M&b I

Front 1

Asset

Back 1

Anything valuable owned by person or firm

Front 2

Financial asset

Back 2

asset represents claim someone else payment.

ex. Chequing account (claim on bank)

Front 3

Security

Back 3

financial asset can buy/sell (tradable) in financial market.

## financial asset either security or not (not tradeable- ex. cheqAcct)

Front 4

Financial market

Back 4

place or channel buy/sell stocks, bonds, & other securities.

Front 5

Money

Back 5

Anything generally accepted payment g+s or debts.

Front 6

Money supply

Back 6

total quantity money in economy.

Front 7

Stocks (also Equities)

Back 7

Financial securities represent partial ownership corporation

## issuing stock increases funds avail firm (financial capital) in exchange ⬆️#owners.

Front 8

Dividends

Back 8

payment corporation makes (profits) its shareholders.

## profits kept = Retained Earnings

## typ paid quarterly

Front 9

Bond

Back 9

financial security issued by corporation or a government represents promise repay fixed amount money (originally lended)

## issues coupons [fixed amount interest] in 'n' periods (month, year etc)

## pays principal when loan matures

Front 10

Interest rate

Back 10

cost borrowing / payment lending funds

## usually expressed %borrowed

Front 11

Short vs Long-term Bond

Back 11

(i) Short: matures <= 1yr

(ii) Long: matures > 1yr

Front 12

Foreign exchange

Back 12

refers units foreign currency

## banks most imp buyers/sellers (buy foreign assets, import/export g+s behalf investors)

Front 13

Financial intermediary

Back 13

financial firm borrows funds savers & lends borrowers.

ex. Bank, pension fund, insurance comp, mutual fund, hedge fund

Front 14

Financial system matches savers & borrowers (ii) channels

Back 14

(i)financial intermediaries: funds indirectly flow savers to borrowers

ex. Loan from bank =

indirect loan from depositors

(ii)financial markets:

funds directly flow savers to borrowers

ex. buy stock

Front 15

Investment bank

Back 15

banks d/accept deposits (ex. Goldman Sachs & Morgan Stanley), concentrate advice firms:

i. issue stocks & bonds

## can also underwrite (gurantee P firm issue stock/bond, sell @ profit)

ii. considering merger

## until very recent rarely lent directly households

## late 90s⬆️importance due:

i. Loan Securitization (esp. mortgage loans)

ii. Proprietary Trading (earn profits buy & sell securities)

Front 16

Insurance Company

Back 16

(besides main func protect policyholder risk financial loss) collect premiums from policyholders & invests funds.

## pension funds similar func

Front 17

Mutual Funds

Back 17

sells own stock & invests portfolio financial assets (stocks, bonds etc), charging management fee.

## can⬇️risks (diversity) & costs (scale) indiv investors picking stocks.

Front 18

hedge fund

Back 18

Similar mutual funds (sell own stock & invest finAssets), except typ <99 investors [wealthy indivs or insts (ex. pension funds)]

## usually riskier investments vs mutual funds

## charge much higher mngmt fees

Front 19

primary vs secondary markets

Back 19

(i) p.m: securities sold 1st time (IPO)

(ii) s.m: trade existing securities

Front 20

1978 v 2016 household portfolio spread

. The increase in the value of household pensions is a result of substantial increases in pensions that state and local governments have provided to their workers and an increase in the funds workers have deposited in IRAs and 401(k) plans offered by companies. The income workers deposit in IRAs and 401(k) accounts is not taxed until they withdraw the funds after they retire, which makes these accounts a very attractive way for most people to save.

Back 20

E

Front 21

Federal Reserve

Back 21

US Central Bank, acts lender last resort banks & influencer ms

## FDIC insures bank deposits <$250,000 (per depositor, per bank)

Front 22

Monetary policy

Back 22

Fed actions manage ms & IRs

pursue macro objectives:

i. high employment

ii. low inflation rate

iii. high rate growth

iv. stability financial system

## 7 member BofGovs presAppoint&confirmSenate

### 1 Chair

## 12 district FedResSys

## FOMC = 7 BofG + Pres FedNY + 4/11 othPres

### meet 8x/year

### sets federal funds rate

Front 23

Federal funds rate

Back 23

IR banks charge each other shortterm loans.

