Chapter II UTA MONEY AND BANKING ECON 3303

Federal funds rate

The IR (interest rate) at which depository institutions lend to eachother.

Mortgage backed securities

An asset backed by a mortgage or collection of mortgages.

Security

A tradable financial asset, used to raise capital, including equities and debt

Bond

A security where the issuer owes the holder a debt, with an interest.

Bond timelines

Short term- less than or equal to a year < intermediate 1-10 years <long term, any longer

Direct financing

Funds go directly from lenders to borrowers, often through a financial market

Indirect finance

When the money goes from lenders to a financial intermediary, then to borrower.

liabilities

IOUs or debts

Capital

Wealth, either financial or physical which is employed in producing more wealth

residual claimant

the corporation must pay all its debt holders before it pays its equity holders.

Primary Markets

A financial market in which new issues of securities are sold to initial buyers

Secondary markets

where previously issued securities are traded and sold

Investment banks

Firms which assist in the initial sale of securities onto the primary market, done by underwriting the security

Underwriting

Guaranteeing the price for a corporations securities and selling them to the public

Discount rate

The minimum rate of expected return based on risk

Prime rate

The interest rate for very low risk borrowers

Financial institutions

Companies, banks and insurance companies +more which borrow money from savers

Financial markets

The bond, stock and Forex market where money goes from lenders to borrowers

Equity

• A claim to some future income and the assets of a thing

• pay dividends

• long term securities since they have no maturity date

• residual claimants

• common stocks

Secondary markets

• Exchanges

  • literal old school exchange, people making deals irl

• OTC

  • Dealers at different locations who have securities sell and buy

Money markets

Only short term debt instruments are traded

Capital market

Longer term debts and equities are traded

Coupon rate

The rate of expected return from a fixed income investment or security.

Shadow banks

Provide bank like services

Brokers

match buyers and sellers of securities

Dealers

Hold an inventory of securities and link via making sales and purchases at set prices.

T-Bills

Issued electronically, shortest maturity lengths of 4, 8, 13, 26 and 52 weeks.

T-notes

earn and pay a flat interest every 6 months until maturity. Fixed principal notes, sold in 5k$ denominations. Come in maturities of 3, 5, 7 and 10 years.

Money markets

Short maturity dates, fairly stable and safe investments.

Capital markets

Long term maturities, higher risks.

Money market rates

• Prime rate

• Federal funds rate

• Tbill rate

• Libor rate

Libor rate

the british banker association average inter bank rates per dollar in london.

Commercial paper

short term debt instrument sold by megacorps and banks to make use of their idle millions. Bond like, but not backed by anything but the ability of the corp being able to pay back

US treasury bills

come in 1, 3 and 6 month maturities, no interest but make money via being sold at a “discount” of their whole amount, meaning you are able to have it redeemed at a higher amount than what you paid in time.

Negotiable bank CDs

a debt instrument sold by a bank to its depositors, paying annual interest and maturities. Sold in secondary markets.

Repurchase agreements (repos)

short terms, typically less than two weeks with T bills serving as collateral, allow for a bank to gain some quick liquidity.

T-Bonds

pays interest every 6 months, mature in 30 years.

TIPS- Treasury inflation protected securities

Issued with rates in real interest, actively adjust for inflation. Issued in 5, 10 and 20 year maturities and pay every 6 months.

adverse selection

The problem created by asymmetric information prior to a financial transaction: it occurs when one party to a transaction has information about a hidden characteristic and takes economic advantage of this information by making an agreement (transaction) with less informed parties.

asset transformation

The process of turning risky assets into safer assets, accomplished by creating and selling assets with risk characteristics that people are comfortable with and then using the funds acquired by selling these assets to purchase other assets that have far more risk.