ECON 2035

Asset

Something of value that an individual or a firm owns. Example: Your car, your house, or the cash in your bank account are all assets you own.

Financial Asset

An asset that represents a claim on someone else for a payment. Example: A savings bond you hold is a financial asset because it's a claim on the government to pay you back with interest.

Security

A financial asset that can be bought and sold in a financial market. Example: A share of Apple stock is a security you can buy or sell on the NASDAQ.

Financial Market

A place or channel for buying or selling stocks, bonds, and other securities. Example: The New York Stock Exchange is a financial market where investors trade shares of companies.

Money

Anything that is generally accepted in payment for goods and services or in the settlement of debts. Example: You hand a cashier a $20 bill to pay for groceries, and they accept it without question.

Money supply

The total quantity of money in the economy. Example: The Federal Reserve tracks the money supply (M1, M2) to decide whether to raise or lower interest rates.

Stock

A financial security that represents partial ownership of a corporation; also called an equity. Example: Buying 10 shares of Tesla makes you a partial owner of the company.

Dividend

A payment that a corporation makes to stockholders typically on a quarterly basis. Example: Coca

Bond

A financial security issued by a corporation or a government that represents a promise to repay a fixed amount of money. Example: The U.S. Treasury sells bonds to investors, promising to repay the principal plus interest.

Interest Rate

The cost of borrowing funds (or the payment for lending funds), usually expressed as a percentage of the amount borrowed. Example: Your credit card charges an 18% interest rate on any balance you carry over each month.

Foreign Exchange

Units of foreign currency. Example: When traveling to Japan, you exchange U.S. dollars for Japanese yen at the airport.

Securitization

The process of converting loans and other financial assets that are not tradable into securities. Example: A bank bundles thousands of individual mortgages into a mortgage

Financial Liability

A financial claim owed by a person or a firm. Example: Your student loan balance is a financial liability you owe to the lender.

Financial intermediary

A financial firm, such as a bank, that borrows funds from savers and lends them to borrowers. Example: A bank takes your savings account deposit and lends that money out to someone buying a car.

Commercial bank

A financial firm that serves as a financial intermediary by taking in deposits and using them to make loans. Example: Chase Bank accepts your checking deposits and uses those funds to issue mortgages to homebuyers.

Portfolio

A collection of assets, such as stocks and bonds. Example: Your retirement account might hold a portfolio of index funds, individual stocks, and bonds.

Primary market

A financial market in which stocks, bonds, and other securities are sold for the first time. Example: When a company holds its IPO and sells shares to investors for the first time, that sale happens in the primary market.

Secondary market

A financial market in which investors buy and sell existing securities. Example: When you buy Apple stock through your brokerage app, you're buying it from another investor on the secondary market, not from Apple itself.

Federal Reserve

The central bank of the United States; usually referred to as "the Fed." Example: The Federal Reserve sets the federal funds rate to help control inflation and unemployment.

Monetary Policy

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives. Example: The Fed raising interest rates to fight inflation in 2022

Federal funds rate

The interest rate that banks charge each other on short

Diversification

Splitting wealth among many different assets to reduce risk. Example: Instead of putting all your savings into one company's stock, you spread it across stocks, bonds, and real estate.

Risk Sharing

A service the financial system provides that allows savers to spread and transfer risk. Example: Buying shares in a mutual fund lets you share investment risk with thousands of other investors instead of bearing it alone.

Liquidity

The ease with which an asset can be exchanged for money. Example: Cash in your wallet is highly liquid, but a house you own is not, since it can take months to sell.

Information

Facts about borrowers and expectations of returns on financial assets. Example: A bank checks your credit score and income (information) before deciding whether to approve your loan.

Financial Crisis

A situation in which serious problems in the financial system result in a significant disruption in the flow of funds from lenders to borrowers. Example: The 2008 financial crisis caused banks to stop lending, freezing credit markets worldwide.

Bubble

A situation in which the price of an asset rises well above the asset's fundamental value. Example: Housing prices in the mid

Barter

A system of exchange in which individuals trade goods and services directly for other goods and services. Example: A farmer trades a bushel of wheat directly for a pair of shoes from a cobbler, with no money involved.

Transactions costs

The cost of a trade or financial transaction; for example, the brokerage commission charged for buying or selling a financial asset. Example: You pay a $5 fee every time you buy or sell stock through your brokerage account.

Commodity money

A good used as money that has value independent of its use as money. Example: Gold coins were once used as money and could also be melted down and used to make jewelry.

Specialization

A system in which individuals produce the goods or service for which they have the best ability relative to others. Example: A skilled baker focuses only on making bread and buys everything else she needs, rather than growing her own wheat.

