Money and Banking Focus Flashcards (the hard ones I keep messing up)

Financial markets are crucial to…

promoting greater economic efficiency

What two markets does Financial Markets include?

Bond and Stock markets

What do Financial markets have a direct effect on?
1.
2.
3.

1. Personal wealth

2. Consumer/business behavior

3. cyclical performance of the economy

A claim on the issuer’s future income or assets

Security (financial instrument)

A debt security that promises to make periodic payments for a specified time period

Bond

Debt markets (bond markets) are important to economic activity because:
1.
2.

1. They enable corps and govts to borrow money to finance their activities

2. It is where interest rates are determined

Why are interest rates important on a personal and general level?
1. Personal level:
2. General level:

Encourages you to save for that sweet interest pension

1. They impact consumer’s willingness to spend/save & business investment decisions

Which financial intermediary would you most likely use to get a loan to buy a car?

a. Commercial Bank
b. Credit union
c. Mutual fund
d. Investment bank

A and B are correct

Financial markets are beneficial because they
1.
2.
3.

1. produce an efficient allocation of money

2. produce an efficient allocation of capital

3. let consumers time their purchases better

Two important functions of secondary markets
1.
2.

1. Makes financial instruments more liquid

2. Directly impacts the price of the security in the primary market  

Short-term debt instruments sold by the government; low risk 

• Example: You give the government $9000 and 6 months later they give you $10000 back 

US Treasury Bills

Short-term loans of less than two weeks for which treasury bills serve as collateral 

Repurchase agreements

Why is Indirect Finance important in financial markets? (4)

• 1. They reduce transaction costs by utilizing economies of scale 

• 2. They reduce risk

• 3. They reduce Adverse selection and moral hazard 

• 4. They can achieve economies of scope 

Strategies the government uses to ensure the soundness of financial intermediaries (5)

• Restrictions on interest rates 

• Restrictions on assets and activities

• Restrictions on who can become an intermediary 

• Full disclosure of bookkeeping 

• Deposit insurance 

Why is the financial market regulated? (two reasons) 

• 1. To increase info available to investors 

• 2. To ensure it’s soundness

Regarding the Money Market and Capital Market, which one has a primary market focus and which has a secondary market focus?

Money market: Primary market focus
Capital market; Secondary market focus

Name the 4 only intermediaries that expand and contract the money supply

Banks, Savings & Loans associations, mutual savings banks, & credit unions

The U.S. Government finances its deficit spending through the use of securities known as treasuries. Each type of security has a unique name based on its maturity date.

Using the maturity dates shown, identify which the appropriate treasury instrument.

1. Short term (1, 3, or 6 months)
2. Intermediate term (2, 5, or 10 years)
3. Long term (10+ years)

1. Treasury bills

2. Treasury notes

3. Treasury bonds

Matching

1. These financial institutions are very small cooperative lending institutions organized around a particular group: union members, employees of a firm, and so forth. They acquire funds from deposits called shares and primarily make consumer loans.

2. These intermediaries raise funds by selling commercial paper (a short-term debt instrument) and by issuing stocks and bonds. They lend these funds to consumers and to small businesses.

3. These financial intermediaries raise funds primarily by issuing checkable deposits, savings deposits, and time deposits. They then use these funds to make commercial, consumer, and mortgage loans and to buy U.S. government securities and municipal bonds.

4. These depository institutions obtain funds primarily through savings deposits (often called shares) and time and checkable deposits. In the past, these institutions were constrained in their activities and mostly made mortgage loans for residential housing.

5. These financial intermediaries acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds.

Commercial Banks
Savings and Loan
Credit Unions
Mutual Funds
Finance Companies

1. Credit Union

2. Finance Companies

3. Commercial Banks

4. Savings and Loan

5. Mutual Funds