Lecture Notes: Financial Markets & Institutions, Monetary Policy, and Banking Operations (Chapters 1-5, 17)

Vocabulary flashcards covering core terms and concepts from the notes on financial markets, monetary policy, and banking operations.

Financial market

A marketplace where lenders and borrowers exchange financial assets such as stocks and bonds.

Financial institutions

Intermediaries that move money from savers/lenders to borrowers.

Debt securities

A loan instrument where the holder lends money and expects repayment (IOU).

Equity securities

Securities that represent ownership in a company (you have equity).

Loanable Funds Theory

Idea that interest rates are determined by the supply of and demand for money.

High Demand for Loans

When loan demand increases, interest rates tend to rise.

High Supply of Money to Lend

When money available to lend increases, interest rates tend to fall.

Credit (Default) Risk

The risk that a borrower will not repay; higher risk leads to higher interest rates.

Liquidity

Ease with which a security can be sold for cash; lower liquidity raises the required return.

Tax Status

Tax treatment of securities; e.g., municipal bonds are tax-free for certain investors.

After-Tax Yield formula

After-Tax Yield = Before-Tax Yield × (1 − Tax Rate).

Federal Reserve (The Fed)

U.S. central bank whose goals include price stability and maximum employment.

Quantitative Easing (QE)

Fed program of purchasing long-term securities to lower rates and stimulate the economy.

Consumer Financial Protection Bureau (CFPB)

Government agency that protects consumers from unfair financial practices.

Open Market Operations

Fed’s tool of buying/selling securities to influence money supply; buy to stimulate, sell to restrict.

Reserve Requirement

Minimum reserves banks must hold; lowering stimulates lending, raising restricts lending.

Primary Credit Lending Rate (Discount Rate)

Rate at which banks borrow directly from the Fed; lower to stimulate, higher to restrict.

Inflation

Sustained increase in prices; money buys less over time.

Leading indicators

Economic indicators that predict future activity (e.g., stock market trends).

Coincident indicators

Indicators that reflect current economic activity (e.g., GDP).

Lagging indicators

Indicators that show past performance (e.g., unemployment rate).

Stimulative policy

Policy aimed at boosting economic activity.

Restrictive policy

Policy aimed at slowing the economy and fighting inflation.

SBA

Small Business Administration; government agency that guarantees loans to help small businesses.

Bank Balance Sheet

Statement listing assets, liabilities, and capital of a bank.

Assets

Resources owned by the bank (e.g., loans and securities).

Liabilities

Obligations owed by the bank (e.g., deposits).

Capital

Bank’s net worth; difference between assets and liabilities.

Sources of Funds

Where banks obtain money (primarily customer deposits).

Uses of Funds

How banks deploy money (primarily loans and securities).

Prime rate

Best interest rate offered to a bank’s most creditworthy customers.

Loan participations

A single large loan shared by multiple banks.

Loan commitment

Bank promise to provide a borrower a specified amount of money when needed.

Collateral

Asset pledged to secure a loan (e.g., a house for a mortgage).

Federal funds

Overnight loans between banks to meet reserve requirements.

Term loans

Loans repaid in regular payments over a set period.

Working capital loans

Loans for day-to-day business needs like inventory or payroll.