fin 310 things to know!!!!

surplus unit

participants who receive more money than they spend… can be invested

deficit units

participants who spend more money than they receive… need to borrow

securities

certificates that represent a claim on the issuer

primary market

issuance of new securities

secondary mkt

trading of existing securities

debt securities

present debt/credit/borrowed funds provided to initial issuer by purchaser

equity securities

aka stocks, represent ownership in a business

money market

sale of ST debt securities by deficit to surplus units; maturity 1 year or less

capital market

sale of LT securities by deficit to surplus units; mature in 1+ year

examples of money mkt

treasury bills, commercial papers, cds

types of capital mkt

stocks, bonds, mortgages

valuation of securities

each security has unique cash flow streams; some rely on economic or industry info, some rely on financial statements from firm, some rely on opinions from publishers about mgmt

efficient mkts

securities that are reasonably prices

behavioral finance

The application of psychology to make financial decisions.

asymmetric info

Information about a firm’s financial condition that is not available to investors.

foreign exchange mkt

The financial market that facilitates the exchange of different currencies

nondepository

generate funds from sources other than deposits but also play a major role in financial intermediation.

mutual funds

sells shares if surplus units and uses the funds received to buy portfolios and securities

money mkt mutual funds

Mutual funds that concentrate their investment in money market securities.

systemic risk

The spread of financial problems, among financial institutions and across financial markets, that could cause a collapse in the financial system.

loanable funds theory

suggests that market interest rates are determined by factors controlling supply and demand for loanable funds

finanical institutions

main source or funds and uses

commercial banks

deposits from households, businesses and gov agencies… loans to same things

savings institutions

deposits from households, businesses, and gov agencies… loans to same and mortgages

credit unions

deposits from cu members and loans to cu members

finance companies

securities sold to households and businesses, loans to same

interest inelastic

insensitive to interest rates (usually fed gov demands lf no matter what)

equilibrium

supply equal demand

factors that impact interest rates

economic growth or changes, inflationary expectation changes, foreign markets, monetary policy, budget deficit

economic growth/changes

when more favorable change, cash flows increase (outward shift)

changes in inflationary expectations

altering amounts of spending by households/businesses… impact saved and borrowed

fisher effect

nominal int rates on savings must be sufficient to compensate savers in two ways

real int rates

nominal int rate adjusted for inflation

monetary policy

fed can increase or decrease total amounts of deposits held at banks or other depository institutions… revising money supply, revises LF, affects int rates!

budget deficit

when fed enacts fiscal policy that results in more expenditures made than tax revenues, budget deficit (debt) increases (outward shift)

crowding out effect

increased government spending and borrowing reduce private sector investment and consumption

foreign market flows

currencies from one country have dif int rates than others

beige book

consolidated report of economic conditions in each of the Federal Reserve districts; used by the Federal Open Market Committee in formulating monetary policy.

fed reserve district banks: how many

12 members

fed reserve district banks

clear checks, replace old currency, providing loans to banks, conducting research

board of govs: how many and how long

7 members, 14 years (nonrenewable), president is 4 year term (renewable)

board of govs

regulates commerce and monetary policy, sets margin requirements and revises them

fed open mkt committee how many

7 members of BOG and 5 presidents from fed reserve district banks… one has to be from NY

fed open mkt committee

control monetary policy, stabilize economic growth and prices

advisory committees: how many

1 member from each fed reserve district bank and meets with BOGs

advisory committees

recommends policies for banking and economic issues

how fed controls money supply

meet 8 times a year and considers changes for money supply against growth or int rates

policy directive

determines if change in monetary policy is appropriate through 1. adjusting lvl of fed funds rate and adjusting 2 administered rates 2. FOMC instructs open mkt trading desk @ NY fed district bank

ample reserves framework

conducted by revising 2 administered rates (IORB + ON RRP)

Rate of int on reserve balaces

risk free rate banks earn if keep reserve accounts w/ fedds

Rate on overnight reserve repo facility

int value fed provides to other financial institutions and gov sponsored enterprises

M1

checking accounts. most narrow and volatile

M2

composed of M1 + savings accounts + small time deposits + MMDAs + etc

M3

composed of M2 + large time deposits

MMDAS

deposit acc that pays int and allows limited checking, does NOT specify maturity

reserve required ratio

not used currently… proportion of deposits that must be retained by a bank as required reserves

segmented mkts theory

ST + LT int rates are completely independent and determined by separate supply and demand conditions in each maturity mkt

after tax

Yat = Ybt (1-T)

pure expectations theory

term structured interest rates are solely determined by expectations of interest rates

yield to be offered on debt security

Yn = Rf,n + CP + TA + LP

Rn

current yield on n period LT bond

r1

current yield on 1 period st bond

e2, e3, e4……

expected future st int rates for each subsequent period

yield curve pure expectations

dictated by interest rate expectations

yield curve liquidiy

shorter maturities have greater liquidity and, therefore, should not have to offer as high a yield as do securities with longer terms to maturity.

yield curve segmented mkts

investors and borrowers have different needs that cause the demand and supply conditions to vary across different maturities.

3 theories

suggests that the term structure of interest rates depends on interest rate expectations, investor preferences for liquidity, and the unique needs of investors and borrowers in each maturity market