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57 Cards in this Set
- Front
- Back
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Interest Rate
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-rental price for money
-penalty to borrowers for consuming before earning -reward to savers for postponing consumption -expressed in terms of annual rates -as with any price, interest rates serve to allocate resources. |
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return on investment
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the future additional real output generated by investment in productive capital projects
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positive time preference
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the preference of people to consume goods today rather than tomorrow
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real rate of interest
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the nominal rate of interest prevailing in the marketplace adjusted for the expected rate of inflation;
the equilibrium rate of interest (between desired real investment and desired saving) if no inflation occurs. |
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i=r+PIe + (r x PIe)
i= observed nominal rate of interest r= real rate of interest PIe=the expected annual rate of inflation. |
fisher equation
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Nominal interest rate
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the interest rates that are observed in the marketplace
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Supply of loanable funds
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all sources of funds available to invest in financial claims:
-consumer savings -business savings -government budget surpluses -central bank action |
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demand for loanable funds
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all uses of funds raised from issuing financial claims:
-consumer credit purchases -business investment -government budget deficits |
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equilibrium interest rate
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if competitive forces operate in financial sector, laws of supply and demand will bring rates into equilibrium
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equilibrium is temporary or dynamic meaning:
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any force that shifts supply or demand will tend to change interest rates
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borrowers
lenders |
unanticipated inflation benefits ________ at expense of ______.
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lenders charge added interest to ...
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offset anticipated decreases in purchasing power
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...nominal interest rates
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expected inflation is embodied in ________
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financial intermediary
(or financial institution) |
facilitate flows of funds from savers to borrowers
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surplus spending unit (SSUs)
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have income for the period that exceeds spending, resulting in SAVINGS
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Deficit spending units (DSUs)
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have spending for the period that exceeds income.
-borrower -mostly businesses or govt. |
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Financial claim
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a written promise to pay a specific sum of money (the principal) plus interest, for the privilege of borrowing money over a period of time.
-they are issued by DSUs and purchased by SSUs |
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marketablility
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ease with which a financial asset may be sold to another SSU
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direct financing
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-DSU and SSU find each other and bargain
-SSU transfers funds directly to DSU -DSU issues claim directly to SSU -preferences of both must match as to: amount,marturity, risk and liquidity. -simplest way for funds to flow. |
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financial intermediation
9indirect financing) |
-raise funds by issuing claims to SSUs
-use funds to buy claims issued by DSUs |
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financial market
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-markets for financial instruments (claims or securities
- markets for buying and selling financial claims |
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private placement
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-a common institutional arrangement in direct finance
-DSU sells whole security issue to one investor or investor group. -advantages include speed and low transaction costs -simplest |
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investment banker
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-"underwrite" new issues of securities
-buy entire issues of securities from DSUs -find SSUs to buy securities at higher price **-profit from difference (called underwriting spread) |
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Underwriting
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-the risk-bearing funciton of the investment banker.
- the investment banker guarantees fixed proceeds to security issuers while uncertain of the eventual resale price. |
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Brokers
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-bring buyers and sellers of direct claims together
- buy or sell at best possible price for their clients |
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Dealers
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-bring buyers and sellers of direct claims together
- "make markets" by carrying inventories of securities. |
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bid price
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the price offered by a dealer to purchase a given security
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ask price
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-the bid price plus a price "spread" that provides the dealer's profit;
-the lowest price at which a the dealer is willing to sell the security |
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bid-ask spread
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the dealer's gross profit
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disintermediation
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the withdrawal of funds that were previously invested through financial intermediaries so that they can be invested directly in the financial markets.
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commercial paper
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-an unsecured, short-term promissory note issued by a large credit worthy business or financial institution.
-a major money market instument |
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primary financial market
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are where financial claims are "born": DSUs recieve funds, claims are first issued
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Secondary financial market
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are where financial claims "live:- are resold and repriced
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Over-the counter market
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-virtual, relatively inclusive.
-decentralized network available to any licensed dealer willing to buy access and obey rules, for wide range of securities. Ex. NASDAQ |
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Futures market (or forward market)
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immediate payment for promise of future delivery
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futures contract
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standardized as to amounts, forms, and dates; trade on organized exchanges
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option market
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rights in underlying securities or commodities-- writer grants owner some exclusive right for some certain time
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puts
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options to sell
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calls
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options to buy
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options contract
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a contractual agreement that allows the holder to buy (or sell a specified asset at a predetermined price prior to its expiration.
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Eurodollars
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US dollars deposited outside the US
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Eurobonds
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bonds issued outside US but denominated in $US.
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Money markets
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wholesale markets for short-term debt instruments resembling money itself.
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treasury bills
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-example of a major money market instrument
-direct obligation of the federal government. They are considered to have no default risk and are the most marketable of any security issued. |
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Negotiable Certificates of Deposit
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-example of a major money market instrument
-unsecured liabilities of banks that can be resold before their maturity in a dealer-operated secondary market. |
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Federal funds
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immediately available funds that can be lent on an overnight basis to financial institutions.
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Fed fund market
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the market in which banks make short-term unsecured loans to one another
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capital markets
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where "capital goods" are permanently financed through long-term financial instruments
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common stock
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-major capital market instrument
-basic ownership claim in a corporation. -Stockholders share in the distributed earnings and net worth of a corporation and select its directors. |
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corporate bonds
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-major capital market instrument
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municipal bonds
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--major capital market instrument
- bonds issued by state and local government bodies; they comprise one of the largest fixed income securities markets. |
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Mortgages
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--major capital market instrument
-loans for which the borrower pledges real property as collateral to guarantee that he debt will be repaid. |
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credit risk (or default risk)
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the risk that a DSU may not pay as agreed.
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interest rate risk
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fluctuations in a security's price or reinvestment income caused by changes in market interest rates.
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liquidity risks
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reik that a financial institution may be unable to disburse required cash outflows, even if essentially profitable.
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Foreign exchange risk
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effect of exchange rate fluctuations on profit of financial institutions
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political risk
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risk of government or regulatory action harmful to interests of financial institutions.
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