5 categories of financial assets

Money, stocks, bonds, foreign exchange, securitized loans. Example: A diversified investor's portfolio might include cash, Apple stock, U.S. Treasury bonds, euros, and mortgage

Dividends

Payments corporations typically make every quarter to stockholders. Example: If you own 100 shares of a company that pays a $1 dividend per share, you'd receive $100 every quarter.

Coupons

Bonds pay interest in fixed dollar amounts. Example: A $1,000 bond with a 5% coupon pays the bondholder $50 in interest each year.

Matures

Stable population growth and slowed economic growth. Example: An economy like Japan's, with a shrinking birth rate and slower GDP growth, is often described as a "mature" economy.

Short

term bond

Long

term bond

Households

Individuals and families. Example: A married couple with two kids living together and sharing income and expenses counts as one household in economic statistics.

Investment Banks

Concentrate on providing advice to firms issuing stocks and bonds or considering mergers with other firms. Example: Goldman Sachs advises a company on how to price its shares before its IPO.

Underwriting

Guarantee a price to a firm issuing stocks or bonds and then make a profit by selling the stocks or bonds at a higher price. Example: An investment bank agrees to buy a company's new bond issue at $98 per bond and resells it to investors at $100.

Insurance companies

Specialize in writing contracts to protect their policy holders from the risk of financial losses associated with particular events. Example: State Farm collects your monthly premium and agrees to pay for damages if your car is in an accident.

Pension Funds

Invest contributions from workers and firms in stocks, bonds, and mortgages to earn the money necessary to pay pension benefit payments during workers' retirements. Example: A teachers' pension fund invests contributions from every teacher's paycheck into stocks and bonds to fund their retirement payouts decades later.

Hedge Funds

Actively managed investment funds that pool capital from accredited investors to pursue high returns through diverse and often complex strategies. Example: A hedge fund might short

Financial Markets

Places or channels for buying and selling stocks, bonds, and other securities. Example: The bond market, stock market, and foreign exchange market are all examples of financial markets.

NASDAQ

Over

IPO

Initial public offering; a company selling its stock for the first time in the primary market. Example: When Airbnb went public in 2020, it sold shares to investors for the very first time in its IPO.

SEC

Securities and Exchange Commission; regulates financial markets. Example: The SEC investigates companies suspected of insider trading or accounting fraud.

FDIC

Federal Deposit Insurance Corporation, insures deposits in banks. Example: If your bank fails, the FDIC guarantees you'll get back up to $250,000 of your deposited money.

Office of Comptroller of the Currency

Regulates federally chartered banks. Example: The OCC examines a national bank's books to make sure it's following federal banking laws.

CFPB

Consumer Financial Protection Bureau; protects consumers from fraud and deceptive practices in financial markets. Example: The CFPB fines a lender for hiding fees in a mortgage contract.

FOMC

Federal Open Market Committee, main policy making body of the Fed, having 7 members of the Board of Governors, president of the Federal Reserve Bank of New York, and four presidents from the other 11 Federal Reserve District Banks. Example: The FOMC meets eight times a year to decide whether to raise, lower, or hold the federal funds rate.

Risk

The chance that the value of financial assets will change relative to what you expect. Example: Buying stock in a new startup carries more risk than buying a U.S. Treasury bond, because the startup could fail.

Bubble

Situation in which the price of an asset rises well above the asset's fundamental value. Example: Bitcoin's rapid price spike in 2021, followed by a sharp crash, is often cited as a possible bubble.

Transaction Cost

Costs of a trade or financial transaction; for example, the brokerage commission charged for buying or selling a financial asset. Example: Paying a $10 fee to your broker every time you buy or sell a stock.

Medium of Exchange

Something that is generally accepted as payment for goods and services; a function of money. Example: You use dollars to buy coffee because the barista will accept them, rather than trading her a chicken for it.

Unit of Account

A way of measuring value in an economy in terms of money; a function of money. Example: A car is priced at $25,000 and a sandwich at $8, letting you compare their relative value using the same unit, dollars.

Store of Value

Accumulation of wealth by holding dollars or other assets that can be used to buy goods and services in the future, in effect moving your purchasing power forward in time; a function of money. Example: You put $500 in a savings account today so you can spend it on a vacation next year.

Standard of Deferred Payments

Characteristic of money by which it facilitates exchange over time; a function of money. Example: You sign a loan agreement to repay $10,000 over five years, using money as the agreed standard for future payments.

Wealth

Sum of the value of a person's assets minus the value of the person's liabilities. Example: If you own a $300,000 house and have a $200,000 mortgage plus $10,000 in savings, your wealth is $110,000.

Fiat Money

Money, such as paper currency, that has no value apart from its use as money. Example: A U.S. dollar bill isn't backed by gold; it has value only because the government and public agree to accept it as money.

