Money and Banking

Indirect Finance

Involves financial intermediaries acting as intermediaries between those with surplus funds and those in need of funds.

Debt Market Types

Includes short-term (maturity < 1yr), long-term (maturity > 10 yrs), and intermediate-term (maturity in between).

Primary Market

Where new security issues are sold to initial buyers, typically involving an investment bank underwriting the offering.

Secondary Market

Involves the exchange of previously issued securities among investors, such as trading on stock exchanges like NYSE and Nasdaq.

Financial Intermediaries Functions

Include cost-saving through economies of scale, risk-sharing, and alleviation of information asymmetry problems.

Depository Institutions

Accept deposits and make loans, comprising commercial banks, thrifts, and credit unions.

Contractual Savings Institutions

Acquire funds on a contractual basis and include life insurance companies, pension funds, and government retirement funds.

Investment Intermediaries

Include finance companies, mutual funds, hedge funds, and investment banks.

Interest Rate

Represents the yield to maturity and differs from current yield, coupon rate, and real interest rate.

Demand Curve

Represents the relationship between the price of a bond and the quantity demanded.

Supply Curve

Represents the relationship between the price of a bond and the quantity supplied.

Market Equilibrium

Occurs when the quantity demanded equals the quantity supplied at a given price in the bond market.

Yield Curve

Plots interest rates at different maturities and typically has an upward slope.

Risk Premium

Reflects the additional interest required by investors to hold a risky bond due to factors like default risk, liquidity, and tax considerations.