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FIN 201 Chapter 2
| Question | Answer |
|---|---|
| Money | Anything that is generally accepted as payment for goods and services or for the retirement of debt |
| 3 requirements to be considered money | Anything may perform the role of money (shells, sticks), money has to be generally accepted, money acts as a store of value |
| Liquidity | The ease of converting an asset into cash without loss |
| Money Supply | The total amount of money in circulation |
| M1 | Coins and currency, demand deposits, savings accounts, and other checkable deposits |
| M2 | M1 plus retail money market funds and small certificates of deposit |
| What is M1 inside of? | M2 |
| Interest | The amount that one pays to use another's money for a period of time, it helps allocate scarce credit among competiting uses for the funds |
| Inrerest rates can be of which terms? | Short term (a year or less), intermediate (1 to 10 years), long term (over 10 years) |
| Term structure of interest rates | The relationship between yields and time to maturity for debt with a given level of risk |
| Yield Curve | Graph relating the yield on debt instruments with different terms to maturity |
| Positively sloped yield curves | Indicates that the longer the borrower has the use of the funds, the greater is the cost of funds |
| What are the ways in which financial markets transfer savings to productive uses? | Direct investment and indirect investment |
| Direct investment | When you start your own business and invest your savings, when new securities are issued in the primary market |
| Indirect investment | Financial markets also transfer existing securities in the secondary market |
| What happens when funds are indirectly transferred through financial intermediaries? | Funds are transfered from savers to borrowers through financial intermediaries |
| Financial intermediary examples | Commercial banks, life insurance companies. pension plans, thrift institutions (savings and loan associates, mutual savings banks, and credit unions), money market mutual funds |
| What is the difference between direct and indirect transfers of funds? | With direct transfers, borrowers aquire funds directly from lenders by selling them securities. With indirect transfers, funds are transferred from savers to borrowers through financial intermediaries, so there's a 3rd party |
| Monetary Control Act 1980 | Depository institutions regulated by the Federal Reserve, granted the right to borrow funds from the Federal Reserve |
| What was the net effect of reforms? | Reduced differentiation among intermediaries, increased competition among intermediares |
| What are the assets of commercial banks? | The primary assets are loans to firms and consumer loans |
| Most loans are... | short term |
| How fast are bank deposits turned over? | Rapidly, especially demand deposits |
| What are the liabilities of commercial banks? | Deposits: checking accounts, savings and time deposits |
| Checking accounts are... | Demand deposits |
| Savings and time deposits are... | Interest bearing accounts |
| What are certificate deposits (CDs)? | Time deposit, issues by a bank with a specified interest rate and maturity |
| What are Negotiable CDs? | Certificate of deposit issued in amounts of $100,000 or more |
| Who negociates the terms of CDs? | The bank and the saver |
| What happens with larger denomination CDs? | There is a secondary market for them |
| Who owns mutual savings banks? | Depositors |
| Who manages mutual savings banks? | Board of trustees |
| What is a requirement for mutual savings banks? | They must have sufficient liquidity to meet withdrawals |
| What do savings and loans (S&Ls) do? | Accept deposits and make a variety of loans, emphasis on mortgage loans |
| Who pays a higher rate of interest, commercial banks or savings and loans (S&Ls)? | Savings and loans (S&Ls) |
| What are required reserves? | Funds that banks hold against deposit liabilities |
| What can reserves be held as? | Cash in the vault, deposits with correspondent banks |
| What is a reserve requirement (percentage of deposits)? | A tool of monetary policy, determined by the Federal Reserve, things that you can liquidate easily |
| Excess Reserves | Reserves held by a bank in excess of those it must hold to meet its reserve requirements. They may be lent out to borrowers or ursed to purchase government securities |
| Secondary Reserves | Short-term securities, especially Treasury bills, held by banks to increase their liquidity |
| Deposit Insurance policy | All commercial banks that are members of the Federal Reserve System must purchase insurance from the FDIC, they insure deposits up to $250,000 |
| What does the FDIC do other than insure deposits? | Examine banks, along with other regulatory agencies |
| What has happened to bank failures? | They have not been eliminated despite the establishment of the FDIC and other regulatory agencies |
| Life Insurance companies consist of? | Ordinary and universal life insurance policies and endowments |
| What do ordinary and universal life insurance policies and endowments contain? | Insurance and savings plan |
| What do insurance premiums cover? | The cost of the insurance and the savings program |
| What do life insurance companies do with proceeds from policies? | They use them to acquire income-earning assets |
| What do pension plans do? | Accumulate assets for workers so that they have funds for retirement |
| What must a pension plan do to serve as a financial intermediary? | Pass the funds directly to a borrower, or invest them directlyt in a firm |
| Example of pension plan that serves as a financial intermediary? | CREF primary purchases existing corporate stock |
| What do many pension plans not do? | Invest or lend the money directly to borrowers |
| Example of pension plans not giving money directly to borrowers | TIAA stresses debt, especially mortgages |
| What is a money market mutual fund (MMMF)? | Investment company that invests solely in short-term money market instruments |
| Who do MMMFs directly compete with and why? | Banks, they offer the advantages of somewhat higher yields, and almost comparable safety |
| What is the difference between MMMFs and banks? | Shares are not federally insured like deposits in banks but short-term nature of their porfolios affords the saver safety of principal |
| Money Market Instrument examples | U.S. Treasury bill, commercial paper, repurchase agreement (repo), banker's acceptances, tax anticipation notes, |
| What do financial intermediaries compete with each other for? | Funds |
| Who offers services and financial products? | Insurance agents, stockbrokers, and bankers |
| What do S&Ls offer? | Savings and checking accounts, life insurance, and brokerage services |
| What does the competition for funds power? | The flow out of financial intermediaries, they make fewer loans and it increases the cost of credit |
| What happens when one intermediary transfers funds to another? | The supply of credit available to a particular sector of the economy can be affected |
| What is happening to specialization? | It's disappearing |
| Example of how technology is changing the way money is raised | Crowdfunding |
| Example of how technology is changing the way payments are made | PayPal |
| Example of how technology is changing the definition of money | Bitcoin |
| Who gets the power to create money from the Constitution? | Congress/the Federal government |
| How has the yield curve been sloped during most historical periods? | positviely |
| What is the limit for a large certificate of deposit to be insured by the FDIC? | Up to $250,000 |
| What does M2 include? | Coins and currency in circulation outside of banks as well as demand deposits, savings accounts, and small certificates of deposit |
| What is the primary asset of life insurance companies? | Corporate securities |
| What accurately describes Treasury bills? | They are short term securities issued by the federal government |
| What happens to amounts greater than $250,000 lost in cases of bankruptcy/investment loss through an FDIC insured bank? | You will be reimbursed up to $250,000 and any greater amount will be lost |
| What does an increase in interest rates tend to do? | Increase the earnings of money market mutual funds (MMMF) |
Created by:
lavenderdreamy
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