Chapter 12 - Investment and Financial Markets

Financial intermediaries

Financial intermediaries

________: Organizations that receive funds from savers and channel them to investors.

interest rate

As the ________ decreases, the opportunity cost of your funds also decreases, so the present value of a given payment in the future rises.

today

An investment is an action that creates a cost ________ but provides benefits in the future.

Invest

________ in a project if the cost you incur today is less than or equal to the present value of the future payments from the project.

Securitization

________: The practice of purchasing loans, repackaging them, and selling them to the financial markets.

Procyclical

________: Moving in the same direction as real GDP.

Present Value

________: The maximum amount a person is willing to pay today to receive a payment in the future.

Multiplier accelerator

________ model: A model in which a downturn in real GDP leads to a sharp fall in investment which triggers further reductions in GDP through the multiplier.

Leverage

________: Using borrowed funds to purchase assets.

Issuance companies

________ lend the premiums received to earn returns from investments so they can pay off the insurance claims of individuals.

Deposit insurance

________: Federal government insurance on banks and savings and loans.

source of liquidity

Funds deposited in a bank account, provide a(n) ________ for households because they can be withdrawn at any time.

earnings

Retained ________: Corporate earnings that are not paid out as dividends to their owners.

Accelerator theory

________: The theory of investment that says that current investment spending depends positively on the expected future growth of real GDP.

Liquid

________: Easily convertible into money on short notice.

Financial intermediation

________ does not always work.

interest rates

When ________ fall, the present value of a given payment in the future increases.

financial intermediaries

Increases in leverage increase the risk that ________ undertake because they are obligated to pay off the funds they have borrowed, regardless of the actual performance of the assets they have purchased.

Retained earnings

________________: Corporate earnings that are not paid out as dividends to their owners.

Q-theory of investment

________________: The theory of investment that links investment spending to stock prices.

Corporate bond

_____________: A bond sold by a corporation to the public in order to borrow money.