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81 Cards in this Set
- Front
- Back
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Fiscal Policy
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is controlled by Congress |
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Monetary Policy
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Controlled by the Federal Reserve Regulates the flow of money and credit in the economy. |
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The Fed Regulates the Flow of Money and Credit in the Economy by:
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1. Federal Open Market Committee (FOMC) a. buys or sells government securities (usually t bills) including T bills, T notes, T bonds, and Federal Agency Issues b. would buy to stimulate the economy c. would sell to slow down the economy |
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The Prime Rate
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is set by the banks NOT the FED but the FED can certainly influence the rate by their actions. |
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5 Tools Used by the Fed:
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2. Changing the primary reserve requirement maintained by member banks a. Reserve requirements would be: 1. Lowered to stimulate the economy 2. Raised to slow the economy **the fed would be LEAST likely to use this tool to influence the money supply |
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5 Tools Used by the Fed: |
4. Changing the margin required by broker/dealers (the least EFFECTIVE tool)..Reg T 50% 5. Moral Suasion- also used to control money and credit. |
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The Discount Rate |
The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank.
***is the ONLY interest rate that is set and controlled by the Fed |
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Functions of the Federal Reserve System Include:
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2. Lending to commercial banks 3. Acting as an agent for the US Treasury 4. Regulating bank credit *5. Being a lender of last resort (banks would prefer to borrow from another entity than FEDs, so they do not get audited) |
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If the Fed is purchasing government securities it causes:
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2. Bank reserves to increase |
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Fiscal Policy is Set by Congress and Deals With:
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2. Taxes 3. Welfare **Deals with all areas of where our tax dollars are spent |
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Key Interest Rates
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2. Federal Funds Rate: rate that banks charge each other for overnight loans. 3. Discount Rate: Rate charged to member banks borrowing from the Fed, to cover temporary reserve needs. 4. LIBOR (London Inter Bank Offered Rate)- rate that international banks charge each other 5. Broker or Call Loan Rate: rate at which broker dealers borrow from banks to cover margin loans to customers 6. The Real Interest Rate: is the nominal rate minus current rate of inflation. The real interest rate is also called the Inflation Adjusted Return |
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Money Market vs. Capital Market
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Money Market instruments are investments with maturities of 12 months or less |
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Money Market Instruments
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short term debt instruments: 1. Treasury Bills (most liquid) 2. Certificates of Deposit (CD's) 3. Commercial Paper (maximum maturity of 270 days) 4. Bankers Acceptances (least liquid) 5. Federal Funds 6. Repurchase Agreements (repos) 7. Eurodollars 8. Variable Rate Demand Notes *ADRs are capital market instruments, not money market instruments. |
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Capital Market Instruments
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1. Equity Instruments (common & preferred stock) 2. Corporate bonds 3. Treasury bonds 4. Municipal bonds 5. Mortgages 6. ADR's - American Depository Receipts **The Federal Reserve Board does NOT issue securities, because if the FED needs money they PRINT it |
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Federal Funds
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Usually funds which are in excess of reserve requirements |
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Federal Funds Rate
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1.most volatile rate in the money market 2.rate is normally higher than the rate charged at the Federal Discount Window 3. it is a leading indicator of interest rates since it is set daily by the market, it is NOT set by the Fed |
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Federal Funds Rate
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5. the effective federal funds rate is the daily average rate of interest costs of Federal Funds transactions throughout the country 6. A decline in the Federal Funds Rate will expand the money supply 7. A rise in the Federal Funds Rate will contract the money supply 8. Commercial banks, small regional banks, thrift institutions, and some foreign banks aer sources of Federal Funds |
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Repurchase Agreements (REPO's)
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-short term money market instruments -an agreement to purchase US Government (or other) securities at a fixed price, usually on an overnight transaction |
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Repurchase Agreements (REPOs)
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2. most buyers are corporations with surplus funds ***3. The difference between the purchase and repurchase price is interest 4. REPOs usually trade in denominations of $1MM |
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Repurchase Agreements (REPOs)
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5. Interest paid on REPOs is competitive with the Fed Funds rate 6. Repo rates are negotiated between two parties ***7. Repos are not riskless transactions ***8. Some REPO's are issued as callable |
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Bankers Acceptances (are foreign trade) |
2. Drafts or bills of exchange which become money market instruments when payment is guaranteed by a bank or other financial institution 3. Issued on a discount basis so that exporters can receive immediate payment |
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Bankers Acceptances
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5. Most mature within 9 months 6. Trade OTC ****7. Dealers in Bankers Acceptances profit from the spread between the price at which they are bought and sold (discount) |
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Commercial Paper
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Think of a major corporation that wants to finance its accounts receivable (accounts receivable = money owed to a company by its debtors) |
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Commercial Paper
