Federal Reserve System, Interest Rates, and Security Valuation

Flashcards covering the Federal Reserve System, monetary policy tools, interest rate fundamentals, loanable funds theory, and security valuation concepts.

The Federal Reserve was founded by Congress as the central bank of the United States under the Federal Reserve Act of __________.

$$1913$$

Members of the 7-member Board of Governors of the Federal Reserve System serve a nonrenewable term of __________ years.

$$14$$

The sum of currency in circulation and depository institution reserves is referred to as the Fed's __________.

monetary base or money base

The Federal Open Market Committee (FOMC) is required to meet at least __________ times each year in Washington, D.C.

four

When the FOMC determines policy targets, the policy directive is forwarded to the Trading Desk at the __________ to execute open market operations.

Federal Reserve Bank of New York

The three lending programs offered through the Fed's discount window are primary credit, secondary credit, and __________ credit.

seasonal

The rate of interest on interbank trading of excess reserves held at local Federal Reserve Banks is called the __________.

fed funds rate

The interest rate used to find the fair present value of a financial security based on its risks is an ex-ante measure called the __________.

required rate of return

An ex-post measure representing the actual interest rate earned on an investment in a financial security is the __________.

realized rate of return

The speed with which financial security prices adjust to unexpected news to maintain equality with fair present value is referred to as __________.

market efficiency

A bond trades at a premium (above par) when its coupon rate is __________ its yield to maturity.

greater than

The weighted-average time to maturity on an investment using the relative present values of cash flows as weights is defined as __________.

duration

All else equal, the higher the coupon rate on a bond, the __________ its duration.

shorter

The degree of curvature of the price-interest rate curve around a specific interest rate level is called __________.

convexity

The formula $i = RFR + E(IP)$ defining the relationship between the nominal interest rate, real risk-free rate, and expected inflation is known as the __________.

Fisher Effect

According to loanable funds data for 2019, the market participants that act as the largest net suppliers of funds are __________.

Households

The theory stating that investors will hold long-term maturities only if offered a premium to compensate for future uncertainty is the __________ Theory.

Liquidity Premium

The theory assuming investors and FIs have specific maturity preferences and do not view securities of different maturities as perfect substitutes is the __________ Theory.

Market Segmentation

As shown in the map of Federal Reserve Districts, Alaska and Hawaii are included as part of the __________ District.

San Francisco