Front 24

Liquidity

Back 24

ease asset exchange for money

## illiquid = delay &/ incur costs

## (generally) finAssets (stocks, bonds, money, bank accts) more liq v own physAssets (car, house, factory etc- advertising etc)

## finInts & loanSec ⬆️liquidity assets prev less (mortgages, bonds) as investors accept ⬇️IRs

(&⬇️cost borrowing)

Front 25

Financial crisis

Back 25

significant disruption flow funds lenders to borrowers.

Front 26

Bubble

Back 26

unsustainable ⬆️P class assets.

Front 27

in mortgages to make it easier for families to borrow money to buy houses. To reach this goal, in 1968 Congress began relying on government-sponsored enterprises (GSEs): the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Fannie Mae and Freddie Mac sell bonds to investors and use the funds to purchase mortgages from banks. By the 1990s, a large secondary market existedThe Financial Crisis of 2007–200917MyEconLab real-time data1,0001,2001,4001,60020040060080002003200520072009FIGure 1.3 The Housing Bubble(a) New home salesPanel (a) shows that the housing bubble resulted in rapidincreases in sales of new houses until 2005, followed by a sharpdecrease in sales beginning in July 2005. A slow revival in housesales started in 2011.201120132015100120140160180200220200320052007(b) Index of home prices2009201120132015Panel (b) shows that home prices followed a similar pattern tohome sales, although after 2011, home prices increased morerapidly than did home sales.Source: Federal Reserve Bank of St. Louis.in mortgages, with funds flowing from investors through Fannie Mae and Freddie Macto banks and, ultimately, to people borrowing money to buy houses.By the 2000s, important changes had taken place in the mortgage market. First, in-vestment banks became significant participants in the secondary market for mortgages.Investment banks began buying mortgages, bundling large numbers of them togetheras mortgage-backed securities, and reselling them to investors. Mortgage-backed secu-rities proved very popular with investors because they often paid higher interest ratesthan other securities with comparable risk that the seller would default, or stop makingpayments on the security. Second, by the height of the housing bubble in 2005 and early2006, lenders had greatly loosened the standards for obtaining a mortgage loan. Tradi-tionally, only borrowers who had good credit histories and who were willing to make adown payment equal to at least 20% of the value of the house they were buying wouldbe able to receive a mortgage. By 2005, however, many mortgages were being issued tosubprime borrowers with flawed credit histories. In addition, Alt-A borrowers, who statedtheir incomes—but did not document them with income tax returns—and borrowerswho made very small down payments found it easier to take out loans. Lenders also cre-ated new types of adjustable-rate mortgages that allowed borrowers to pay a very low inter-est rate for the first few years of the mortgage and then pay a higher rate in later years.The chance that the borrowers using these nontraditional mortgages would stopmaking payments and default on their mortgages was higher than for borrowers usingNew home sales(thousands)Index of home prices(January 2000 = 100)18 CHAPTER 1 • Introducing Money and the Financial Systemtraditional mortgages. Why would borrowers take out mortgages on which they might have trouble making the payments, and why would lenders grant such mortgages? Both borrowers and lenders anticipated that housing prices would continue to rise, which would reduce the chance of borrowers defaulting on their mortgages and also make it easier for borrowers to convert to more traditional mortgages in the future.

Back 27

E

Front 28

Foreign exchange

Back 28

refers units foreign currency

## banks most imp buyers/sellers (buy foreign assets, import/export g+s behalf investors)

Front 29

Securitization

Back 29

process converting loans & other financial assets (not tradable)

into securities.

## federal gov & some financial firms created markets many types of loans (prev d/exist)

ex. MBS

Front 30

financial liability

Back 30

financial claim owed by person/firm.

ex. car loan ur liability to bank (owns financial asset)