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2. Represents an unsecured promissory note of corporations 3. The proceeds may be used in anyway by the issuer |
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Commercial Paper
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4. Normally issued for a specific amount at a DISCOUNT and redeemed at face value on a specific date, but can be issued as interest bearing certificates 5. "Prime commercial Paper" are notes issued by major corporations 6. Usually yields more than Treasury Bills for the same maturity ***7. Very liquid investment, has a secondary market 8. Exempt from SEC registration |
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Eurodollars
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**deposits in US dollars that have been deposited with banks outside of the US -the Fed generally is not a major participant in the Eurodollar market |
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Eurodollar Bonds
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Bonds that are issued in Europe by either foreign or domestic corporations 1. Eurodollar bond interest and principal payments can only be made in **US dollars** 2. Eurodollar bonds are normally sold at rates lower than US interest rates because there is less regulation 3. They also offer diversification to investors ****4. The SEC does NOT have jurisdiction |
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The Interbank Market
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-free from government regulation -governments may take actions which would affect the value of their own currencies -Trading is generally conducted in units of $50MMto $100MM |
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The Interbank Market Risks
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2. Changes in government policies 3. No last sale information 4. 24 hour market |
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Certificates of Deposit (CD's)
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1. Issued in denominations of $100 up to $100K+ 2. Issued and guaranteed by banks 3. Generally have maturities of 1 year or less 4. Interest is accrued and paid at maturity 5. Penalties may be incurred if cashed in prior to maturity 6. Are not liquid |
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Negotiable or "Jumbo" CDs
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1. Issued and guaranteed by banks (generally commercial banks) in return for time deposits but are offered by broker/dealers 2. Have $100K minimum deposits 3. Generally have fixed maturities of 1 year or less (money market instruments) |
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Negotiable or "Jumbo" CDs
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4. Usually trade "plus interest" (with accrued interest) which is paid to seller on settlement date 5. Penalties may be incurred if cashed in prior to maturity 6. Have a liquid secondary market as compared to the market of individual CD's but overall not as liquid as other securities |
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Negotiable or "Jumbo" CD's
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8. Are FDIC insured |
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Euro Dollar Certificates of Deposit
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1. Interest and principal will always be paid in US Dollars 2. Secondary market is NOT very active |
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Passbook Savings Account Interest Rates
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are changed the least and are the least sensitive to changes in interest rates |
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An Inverted or Negative Yield Curve
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-short term rates exceed long-term rates -this tells you that interest rates have gone up sharply and quickly |
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Flat Yield Curve
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my. -Yields tend to flatten due to uncertainty **Bond buyers should consider Short and Intermediate bond maturities |
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Foreign Trade
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-Always expect the foreign currency to move in the opposite direction of the dollar -We would never trade US dollars because we don't trade our own currency |
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A depreciation of the American Dollar in relation to the currencies of other nations causes:
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2. Foreign imports to become less competitive in the US market. |
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An appreciation of the American Dollar in relation to currencies of other nations causes:
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2. Foreign imports to become more competitive as we can buy more |
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***As interest rates rise, the US dollar usually rises, and foreign currency values decline
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****The US Balance of Payments Deficit has NOTHING to do with US Govt. deficit spending. It deals with Imports/Exports. ***MORE $ FLOWING OUT OF THE COUNTRY THAN FLOWING IN |
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US Balance of Payments Deficit would *increase* due to:
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2. US tourists spending abroad 3. US loans to other countries 4. Raising dividends and interest payments on foreign owned securities of US issuers |
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"Balance of Payments"
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A statement that summarizes an economy’s transactions with the rest of the world for a specified time period.
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US Balance of Payments deficit would *improve* with: (money coming into the country)
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2. Commodity exports 3. Spending by foreign tourists in the US 4. Increased dividends and interest earned on foreign investments 5. Money coming into the US would reduce the deficit |
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The Floating Exchange Rate
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it is determined by central banks and market forces; supply and demand |
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International Monetary Fund (IMF) |
Its purpose is to promote monetary and exchange stability and international trade |
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The World Bank
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Its purpose is to assist developing nations by providing them with loans |
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Federal regulations which govern the extension of credit when securities are used as collateral for a loan: Regulation T Regulation U Regulation G |
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Regulation T
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-Regulates credit extension by *broker/dealers* to CUSTOMERS when securities are used as collateral.
