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