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FIN 3244 exam 1
| Borrowers Impacted by Financial Crisis | • During the financial crisis of 2007-2009 there was the largest amount of loan losses since the Great Depression. Banks tightened their loan guidelines, which made it hard for households and businesses to qualify for loans. • Cut off from a source of fu |
| Bank Lending Impact on Community | • Most households rely on borrowing money from banks for big-ticket items such as cars or homes. Firms rely on banks to meet short term and long term needs for credit |
| Financial intermediaries | a financial firm, such as a bank, that borrows funds from savers and lends them to borrowers. |
| Financial markets | places or channels for buying and selling stocks, bonds, and other securities. Stocks and bonds sold in a particular market are said to be “listed” on that market. |
| Primary markets | a financial market in which stocks, bonds, and other securities are sold for the first time. IPO (initial public offering) |
| Secondary Markets | a financial market in which investors buy and sell existing securities |
| The Federal Reserve | the central bank of the US. The Fed was created because if large amounts of people demand their money out of their bank account, the bank might not have the money to satisfy the demand, so the Fed could lend banks short term loans as a last resort |
| Monetary policy | the actions the Fed takes to manage the money supply and interest rates to pursue macroeconomic policy objectives, such as high levels of employment, low rates of inflation, high rates of growth, and stability in the financial system. |
| Future Value | the value at some future time of an investment made today |
| Present Value | the value today of funds that will be received in the future. Funds in the future are worth less than funds in the present, so funds in the future have to be discounted to find their present value. |
| Time Value of Money | the way that the value of payment changes depending on when the payment is received. |
| Transaction costs | - the cost of trade or exchange. The cost of making a direct financial transaction, such as buying a stock or bond, or making a loan. |
| Information costs | the costs that savers incur to determine the creditworthiness of borrowers and to monitor how they use the funds acquired. |
| Asymmetric Information | a situation in which one side of a economic transaction has more information than the other side. |
| Adverse selection | the problem investors experience in distinguishing low-risk borrowers from high risk borrowers before making an investment |
| Lemon's Problem | Akerlof was awarded a Nobel Prize in Economics for his research into the economics of information. He looked into the used car business. He calculated the expected value by multiplying the probability the car is good |
| Balance sheet | a statement that shows an individual’s or firm’s financial position on a particular day. A bank’s sources and uses of funds are summarized on its balance sheet |
| Checkable deposits | accounts against which depositors can write checks. Also called transaction deposits. They are liabilities because banks have the obligation to pay the funds to depositors on demand. |
| non-transaction deposits | for savers who are willing to sacrifice immediate access to their funds in exchange for higher interest payments. Savings accounts, money market deposit accounts, time deposits/certificates of deposit (CDs) |
| fixed interest rate | interest rate on a fixed rate asset or liability changed less often than once per year |
| Variable interest rate | interest rates on variable rates changes at lest once per year. |
| Types of bank accounts | Savings account/Checking account/Interest- bearing checking account/Money Market Deposit Account (MMDAs)/Certificates of deposit (CDs) |
| Required reserves | reserves the FED requires banks to hold against demand deposit and now account balances |
| excess reserves | any reserves bank hold above those necessary to meet reserve requirements |
| Moral Hazard | the problem investors experience in verifying that borrowers are using their funds as intended. |
| Net worth | the difference between the value of a firm’s assets and the value of its liabilities. When a firm’s net worth is high, the firm’s managers have more to lose by using borrowed money for high risk investments. |
| Relationship banking | the ability of banks to assess credit risks on the basis of private information about borrowers, because of doing business with them for a period of years. |
| Bank capital | The funds contributed by the shareholders through their purchases of the bank’s stock plus the banks accumulated, retained profits. |
| Federal funds market | short term loans from bank to bank. The interest rate on these interbank loans is called the federal funds rate |
| Reserves | a bank asset consisting of vault cash plus bank deposits with the Federal Reserve. The most liquid asset a bank has. |
| Vault cash | cash on hand in a banks, includes currency in ATMs and deposits with other banks |
| loans | largest category of bank assets. They are illiquid compared to marketable securities and entail greater risk and information costs, so the interest rates are higher |
| Dual Banking system | the system in the US in which banks are charted by either a state government or the federal government |
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