ECON 3303 EXAM 3

Responses to Changes in Demand Conditions: Interest-Rate Volatility

-adjustable rate mortgage -financial derivatives -mortgage backed securities

What does the Comptroller of currency do?

-charters, regulates, and supervises all national banks, federal savings associations, and federal branches and agencies of foreign banks -ensure that the banks we supervise operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations

Effects of FED contracting credit on market

-decrease money supply -raise interets rates -stronger currency dollar value

Determinants of Supply for bonds

-expected profitability -expected inflation -government budget

Effects of FED expanding credit on market

-increase money supply -lower interest rates -Max employment -stable prices -lower currency dollar value

Lemons Problem

-the seller has more information regarding the true value of the vehicle than the buyer. This results in the buyer not wanting to pay more than the average price of the car, even if it is of premium quality -In a market where buyers cannot easily determine the quality of a used car before purchase, they are likely to be cautious and may only be willing to pay an average price that reflects the expected value of a car of uncertain quality

Determinants of demand for bonds

-wealth -expected returns -expected inflation -risk -liquidity

How many federal reserve banks

12

Escrow

A legal concept describing a financial agreement whereby an asset or money is held by a third party on behalf of two other parties that are in the process of completing a transaction.

Restrictive Covenants

A statement written into a property deed that restricts the use of the land in some way; often used to prohibit certain groups of people from buying property -It dealt with how a piece of land may be used and developed.

Moral Hazard

Arises when people behave recklessly because they know they will be saved if things go wrong -after transaction has been developed

Why might municipal bonds be more desirable for investors?

Interest payments on municipal bonds are exempt from federal income taxes.

Who is the Comptroller of currency

Michael J. Hsu

Cointegration

Occurs when two time series are moving with a common pattern due to a connection between the two time series -technique used to find a a possible correlation between time series processes in the long term -man walking his dog but cannot wander too far bc of leash

dual banking system (state)

State banks are chartered and regulated under state laws and standards, which includes supervision by a state supervisor.

zombie bank

an insolvent(unable to pay debts owed) financial institution that is able to continue operating thanks to explicit or implicit support from the government. Zombie banks are kept afloat to prevent panic from spreading to healthier banks. -too big too fail

conflicts of interest from underwriting and rating debt instruments

conflict of interest

Bond prices and interest rates are inversely related why?

if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.

Why would governments choose to issue perpetuities rather than alternatives?

interest rates are extraordinarily low for longer-term debt. -no maturity date that does not repay principal but fixed coupons payments forever

Random Walk Theory

movement of the market is completely random; future movement is not only unknown, it is unknowable -stock prices move unpredictable

Function of the Federal Reserve chairman

responsible for conducting monetary policy, regulating and supervising banks, and maintaining the stability of the financial system -overseeing the functions and activities of the Federal Reserve System - max employment -FOMC -long term interest rates -stable prices -monetary policy - supervise/ regulate bank operations

who appoints federal reserve chairman

the president

Adverse Selection

the problem of incomplete information - of choosing alternatives without fully knowing the details of available options -refers to a situation where one party in a transaction has more information than the other, and this asymmetry of information can lead to undesirable outcome-occurs before a transaction

Securitization

the process of transforming loans or other financial assets into securities

how long is the federal reserve chairman term

they serve a 4 year term

how Financial Intermediaries reduce transaction costs in markets

-Lower transaction costs (time and money spentin carrying out financial transactions) -Reduce the exposure of investors to risk -deal w/asmymmetric probs -adverse selection -moral hazard

Responses to Changes in Supply Conditions:Information Technology

*Bank credit and debit cards -Improved computer technology lowers transaction costs • Electronic banking • ATM, home banking, ABM and virtual banking • Junk bonds • Commercial paper market

What's the purpose of financial intermediaries?

They help reduce the cost of moving savings from savers to borrowers and investors.

dual banking system (federal)

Under the dual banking system, national banks are chartered and regulated under federal law and standards, and supervised by a federal agency.

dual banking system

a banking system in which bank chartering exists at both the national and state levels

shadow banking system

a group of institutions that engage in lending activities, much like traditional banks, but do not accept deposits and therefore are not subject to the same regulations as traditional banks -lead up to the global financial crisis 2007 to 2009 -lenders, brokers, securitization, unregulated

Adjustable rate mortgage

a mortgage whose rate of interest is adjusted periodically to reflect market conditions. -interest rate fluctuates • Flexible interest rates keep profits high when ratesrise • Lower initial interest rates make them attractive tohome buyers

Principle-Agent Problem

a problem caused by agents pursuing their own interests rather than the interests of the principals who hired them -Managers pursue personal benefits and power rather than the profitability of the firm. -how asymmetric information problems affect economic behavior

Mortgage Backed Securities (MBS)

a type of asset-backed security that is secured by a mortgage or collection of mortgages