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