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112 Cards in this Set
- Front
- Back
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usury laws
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laws limiting the legal amount a lender can charge the borrower in interest rates on a loan
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Marquette Bank Decision
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US Supreme Court decision that deregulated interest rates on credit cards.
Said that whatever state credit made, you can apply that interest rate to out-of-state laws. |
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dead beat
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ppl who pay their credit card bills on time
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revolver
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people who can't pay off their credit card debt in full each month
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FICO score
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indicates credit worthiness
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unsecured loan
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loan made with no collateral
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What two innovations did Andrew Kahr suggest that has helped increase the credit card industry's profitability?
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1. high interest rate
2. reduce minimum payment to 2% balance so they pay interest for longer (later...0% interest for first 6 months) |
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three things that most often trigger bankruptcy
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divorce
illness job loss |
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investment
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the act of redirecting resources from being consumed today so that they may create benefits in the future;
the use of assets to earn income/profit |
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financial system
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allows transfer of money between savers and borrowers (needed for investment to take place)
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financial asset
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claim on the property or income of a borrower; security
(if the borrower can’t repay loan, serves as proof in court that money was borrowed) |
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financial intermediaries
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institution that helps channel funds from savers to borrowers
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Types of Financial Intermediaries
1. b_____; c_____ u_____ 2. m_____ f____ 3. l___ i_______ c_______ 4. P_____ F_____ |
1. banks, savings & loan associations; credit unions
2. mutual funds 3. life insurance comanies 4. Pension Funds |
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finance companies
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loans to consumers&small businesses...higher fees&interest rates b/c higher risk
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mutual funds
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pools savings of many indivs&invests the money in a variety of stocks, bonds&other assets
allow ppl to invest in broad range of companies (diversification) in stock market for less risk safe way to invest overseas |
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life insurance companies
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collect premiums (payments) from insurance buyers & lend out part of premium to investors
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Pension Funds
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employers set up to collect deposits&dist payments; pension fund managers invest deposits in stocks, bonds+other financial assets
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advantages of intermediaries
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1.`diversification: spreading out investments to reduce risk
2. providing information 3. providing liquidity |
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return
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money an investor receives above and beyond the sum of money they initially invested
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What is money?
Three Uses of Money |
1. medium of exchange
2. a unit of account/ Means of comparing value 3. a store of value |
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Characteristics of money
D U L A P D |
Divisibility
Uniformity Limited Supply Acceptability Portability Durability |
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Sources of Money’s Value
1. Commodity Money 2. Representative Money 3. Fiat Money |
1. Sources that have value in and of themselves
2. Objects that have value because they can be exchanged for something else of value 3. Objects that have value b/c govt says so...social agreement |
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Functions of Financial Institutions
1. S 2. S 3. L /M 4. E 5. C |
1. Storing Money
2. Saving Money 3. Loans/Mortgages 4. Electronic Banking 5. Credit Cards |
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Where can you invest cash in?
1. B 2. M 3. C |
Bank accounts
Checking Savings Money Market Accounts limited number of checks floating interest rate Certificates of Deposit (CD) Guaranteed interest rate Funds must remain for a fixed period of time |
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Bond Components
1. coupon rate: 2. maturity 3. par value/face value/principal |
1. interest rate bond issuer will pay to bondholder
2. time at which payment to bondholder is due (usu10,20,30yrs) 3.amnt an investor pays to purchase a bond&that will be repaid to the investor at maturity |
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Bonds: Advantages to the Issuer
- risk? - knowledge? - profits? |
relatively safe
knowledge that it will be making fixed payments for specific amnt time bondholders=/= stockholder.....therefore company doesn’t have to share profits w/bondholders |
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Bonds: Disadvantages to issuer
- moneywise - future firm health |
must keep on paying coupon rate even if it doesn’t make money
if firm doesn’t maintain financial health, its bonds may be downgraded to a lower bond rating= harder to sell= discount bond |
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Types of Bonds
S T M C J |
Savings
Treasury Municipal Corporate- loan, not stock Junk- risky corp bond, higer interst |
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Time periods
T-Bonds T-Notes T-Bills |
T-Bonds- 10+yrs
T-Notes- 1-10yrs T-Bills- under 1 yr |
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Securitization of asset backed bonds
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Turn loans into bonds so you can invest in interest rates
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What does an investment banker do
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buys mortgages, takes some interest for investors...problem- most of the mortgages subprime
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Types of Stock: Income vs. Growth
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Income
pays regular dividends GE and Pfizer for more than 50 consecutive years Growth reinvests to expand and strengthen the business No income tax (capital gains rate) |
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Types of Stock: Common vs.. Preferred Stocks
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Common
Most usual and commonly held from of stock Typically has voting rights in corporate decision matters Order of priority in liquidation – near last Preferred stock No voting rights Share directly in the success or failure of the business Dividends stay the same Have priority over common stock in distribution of dividends and assets |
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Blue Chip vs. Penny stock
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Blue Chip
Largest, long-established, consistently profitable dividends relative safety and stability Often more expensive Royal Dutch Shell, Coca-Cola Company, American Express, IBM, Enron Penny Common stocks that sell for $5 or less a share Low priced, speculative security of a very small company Stocks often traded outside one of the major exchanges (NYSE, NASDAQ, AMEX) |
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Stock: Where do you buy and sell?
