Clemson FIN 3080 Exam I

Daniel Greene

Which firms are in the financial industry, and what makes them unique?

Banks, Insurance, Investment Banks, Mutual Funds, etc

Unique: B/S are different from non-financial firms; role in money creation/monetary policy; support non-financial firms

Commercial Banks

depository institutions whose major assets are loans and whose major liabilities are deposits

Insurance Companies

protect individuals and corporations (policyholders) from adverse events

Investment Banks/Securities Firms

help firms issue securities and engage in related activities like securities brokerage and trading

Investment Funds

pool financial resources of individuals and companies and invest resources in diversified portfolios of assets

Thrifts

depository institutions in form of savings associations/banks and credit unions (eg: State Credit Union)

Finance Companies

 financial intermediaries that make loans to individuals and businesses; do NOT accept deposits but rely on short/long term debt for funding

Pension Funds

savings plans that fund participants accumulate savings during work years before withdrawing during retirement

Fin Techs

use tech to deliver financial solutions in way that competes with traditional financial methods

What are the major themes for financial institutions?

(1) Balance Sheets

(2) Risks

(3) Consolidation

(4) Regulation

What are the differences between primary markets and secondary markets?

Primary markets are where funds flow from investors (suppliers of funds) to companies (users of funds).

Secondary markets are where funds flow from investors to other investors.

What are the differences between money markets and capital markets?

 Maturity is one year or less in money markets (KEY DIFFERENCE).

Money markets tend to be more homogeneous (all debt securities, all trade in decentralized OTC markets, risk is small). While capital markets have a wider range of securities, trading venues, and risk.

Who are the main suppliers and demanders of loanable funds?

Suppliers – households, foreign participants

Demanders – non-financial businesses

 What changes interest rates?

 Economic conditions, monetary expasion/contraction, restrictiveness of non-price conditions

Which factors determine the interest rate (discount rate/yield) of an individual security?

1. Inflation

2. Real risk free rate

3. default/credit risk

4. Liquidity risk

5. Term to maturity

6. Special provisions or covenants

7. Taxability, conversibility feature, callability

How are prices and interest rates (discount rates/yields) connected?

As bond prices rise, interest rates fall, and vice versa. 

Fundamental Rule in Finance: prices and rates move in opposite directions.

What changes the money supply?

Bank injects money into the financial system (makes a loan, buys securities)

What are the major functions of the Federal Reserve System?

1. Conduct monetary policy

2. Supervise and regulate depository institutions (prevent crisis in the economy)

3. Maintain stability of financial system (act as “lender of last resort”)

4. Provide payments and other financial services

5. Promote consumer protection and community development

What is on the Federal Reserve balance sheet and how has it changed over time?

 Liabilities: deposits and currency

Assets: treasuries, other securities, loans to banks

Grown over time, changes in percentages of assets corresponding to Fed actions

What are the tradeoffs for the FOMC in adjusting interest rates?

1. Risk inflation

2. Difficult environment for savers

Which tools are considered traditional monetary policy tools?

1. Open market operations

2. Discount rate

3. Reserve requirements

What are the new, non-traditional policy tools?

1. IOER: sets floor for Fed funds rate

2. Repurchase agreements: alternative to OMOs

How has the Fed dealt with crises? 

 Combo of traditional policy, non-traditional policy, and new programs (Lender of Last Resort)

Who are the past Fed Chairs, and what are each of them known for?

Paul Volcker

Alan Greenspan

Ben Bernanke

Janet Yellen

Jerome Powell

Paul Volcker

used high interest rates to fight inflation, targeted quantity of funds rather than rates

Alan Greenspan

long-serving chair, expanding economy, generally low rates; targeted interest rates

Ben Bernanke

 financial crisis, pushed rates to zero; expert in Great Depression (guided his actions during Great Depression)

Janet Yellen

big decision - “when to rise rates”; first female Fed chair

Jerome Powell

charting new path, post-Crisis; dealt with covid

Federal Reserve Banks

• 12 banks across the country

• supervise/regulate banks in their district, approve mergers

• distribute currency; serve as bank for US government

Board of Governors

• 7 members, based in DC

• serve on FOMC

• supervise/regualte bank holding companies

• authorize lender of last resort activities

FOMC

• 12 members (Governors + FRB Presidents)

• make major monetary policy decision