money and banking test 1

contract to pay a certain amount of money to the owner at certain time

contract that makes the owner of a security a part owner of the comapny that issued the security

households, business firms, foreigners, governments, and financial intermediaries

domestic and foreign business firms and financial intermediaries

financial intermediaries, households, business firms, governments, foreigners

financial intermediaries, households, governments, foreigners

the time until borrowed funds are repaid

the original amount invested in a security

a payment (or series of payments) made by the borrower to the investor in a debt security in addititon to repayment of the principal

the periodic payment made on an equity security

because borrowers have different needs, as do investors, also investors differ in their desires, so bborrowers provide different securities for different investors. Borrowers design securities they issue to make them attractive to investors.

look @ table 2.1

• 1st employees
• 2nd debt owners
• 3rd equity owners

when savers buy securities directly from borrowers. example, selling bonds directly to investors in the bond market

when savers invest through financial intermediaries which buy securities from borrowers. Example a company goes to a financial intermediary to lend funds to investors.

commercial banks, savings institutions, credit unions, life insurance companies, mutual funds, pension funds, and finance companies.

uses- accepting deposits from households of all sizesand make loans to individuals families and small businesses

help savers diversify

pool funds

taking short term deposits and making them long term loans( this may be dangerous because in order to maintain a mortgage, you must always be looking for pp; to submit short term loans.

gathering information

reduce the cost of transacting

place or mechanism by which borrowers, savers, and financial intermediaries trade securities

the market in which a security is initially sold to an investor by a borrower

the market in which a security is sold from one investor to another.

sales in primary market generate funds for issuer of security

for an economy to grow a company must be able to buy capital goods by either using retained earnings, or new borrowing. New firms have no old profit so they must look for new funds. The ability to to borrow is essential for firms to grow, which is shy financial intermediation is vital for economic growth.

countries with efficient financial ssytems end to grow faster than countries whose financial systems do not work as well

many ppl pulled their investments out of asia because of government regulation, incosistent plans for monetary policy and exchange rates, weak banking systems, and poor debt management. Most importantly, lack accounting rules. ppl found out that many of the investments they thought were making money were actually not.

S&L's began failing in large numbers when inflation rose to double digit levels in the late 70's and early 80's, at the time, S&L's were making long term mortgage loans financed with short term deposit accounts. Inflation caused interest payments to rise sharply, but the mortgages were fixed at low rates so they lost lots of money

in the us u only need 10 percent down to buy a house, but in some other countries, u need 20 percent this means that ppl in other countries buy houses much later in life, that are much smaller and have less cost

2000 house prices went up sharply because of subprime lending, they then took a drastic fall in 07 this hurt because many of the sub prime mortgages were rolled into mbs, which were all over the world.

• expected return
• return
• current yield
• capital gain
• capital gains yield

to keep inflation in check

• level of prices
• rate of inflation

medium of exchange - def the function that money serves when ppl exchange money for goods and services

transaction costs- costs of trading such as time spent shopping and negotiating.

unit of account- the function that money serves when prices are denoted in terms of money

standard of deferred payment - the function that money serves when ppl buy something one day and pay for it later and the repayment is denoted in terms of money

society starts to slowly fall apart economy starts to fail

public acceptance

how much money ppl have

in past 2 decades ppl planning to make large transactions in the future do not keep the money in their checking accounts, they keep money in accounts that earn more interest.

coins, paper currency, amounts in checking accounts, and travelers checks money that can be spent quickly and easily

money that incorporates funds in other accounts that can be accessed quickly for spending but are not quite as liquid as the items in M1. includes M1 plus savings accounts, money market mutual funds and small time deposits,passbook savings, money market deposit, cds, treasury securities, and commercial paper

diagram of interest rates on short term bonds

interest rates on long term bonds are lower than interest rates short term bonds