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Stockbrokers...commission
Stock exchanges or markets...blue-chip stocks |
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Where do you buy and sell stock? Specific Exchanges
1. 2. 3. |
1. NASDAQ- AMEX
- specializes Am. high tech & energy stocks -American Stock Exchange National Association of Securities Dealers’ Automated Quotation system (internet based) 2. OTC- Over the counter - electronic -stocks not on organized exchange -new companies- no dividends 3. non-US exchanges - |
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Selling Short
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Make money off betting that a stock will go down, not up
1. Borrow stock from borrower. 2. Sell it to someone 3. Wait until price drops and buy it back 4. Return stock to broker |
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Day trading
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buying and selling within same trading day
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Buying on margin
Margin call Leverage |
Buying using borrowed money
- can borrow up to half - pay interest on loan bt it's less than market rates “Margin call” – money called in when you're in a loss “Leverage” -- multiplies the power of your money |
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derivative
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an agreement based on something else
- future/forward -option (a hedge) option to buy or sell -swap: exchange floating rate for a fixed rate contracts traded on exchange or OTC |
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universal default
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if you make a late payment on another loan, credit company can charge you a default rate, even if it isn't them....or even if your balance is just too high, etc
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Smiley Case (1996)
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-lifted state restrictions on the fees credit card banks could charge
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Office of the Controller of the Currency (OCC)
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regulates national banks
make sure that the banks don't fail ensure the integrity of how the banks operate make sure that they deal fairly and honestly with their customers |
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Money Supply
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all money available in U.S. economy
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liquidity
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ability to be used as/directly converted into cash
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Demand deposits
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money in checking accounts
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money market mutual funds
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intermediaries buy short-term financial assets...investors get higher interest than savings, not covered by FDIC(so slightly riskier than savings accounts)
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certificate of deposit
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guaranteed interest bt can't get money until certain amount of time
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money market account
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limited amount of checks
higher interest rate, can change |
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fractional reserve banking
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banking system that keeps only a fraction of funds on hand and lends out the remainder
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default
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failure to pay back bank loan
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mortgage
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specific type of loan used to buy real estate
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credit card
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card entitling holders to buy goods and services based on cardholder's promise to pay for them
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simple vs compound interest
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simple- interest on principle
compound- interest on principle and accrued interest |
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Types of Financial Institutions
1. C B 2. S L A 3. S B 4. C U 5. F C |
1. Commercial Banks- largest role, almost 1/3 national
2. Savings and Loan Associations 3. Savings Banks 4. Credit Unions 5. Financial Companies- make installment loans to consumers |
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interest
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price paid for use of borrowed money
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principal
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amount of money borrowed
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Financial Asset Markets
1. C 2. M 3. P 4. S |
1. Capital Markets
2. Money Market 3. Primary Market 4. Secondary Market |
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capital market
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money lent for over a yr
ie long term CD, govt+corp bonds requiring over a yr to mature |
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money market
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money lent for periods less than a yr
ie. short term CD, T-bill, money market mutual funds |
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primary market
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market for selling financial assets that can only be redeemed by original holder
ie non transferable savings bonds |
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secondary market
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market for selling financial assets, provides liquidity
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Securities and Exchange Commission (SEC)
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indep agency of the govt that regulates financial markets&investment companies
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Electronic Banking
-A -D -H -A -S |
Automated Teller Machine (ATM)
Debit Card Home Banking (internet) Automatic Cleaning Houses (ACH)- @ Fed Reserve banks, let customers pay bills w/o writing checks, automatic fund transfer Stored Value Cards/Smart Cards (ie prepaid phone cards) |
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creditor
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person/instit to whom money is owed
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greenback
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paper currency issued during Civil War
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gold standard
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monetary system in which paper money and coins are equal to the value of a certain amount of gold
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Federal Reserve System (1913)
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nation's central banking system
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central bank
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bank that can lend to other banks in times of need
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federal reserve note
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national currency used today in US
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Federal Deposit Insurance Corporation (FDIC)
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govt agency that insures customer deposits if a bank fails
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portfolio
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collection of financial assets
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prospectus
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investment report to potential investors
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budget deficit vs. national debt