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Regulation U
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Regulates credit extensions by *banks* to BROKER/DEALERS and CUSTOMERS when securities are used as collateral for the purpose of buying or carrying margin stocks. |
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Regulation G
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Floating Rate System
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currency exchange rates are primarily determined by supply and demand in the open marketplace. |
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Recession
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-Two consecutive quarters of negative growth in GDP |
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Recovery
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-A recovery period would show an increase in the GDP for at least 2 consecutive calendar quarters. |
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Inflationary Period
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** The Feds would tighten the money supply in an attempt to end |
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***Full employment and high consumer spending contribute to increasing inflationary pressure
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Deflationary Period
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-negatively effects output and employment |
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Keynesian Economic Theory
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-"Demand-Side theory" -Active government intervention in the marketplace -Government should manipulate government expenditure and taxation for economic purposes. |
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Monetarist Theory
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-States that CONTROLLING the *money supply* has a greater impact on the economy than Federal spending -Advocates a slow but steady growth in the money supply |
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Supply-Side Economics Theory
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-States that drastic reductions in tax rates and the size of government will stimulate the economy
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Classical Economic Theory
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-the equilibrium between supply and demand in open markets determines prices best without interference from the government -it believes that if an event disrupts the equilibrium, the markets will react and provide a new equilibrium |
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Current Definitions of Money Supply: 1. M-1 2. M-2 3. M-3 |
2. M-2: is M-1 + Money Market fund balances, Repurchase Agreements, Savings Accounts, and Time Deposits of less than $100K 3. M-3: is M-1 + M-2 + Time Deposits of $100K+ |
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Demand Deposits
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any type of account where the money in the account may be withdrawn at any time without prior notice to the financial institution. The most common types of demand deposits are checking accounts and savings accounts.
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Economic Indicators: Leading Indicators
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Production workers average workweek New housing starts new business formation money supply (M-2) vendor performance new orders for durable goods (home appliances) stock prices contracts and orders for equipment index of consumer expectations unemployment claims unfilled orders for durable goods |
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Coincident Indicators - tend to move coincidentally to the economy and include:
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Personal Income *****Industrial Production Index (the exam tries to trick you into saying this is a leading indicator; it is NOT) Retail Sales GDP Non farm payroll workers |
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Lagging Indicators
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Labor costs existing housing sales ****(NEW housing starts is a leading indicator but EXISTING housing sales is a lagging) capital spending outstanding commercial and industrial loans unemployment rate bank interest rates (prime) Corporate profits |
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Gross National Product (GNP)
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The total value of all goods and services produced and shipped inside and outside of the country To properly compare one year to the next, calculations must be done in Constant Dollars (a measure where dollars are adjusted for inflation) |
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Gross Domestic Product (GDP)
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Includes only income derived from within the country Its a better measurement of how the economy is doing as a whole as compared with GNP, which is a broader gauge of economic status |
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**The CPI always plays off of what is going on with the PPI 1. Producer Price Index (PPI) 2. The Consumer Price Index (CPI) |
**changes in the PPI are generally an indication of upcoming changes in the CPI 2. a MONTHLY measurement of the change in the price of the average goods and services bought by wage earners in selected US cities |
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The CPI measures inflation and is also called the Cost of Living Index |
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Banks are referred to as "intermediaries" |
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The Business Cycle ***Interest rates generally parallel or follow the movement of the Business Cycle |
2. Peak - indicates the top of an expansion period. 3. Contraction - indicates a recessionary period 4. Trough - indicataes the bottom of a recessionary period |
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***There is an inverse relationship between interest rates and fixed income securities
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The Passbook Rate
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A personal loan extended to a savings-account holder by the custodial bank. Passbook loans use the balance of the savings account as collateral for the loan. The amount of the loan therefore cannot exceed the savings-account balance.
**It is the interest rate LEAST sensitive to fluctuation |
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Bankers Acceptance
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-short term debt instrument issued by a firm that is guaranteed by a commercial bank -traded at a discount from face value on the secondary market. -maturity ranges from 30 to 180 days, but can be traded prior to maturity in secondary market -relatively safe investment -they are used to finance foreign trade ***primarily purchased by institutional investors |
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Commercial Paper
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is issued for a specific amount and matures on a specific date. It is normally issued with short term maturities, |
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Short, Intermediate, and Long term Instruments/Investments Defined
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short: less than 5 years intermediate: 5-10 years long: 10+ |
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Real Interest Rate
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The nominal rate minus the current rate of inflation |
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5 Functions of The Federal Reserve System
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2. Lending to commercial banks 3. Acting as an agent for the US Treasury 4. Regulating bank credit 5. Being a lender of last resort |
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Maximum Maturity of Commercial Paper
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270 days |
