demand, money deposited with a financial institution

liquidity

the ease with which an asset can be exchanged for money

what do open market operation imply

the purchase or sale of securities, typically US Treasury securities, in financial markets

simple deposit multiplier

the ratio of the amount of deposits created by banks to the amount of new reserves

risk structure of interest rate

the relationship among interest rates of different bonds with the same maturity

what is the risk structure of interest rates

the relationship among the interest rates on bonds that have different characteristics but the same maturity

present value formula

the relationship between the price of a financial asset and the payments an investor receives from owning the asset

the expectations theory suggests that

the slope of the yield curve depends on the expected future path of short term rates

example of commodity money

gold coins

federal funds rate

the interest rate charged on overnight loans of reserves between banks

dual mandate ex

the mandate for the monetary policy goals that has been given to the Federal Reserve System

open markets purchases raise ________, thereby increasing _______

the monetary base, the money supply

Aaa

highest bond rating

least liquid asset

house

the purpose of diversificaiton

reduce risk

economists define money as

anything that people are willing to accept in payment for goods and services or to pay off debts

nominal interest rate

do not adjust for inflation

what determines the acceptability of a medium of exchange

people value something as money only if they believe others will accept it from them as payment

store of value

the accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future (money and shares)

principal

the amount of funds the borrower receives from the lender with a simple loan

a discount bond resembles a simple loan in that

the borrower repays in a single payment

money

anything that people are willing to accept in payment for goods and services or to pay off debts

which interest rate is typically the lowest

3 month treasury bills

asset

a thing of value that can be owned

why aren't credit cards included in M1 or M2

credit is not a from of money, since it is a debt that is owed to the issuer of the card

raising interest rates

increase banks' holdings of reserves and potentially lower the money supply

depositors

individuals that lend funds to a bank by opening a checking account

if the Fed wished to decrease the money supply it could

lower the interest rate

fiat money

money that would have no value if it were not usable as money

the Fed can implement open market operations

more rapidly then either changes in the discount rate or changes in the reserve requirements

money market mutual find shared are included in

only M2

Fed's most important traditional monetary policy tool

open market operations

most commonly used means of changing the money supply

open market operations

four main functions of money

serves as a medium of exchange, a unit of account, a store of value, and a standard of deferred payment

then the yield curve is downward sloping

short term yields are higher than long term yields

if market participants expect that future short-term rates will be higher than current short-term rates the yield curve will

slope upward

T/F: what a saver would consider a financial asset a borrower would consider a financial liability.

True

fiat money ex

a Federal Reserve Note used as money in the 21st century US

financial assets examples

a certificate of deposit, a home mortgage loan, a bond issued by Google

standard deferred payment

a characteristic of money by which it facilitates exchange over time

securitized loan

a collection of loans packaged together that pays an interest payments to the owner of the loan

bond

a financial security issued by a corporation or government to borrow money in exchange for the rights to an interest payment

stock

a financial security that represents partial ownership of a firm

foreign exchange

a unit of foreign currency

published by private bond - rating agencies

bond ratings

investment grade

bond that receives one of the top four ratings

junk bonds

bonds with ratings below Baa or BBB and have a higher default risk

investment grade securities

bonds with relatively low risk of default and have a rating of Baa or BBB and above

main role of financial intermediaries

borrow funds from savers and lend them to borrowers

commodity money vs fiat money

commodity money has value beyond its use as currency, fiat money has no intrinsic value

the narrowest money measure

currency plus all checking accounts

US Treasury securities

default - risk - free instruments with the lowest interest rate

monetary policy is carried out by

the Federal Reserve System

the financial system is primarily a means by which

funds are transferred from savers to borrowers

which goals can conflict in the short run

high employment and price level stability

junk bonds, bonds with a low bond rating

high-yield bonds

a discount bond involves

payment by the borrower to the lender of the face value of the loan at maturity

monetary policy

refers to the actions the Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives

the term structure of interest rates

represents the relationship among the interest rates on bonds that are otherwise similar but that have different maturities

monetary tools the Fed relied on before the financial crisis of 2007-2009

reserve requirements, open market operations, discount policy

key services that the financial system provides to savers

risk sharing, liquidity, and economies of scale information

what isn't included in M1

savings account deposits

medium of exchange

something that is generally accepted as payment for goods and services

monetary policy refers to the actions of Federal Reserve takes to manage

the money supply and interest rates to pursue its economic objectives

the problem of a double coincidence of wants refers to

the necessity in a barter system of each trading partner wanting what the other has to trade

expected real interest rate approximately equals

the nominal interest rate minus the expects rate of inflation

required reserve ratio

the percentage of deposits that banks must hold in reserve

compounding

the process of earning interest on the principal of an investment and on the interest earned

what are the costs and sources of inefficiency in a barter system

transactions costs are almost always high, there is difficulty in accumulating wealth, there is a lack of standardization, there is increased time and effort spent looking for trading partners

if the Fed's policy is contractionary, it will

use open market operations to sell Treasury bills