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deficit- when govt spends more than it makes
debt- sum total $$ fed owes to bondholders |
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perfect vs monopolistic competition
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perfect- market structure where large # of firms sell identical items
monopolistic- market structure where many companies sell similar things |
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rationing
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allocating scarce g/s based on factors other than $$
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Lorenz curve
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shows income distribution
x- fifths of total family y- cumulative distribution of income (%) |
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inflation
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general increase in prices
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inflation equation
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CPI2-CPI1
________ * 100 CPI1 |
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causes of inflation
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quantity theory- too much stuff in market
cost-push theory- producers raise prices to meet inc'd costs demand-pull theory- quantity demanded > supplied |
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three types of GDP
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nominal- GDP measured in current prices
real- GDP expressed in constant prices (take a year and say how much items would have cost in that year) per capita- per person |
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gross domestic product
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dollar value of final g/s produced within a country's borders in a given year
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diversification
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spreading out of investments to reduce risk
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credit card
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card entitling holder to buy g/s based on the holder's promise to pay for them
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stock
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certificate of ownership in a corporation
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business cycle definition
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period of macroeconomic expansion followed by period of contraction
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describe business cycle
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expansion- inc real GDP
peak- real GDp stop growing contraction- real GDP falling trough- real GDP stops falling |
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recession vs depression
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recession- GDP falls 6 straight months, prolonged econo contraction
depression- especially long and severe recession |
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what keeps a business cycle going
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1) business investment
2) interest rates+ credit 3) consumer expectations 4) external shocks |
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bank run
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widespread panic in which great numbers of ppl try to redeem their paper money
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privatization
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sale/transfer of state owned businesses to individuals
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perestroika
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Gorbachev's plan for economic restructuring
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3 uses of money
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medium of exchange
unit of account (means of comparing value) store of value |
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3 types of money
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commodity- has value in and of itself
representative money- obj has value b/c can be exchanged for smthg else of value fiat money- value b/c govt says so |
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intermediate goods are
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used in the production of final goods
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final goods
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goods in the form sold to consumers
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sole proprietorship
why most popular why bad? |
business owned and operated by one person
easy to start up business license, register business name, check zoning laws get all profits, full control, easy to discontinue, few regulations liability, limited access to resources, lack of permanence, few fringe benefits |
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liability
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legally bound obligation to pay debts
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partnership definition
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business organization run by 2+ ppl who agree on specific divisions of responsibilities and profits
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types of partnerships
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general: equally share responsibilites+liability
limited: one person has unlimited liability, other only contribs money limited liability partnership: everyone limited liability (in certain situations, all partners limited from personal liability) |
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advantages of partnerships
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-ease of start up (but articles of partnership/Uniform Partnership Act)
-larger pool of capital -shared responsiblities+specialization -little regulation -no special taxes |
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corporation
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legal entity owned by individual shareholders
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closely held corp vs publicly held corp
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closely held- releases stock to few ppl
publicly held- stock sold on open market |
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advantages of corporations
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limited liability
ability to attract capital long life transferable |
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disadvantages of corporations
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lots of regulation
income+capital gains tax loss of control hard to start up (certificate of incorporation) |
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3 types of loans
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fractional reserve banking
credit cards mortgages |
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laffer curve
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if tax rate too high, ppl will become discouraged and stop working
x- tax rate (%) y- tax revenue (low-high) semi circle |
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what can govt do when running deficit
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creating money- inflation
borrowing- in national debt |
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specialization
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concentration and productive efforts of individuals and firms on a limited number of activities
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factor market
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market in which firms purchase the factors of production from households
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product market
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market in which households purchase the goods and services that firms produce
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advantages free market
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econo efficiency
econo growth (more innovation) econo freedom more stuff to buy |