Legal Tender

Government designation that currency is accepted as payment of taxes and must be accepted by individuals and firms in payment of debts. Example: A store can't legally refuse U.S. dollar bills as payment for a debt already owed, because they're legal tender.

Payments System

Mechanism for conducting transactions in the economy. Example: Swiping your debit card at checkout relies on the banking payments system to move funds from your account to the store's.

Check

Promise to pay on demand money deposited with a bank or another financial institution. Example: You write a check to your landlord for rent, and they deposit it at their bank to receive the funds.

Automated Clearing House Transactions

ACH; electronic transfer of funds between bank accounts. Example: Your paycheck is deposited directly into your checking account via an ACH transfer every two weeks.

Real

time Payments System

E

money

Monetary Aggregate

Measure of the quantity of money that is broader than currency; M1 and M2 are monetary aggregates. Example: Economists watch M2 growth to judge how much money is circulating in the economy beyond just cash.

M1

Narrower definition of the money supply; the sum of currency in circulation and checking account and savings account deposits in banks. Example: The cash in your wallet plus the balance in your checking account both count toward M1.

M2

Broader definition of the money supply; all the assets included in M1, plus time deposits with a value of less than $100,000 and noninstitutional money market mutual fund shares. Example: A $5,000 certificate of deposit (CD) at your bank counts toward M2 but not M1.

Quantity Theory of Money

Connection between money and prices that assumes that the velocity of money is determined mainly by institutional factors and so is roughly constant in the short run. Example: If the money supply doubles and velocity and real GDP stay the same, the quantity theory predicts prices will roughly double too.

Hyperinflation

Extremely high rates of inflation, exceeding 50% per month. Example: In 2008, Zimbabwe experienced hyperinflation so severe that prices doubled roughly every day.

Opportunity Cost

Value of what you have to give up to engage in an activity. Example: If you spend Saturday studying instead of working a shift, your opportunity cost is the wages you gave up.

Default

Failure to meet legal obligations or conditions of a loan agreement. Example: A homeowner who stops making mortgage payments for months is in default on their loan.

Future Value

The value at some future date of an investment made today. Example: $1,000 invested today at 5% interest will have a future value of $1,050 in one year.

Principal

Amount invested or borrowed. Example: You take out a $20,000 car loan; that $20,000 is the principal, before any interest is added.

i

Interest rate. Example: If a savings account offers i = 3%, you'll earn 3% of your balance in interest over the year.

FV2

Future value in 1 year. Example: If you invest $100 today at 4% interest, your FV in one year (FV1) would be $104.

Compounding

Process of earning interest on the principal of an investment and on the interest earned, as savings accumulate over time. Example: Your $1,000 savings account earns interest each year, and next year you earn interest on both the original $1,000 and the interest already added.

Present Value

Value in today's dollars of funds to be paid or received in the future. Example: The present value of $1,050 received one year from now, at a 5% interest rate, is $1,000 today.

Time value of money

Way that the value of a payment changes depending on when the payment is received. Example: Getting $1,000 today is worth more than getting $1,000 in five years, because you could invest today's money and earn interest in the meantime.

Discounting

Process of determining the present value of funds that will be paid or received in the future. Example: A lottery winner discounts their $1 million prize paid over 20 years to figure out what it's worth if taken as a lump sum today.

Debt Instruments

Methods of financing debt, including simple loans, discount bonds, coupon bonds, and fixed payment loans (also known as credit market instruments or fixed

Equity

A claim to part ownership of a firm; stock issued by a corporation. Example: Owning 5% of a small startup's equity means you own 5% of the company itself, not just a loan to it.

Simple Loan

A debt instrument in which the borrower receives from the lender an amount called the principal and agrees to repay the lender the principal plus interest on a specific date when the loan matures. Example: You borrow $1,000 from a friend and agree to pay back $1,050 in one year.

Discount Bond

A debt instrument in which the borrower repays the amount of the loan in a single payment at maturity but receives less than the face value of the bond initially. Example: You buy a Treasury bill for $950 today and receive the full $1,000 face value when it matures in a year.

Coupon Bonds

A debt instrument that requires multiple payments of interest on a regular basis, such as semiannually or annually, and a payment of face value at maturity. Example: A 10

Fixed Payment Loan

A debt instrument that requires the borrower to make regular periodic payments of principal and interest to the lender. Example: A monthly mortgage payment of $1,500 that stays the same every month for 30 years, covering both interest and principal.

Amortized Loans

Loans with payments that include both interest and principal. Example: Each monthly car loan payment you make pays down part of the interest owed and part of the original loan balance.

Yield to Maturity

The interest rate that makes the present value of the payments received from a debt instrument equal to its value today. Example: If you buy a bond for $950 that pays back $1,000 in a year, the yield to maturity reflects the roughly 5.3% return you'll earn.