Studied by 3 peopleasset
any resource that is of value that can be converted into cash
demand deposits
common financial assets like checking and savings accounts, can be withdrawn as needed
equity
investors who buy stocks become partial owners of a company and share in its profits and losses
liquidity
the ease with which assets can be converted to cash
securities
investments traded on the secondary (stock) market
bond
a promise by a corporation or government to repay a specified sum at the end of a specific number of years, along with annual interest
derivative
a financial contract that derives its value from the value of another asset
risk
the danger of losing money
credit risk
danger associated with lending money
liquidity risk
securities or assets that cannot be sold/bought fast enough to cut losses
speculative risk
a chance of loss, no loss, or gain
foreign investment risk
risk of investing in foreign markets
rate of return
yield in percent
time value
how the value of money changes over time
loan
money lent by one party to another with the understanding that it will be repaid at a future date, along with interest
the Federal Reserve System (Fed)
the central bank of the United States
the U.S. Treasury
borrows money for the government by selling fixed-income investments for various term lengths
the Financial Industry
comprised of the banking securities and commodities insurance and real estate sectors
Annual Percentage Rate (APR)
the percentage return that is advertised for bank deposits, loans, and bonds
nominal interest rate
doesn't take inflation rate into account
real interest rate
adjusts the nominal interest rate for inflation
real interest rate =
nominal interest rate - inflation rate
money
anything that most people are willing to accept as payment for goods and services
medium of exchange
something that buyers give to sellers when they purchase goods and services
unit of account
provides a convenient standard for expressing the values of different items
store of value
people can save money for future use
currency
the money used in a particular country as a medium of exchange
monetary unit
the basic form of currency in a country and may be issued in various denominations of the basic unit
commodity money
money that gets its value from the substance it is made of
representative money
its value comes from the commodity is represents
gold standard
guaranteed that governments would redeem paper money for gold
the Barter System
goods and services are traded directly
fiat money
its value comes from the confidence people have in the government that issues it
money supply
the total amount of money in circulation
M0 (monetary base)
measure of all the currency in circulation kept by banks and other institutions in their accounts at the federal reserve
M1
measure of currency held by the public or in fully liquid demand deposits and savings accounts
M2
M1 + money market deposit accounts, CDs, + other bank reserves
depository institution
holds funds or securities for depositors
commercial banks
nations most important financial institution
credit union
a nonprofit financial institution that is owned by its members and organized for their benefit
deposits
money placed into a bank account
withdrawal
money taken out of a bank account
balance sheet
the financial statement that summarizes the assets, liabilities, and owners' equity at a specific point in time
reserve requirement
the percentage of deposits that banking institutions must hold in reserve
excess reserves
reserves greater than the required amounts
fractional reserve banking
banks must hold a portion of their depositors' money in reserve
money multiplier
the amount of money a bank generates with each dollar
money multiplier =
1/reserve ratio
transaction demand for money
people hold money for everyday transactions
asset demand for money
people hold money since it is less risky than other assets
there is an ____ relationship between the interest rate and money demanded
inverse
money demand shifters
Change in price level
Change in income
Change in technology
monetary policy
the setting of the money supply by policymakers in the central bank
money supply shifters
reserve requirement
discount rate
open market operations
Federal Funds Rate (FFR)
the interest rate that a bank must pay on an overnight loan from another bank
interest on reserves (IOR)
the interest rate that the Fed pays commercial banks to hold reserves
administered rates
interest rates set by the Fed rather than determined in a market
discount rate
when the central bank charges commercial banks interest for borrowing money
Note
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