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61 Cards in this Set
- Front
- Back
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What are three things that a financial system accomplishes?
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1) financial assets
2) financial institutions 3) the fed reserve |
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What are financial markets and what do they do?
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places or channel for buying an d selling stocks bonds and other securities
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Bonds?
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a financial security issued by a corporation or a government that represents a promise to repay a fixed amount of money
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Dividends?
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a payment that a corporation makes to its shareholders
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Coupons?
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the annual fixed dollar amount of interest paid by the issuer of the bond to the buyer
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Stocks?
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financial securities that represent partial ownership of a firm also called equities
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What is securitization?
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the process of converting loans and other financial assets that are not tradable into securities
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Liquidity?
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the ease with which an asset can be exchanged for money
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What assets are most liquid?
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stocks
money market instruments government bonds (because so many buyers that it is easier to sell or get rid of) |
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How do funds flow from lenders to businesses?
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indirectly through financial intermediaries such as banks or directly through financial markets such as NYSE
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Money?
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anything that is generally accepted in payment for goods and services or to pay off debts
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What four things does money do for us?
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1) medium of exchange
2) unit of account 3) store of value 4) standard of deferred payment |
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What distinguishes money?
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-acceptable
-standardized -durable -valuable -divisible |
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What did paper money eliminate?
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eliminated gold and silver coins
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Federal Reserve?
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the central bank of the united states
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What is the fed responsible for?
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responsible for the monetary policy which is the actions the fed takes to manage the money supply and interest rates to pursue microeconomic objectives
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How many districts are there in the fed?
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12 districts
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What is the main policymaking body of the fed?
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Federal Open Market Committee (FOMC)
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How many times does the Fed meet per year and what do they do?
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meet 8 times a year to decide on a target for the federal funds rate which is the interest rate that banks charge to each other on short term loans
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What are the differences between money and income?
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money is the component of wealth while income is equal to a persons earnings over a period of time. so person typically has considerably less money than income or welath
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Fiat money?
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money such as paper currency that has no value apart from its use as money
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M1?
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the sum of currency in circulation, checking account deposits, and holdings of travelers checks
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M2?
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M1 plus time deposits less than 100,000, saving account, money market deposit accounts, non institutional money market mutual fund shares
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M3?
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M2 plus large time deposits, institutional money market funds, short term repurchase agreements and other larger liquid assets
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What is purchase power of money?
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the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Inflation decreases the amount of goods and services you will be able to purchase
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Quantity Theory of Money?
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a theory about the connection between money and prices that assume that the velocity of money is constant
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What is Quantity Theory of Money (exchange) equation?
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MV=PY
m-money v-velocity p-price level y-real GDP |
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What is the inflation equation?
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% change in M - % change in Y
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Time Value of Money?
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the way that the value of a payment changes depending on when the payment is received
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Future Value Equation?
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principal x (1+i)
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Compounding Future Value Equation?
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Principal x (1+i)^n
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Discounting Future Value Equation?
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PV = FV / (1+i)^n
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Coupon Bond?
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a debt instrument that requires multiple payments of interest on a regular basis and a payment of the face value at maturity
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Who issues coupon bonds?
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-The US Treasury
-State and Local Governments -Large Corporations |
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What do issuer of coupon bonds do?
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They get money from investors to get more capital and then pay interest to those investors for the n amount of time and then at the end of maturity pay the face value of the bond back.
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Coupon Rate?
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is the value of the coupon expressed as a percentage of the par value of the bond
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Yield to Maturity?
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the interest rate that makes the present value of the payments from an asset equal to the assets price today
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What is the relationship between the bond price, yield to maturity and face value?
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if new bonds are issued at a higher interest rate holders of bonds that pay lower rates would have to adjust the price at which they are willing to sell their bonds. To calculate the new price we need to use the same yield to maturity of the newly issued bonds. Because the yield to maturity is higher the bonds market price will fall below its face value. As interest rates rise bond prices fall.
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Interest Rate Risk?
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the risk that the price of a financial asset will fluctuate in response to changes in market interest rates.
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Expected Rate of Return?
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the return expected on an asset during a future period
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Expected Rate of Return Equation?
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(Prob of event 1 occuring) x (Value of event 1) + (Prob of event 2 occuring) + (Value of event 2)
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Over the most recent history, how did financial assets perform in terms of risk and return?
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the black swan event happened which refers to rare events that have a large impact on society or the economy. Investors in stocks of small companies during these years experience the highest averge returns but also accepted the most risk. Investors in US treasury bills experience the lowest average returns but also the least risk.
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How do you calculate the price of a bond?
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P = C / (1+i) + C / (1+i)2 + C / (1+i)3 …. + C / (1+i)n
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What is the relationship between wealth, bond prices and interest rates?
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an increase in wealth will shift the demand curve for bonds to the right. As the demand curve for bonds shifts to the right equilibrium price of bonds rises and the equilibrium quantity of bonds increases
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Economic Expansion?
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an increase in the level of ecnomic activity and of the goods and services available in the market place. it is a period of economic growth as measured by a rise in real GDP
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Closed Economy?
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an economy in which households. firms and governments do not borrow or lend internationally
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Default Risk?
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the risk that the bond issuer will fail to make payments of interest or principal
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Risk Premium?
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the return in excess of the risk free rate of return that an investment is expected to yield
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The Term Structure of Interest Rates?
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a yield curve displaying the relationship between spot rates of zero coupon securities and their term to maturity.
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Ratings for bonds (moodys)?
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John Moody began the modern bond rating business by publishing Moody’s Analyses of Railroad Investments in 1909
In 2008 congress started an investigation on the rating agencies Conflict started in 1970s when rating agencies witched from selling ratings to investors to selling ratings to the firms whose bonds they rated The mortgage backed securities downgraded during the financial crisis causing the prie to fall and the yields to rise. Investors increased their demand for safer treasury bonds causing their prices to rise and yields to fall. |
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Segmented Market Theory?
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modern theory pertaining to interest rates stipulating that there is no necessary relationship between long and short term interest rates.
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Expectations Theory?
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a theory proposing that long term interest rates can act as a predictor of future short term interest rates
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Liquidity Premium Theory?
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a premium that investors will demand when any given security can not be easily converted into cash and converted at the fair market value. When liquidity premium is high then the asset is said to be liquid which will cause prices to fall and interest rates to rise.
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Efficient Markets Theory?
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an investmend theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.
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Required Rate of Return for a stock?
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investors use the RRR to decide where to put their money. they compare the return of an investment to all other available options taking the risk free rate of return, inflation and liquidity into consideration in their calculation.
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What is the largest stock exchange in terms of total value traded?
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NYSE
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How to determine an assets fundamental value?
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P(t)= [D(e,t) +1 / 1 + R(e)] + [D(e,t) +1 / 1 + R(e)]2….
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Excess Volatility?
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actual fluctuations in the prices of stom stocks have been much greater than the fluctuations in their fundamental values. This finding coud be used to earn above average returns by selling stocks when they are above their fundamental values and buying them when they are below their fundamental values.
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Mean Reversion?
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is the tendency for stocks that have recently been earning high returns to experience low returns in the future and for stocks that have recently been earning low returns to earn high returns in the future
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Noise Traders?
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the term used to describe an investor who makes decisions regarding buy and sell trades without the use of fundamental data. These investors generally have poor timing, follow trends, and over react to good and bad news.
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Herd Behavior?
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one of the most infamous financial events in recent memory would be the bursting tof the internet bubble. Basically everyone is forced to do something without them all wanting to do it. Its just the way that the market works.
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