Financial System Powerpoint

What is the main goal of the European Central Bank (ECB)?

The ECB's primary goal is to maintain price stability, with an inflation target of close to but below 2%.

What are the three main tools of monetary policy?

Open Market Operations: Buying/selling government securities; Discount Rate: Interest rate for borrowing from the central bank; Reserve Requirements: Minimum reserves banks must hold.

What happens to short-term interest rates when the central bank buys government bonds?

Short-term interest rates decrease as the central bank increases the monetary base by injecting liquidity.

What is the loanable funds theory?

Interest rates are determined by the supply and demand for loanable funds in the market.

How does expected inflation affect interest rates?

Higher expected inflation leads to higher nominal interest rates as lenders demand compensation for reduced purchasing power.

What is the term structure of interest rates?

It describes the relationship between interest rates and bond maturities, often depicted using a yield curve.

What are the main characteristics of money market instruments?

Short-term maturities (less than 1 year), High liquidity, Low default risk.

Name three key money market instruments.

Treasury Bills (T-Bills), Commercial Paper, Certificates of Deposit (CDs).

Who are the main participants in the money markets?

Governments, central banks, commercial banks, corporations, and institutional investors.

What is the difference between government bonds and corporate bonds?

Government Bonds: Issued by national governments, generally lower risk; Corporate Bonds: Issued by companies, with higher yields and risk depending on credit ratings.

What is a zero-coupon bond?

A bond that does not pay periodic interest but is sold at a discount and pays the full face value at maturity.

What determines the price of a bond?

The price is the present value of future cash flows (coupons + principal) discounted by the required rate of return.

What is the difference between an IPO and a seasoned offering?

IPO: First-time issuance of shares by a company; Seasoned Offering: Additional shares issued by an already public company.

What is the Efficient Market Hypothesis (EMH)?

EMH suggests that stock prices fully reflect all available information: Weak Form: Reflects past price data; Semi-Strong Form: Reflects all public information; Strong Form: Reflects all public and private information.

Name two types of stock market indexes.

Price-Weighted Index: Dow Jones Industrial Average (DJIA); Value-Weighted Index: S&P 500.

What are the two main types of insurance companies?

Life Insurance Companies: Cover risks like death and longevity; Property-Casualty Insurance Companies: Cover property damage and liability risks.

What is a loss ratio, and how is it calculated?

Loss Ratio = Losses / Premiums. A loss ratio under 100% means premiums cover the insurer's losses.

What are deductibles in insurance, and why are they used?

Deductibles are the amount paid by the insured before insurance covers the rest. They reduce moral hazard by sharing risk.

What is the primary function of financial markets?

To facilitate the allocation of capital by connecting borrowers with lenders and investors.

What is the difference between primary and secondary markets?

Primary Market: Where new securities are issued; Secondary Market: Where existing securities are traded.

What is the main role of financial intermediaries?

To reduce transaction costs, provide liquidity, and manage risk by pooling resources (e.g., banks, insurance companies).