Overview of Financial Markets and Securities
Community Depository Institution Advisory Council
12 members from savings banks; meets biannually.
Community Advisory Council
15 members focus on low-income financial needs; meets biannually.
Risk Premium
Additional yield required for higher credit risk.
Credit Ratings
Assess issuer's creditworthiness and default risk.
Robo-advisor
Automated investment service using algorithms.
Algorithmic Trading
Automated trading using algorithms for efficiency.
Member Banks
Banks that are part of the Federal Reserve System.
Federal Reserve
Central bank responsible for monetary policy in the U.S.
Aggregate Supply of Funds
Combined supply from all sectors and Fed policy.
Integration of Theories
Combines expectations, liquidity, and segmented market theories.
Federal Open Market Committee
Committee that manages U.S. monetary policy.
Beige Book
Consolidated report on regional economic conditions.
Derivative Securities
Contracts deriving value from underlying assets.
Interest Rate
Cost of borrowing money expressed as a percentage.
M1 Money Supply
Currency and demand deposits; most liquid form.
Jerome Powell
Current Chair of the Federal Reserve.
Mortgage-Backed Securities
Debt obligations backed by a pool of mortgages.
Bonds
Debt securities requiring repayment at maturity.
Blockchain Technology
Decentralized ledger for secure financial transactions.
Foreign Demand for Loanable Funds
Depends on interest rate differentials between countries.
Tax Status
Determines if bond yields are taxable or tax-exempt.
Commercial Banks
Dominant depository institutions facilitating loans.
Liquidity
Ease of selling securities without losing value.
NASDAQ
Electronic market primarily for technology stocks.
Rating Agencies
Evaluate and assign credit ratings to securities.
Crowding Out Effect
Excessive government demand reduces private fund demand.
Liquidity Premium
Extra yield demanded for less liquid securities.
Financial Institutions (FI)
Facilitate funds flow from surplus to deficit units.
Monetary Policy
Fed's actions affecting money supply and interest rates.
Open Market Operations (OMO)
Fed's buying/selling of securities to influence rates.
Overnight Reverse Repurchase Agreement (ON RRP)
Fed's tool to manage short-term interest rates.
FOMC
Federal Open Market Committee; meets eight times yearly.
Securities
Financial assets representing ownership or debt claims.
Money Markets
Financial markets for short-term liquid assets.
Insurance Companies
Firms investing premiums to manage risk and returns.
Prime Brokers
Firms providing liquidity and leverage in trading.
Forward Rate Formula
Formula to calculate future interest rates.
Pension Funds
Funds managing retirement savings until withdrawal.
Foreign Exchange Market
Global market for currency exchange transactions.
Soft Landing
Gradual economic slowdown without recession.
Yield Curve
Graph showing relationship between interest rates and maturities.
Household Demand for Loanable Funds
Higher demand when interest rates are lower.
Default Risk Premium
Higher yield required for securities with default risk.
Supply of Loanable Funds
Households are the largest suppliers of funds.
M2 Money Supply
Includes M1 plus savings accounts and small deposits.
M3 Money Supply
Includes M2 plus large time deposits and institutional funds.
After-Tax Income
Income remaining after taxes are deducted.
Economic Growth
Increase in the production of goods and services.
Inflation Impact on Interest Rates
Increases demand for funds while decreasing supply.
Economic Conditions
Influence stock market performance and investor behavior.
Government Demand for Loanable Funds
Insensitive to interest rates; relies on expenditures.
Debt Securities
Instruments representing borrowed funds to be repaid.
Equity Securities
Instruments representing ownership in a company.
Dynamic Open Market Operations
Intended to have lasting economic impact.
Discount Rate
Interest rate Fed charges banks for emergency loans.
Federal Funds Rate (FFR)
Interest rate banks charge each other for loans.
Pure Expectations Theory
Interest rates determined by future rate expectations.
Loanable Funds Theory
Interest rates determined by supply and demand for funds.
Mutual Funds
Investment vehicles pooling funds to buy securities.
Segmented Markets Theory
Investors choose securities based on cash needs.
Liquidity Premium Theory
Investors prefer liquid securities, affecting yield curves.
Securities Act of 1933
Law ensuring full disclosure of financial information.
Securitized Loans
Loans converted into tradable financial instruments.
Stable Prices
Maintaining low inflation and price stability.
Federal Funds Market
Market for interbank lending of reserves.
Secondary Market
Market for trading existing securities among investors.
Primary Market
Market where new securities are issued and sold.
Active Secondary Market
Market where securities are frequently traded post-issuance.
Financial Market
Marketplace for buying and selling financial assets.
Capital Markets
Markets for long-term securities transactions.
Reserve Requirements
Minimum reserves banks must hold against deposits.
Credit Unions
Non-profit financial cooperatives serving members.
Board of Governors
Oversees the Federal Reserve, consisting of six members.
Deficit Units
Participants needing funds beyond their income.
Surplus Units
Participants with excess funds available for investment.
Equilibrium Interest Rate
Point where supply and demand for funds meet.
Behavioral Finance
Psychological factors influencing financial decision-making.
Interest on Reserves Balance (IORB)
Rate banks earn for holding reserves at the Fed.
Tax Leakage
Reduction in returns due to taxation.
Consumer Financial Protection Bureau
Regulates financial products post-2010 Financial Reform Act.
Sarbanes-Oxley Act of 2002
Regulation mandating accurate financial reporting.
Office of Credit Ratings
Regulatory body established by the Financial Reform Act.
Term Structure of Interest Rates
Relationship between maturity terms and yields.
Federal Advisory Council
Represents banking industry; meets with governors quarterly.
Financial Assets
Resources with economic value owned by individuals or firms.
Yield
Return on investment expressed as a percentage.
Credit Risk
Risk of issuer defaulting on debt obligations.
Economic Growth Impact
Shifts demand for loanable funds outward.
Defensive Open Market Operations
Short-term adjustments to stabilize the economy.
Money Market Securities
Short-term debt securities with high liquidity.
T-bills
Short-term government securities with maturities under one year.
Inverted Yield Curve
Short-term rates exceed long-term rates, indicating recession.
Systemic Risk
Spread of financial problems causing market collapse.
FOMC Statement
Summarizes conclusions of FOMC meetings.
Fintech
Technology that enhances financial services and transactions.
Term to Maturity
Time remaining until a debt security's principal is repaid.
Regulatory Technology (RegTech)
Tools for automating regulatory compliance processes.
Aggregate Demand for Loanable Funds
Total demand from all sectors at given interest rates.
District Banks
Twelve regional banks under the Federal Reserve System.
Interest Rate Fluctuations
Variations in interest rates over time.