Financial System Powerpoint

Flashcards - Central Banks and Monetary Policy

Flashcard 1

  • Front: What is the main goal of the European Central Bank (ECB)?

  • Back: The ECB's primary goal is to maintain price stability, with an inflation target of close to but below 2%.

Flashcard 2

  • Front: What are the three main tools of monetary policy?

  • Back:

    1. Open Market Operations: Buying/selling government securities.

    2. Discount Rate: Interest rate for borrowing from the central bank.

    3. Reserve Requirements: Minimum reserves banks must hold.

Flashcard 3

  • Front: What happens to short-term interest rates when the central bank buys government bonds?

  • Back: Short-term interest rates decrease as the central bank increases the monetary base by injecting liquidity.

Flashcards - Determinants of Interest Rates

Flashcard 4

  • Front: What is the loanable funds theory?

  • Back: Interest rates are determined by the supply and demand for loanable funds in the market.

Flashcard 5

  • Front: How does expected inflation affect interest rates?

  • Back: Higher expected inflation leads to higher nominal interest rates as lenders demand compensation for reduced purchasing power.

Flashcard 6

  • Front: What is the term structure of interest rates?

  • Back: It describes the relationship between interest rates and bond maturities, often depicted using a yield curve.

Flashcards - Money Markets

Flashcard 7

  • Front: What are the main characteristics of money market instruments?

  • Back:

    • Short-term maturities (less than 1 year).

    • High liquidity.

    • Low default risk.

Flashcard 8

  • Front: Name three key money market instruments.

  • Back:

    1. Treasury Bills (T-Bills)

    2. Commercial Paper

    3. Certificates of Deposit (CDs)

Flashcard 9

  • Front: Who are the main participants in the money markets?

  • Back: Governments, central banks, commercial banks, corporations, and institutional investors.

Flashcards - Bond Markets

Flashcard 10

  • Front: What is the difference between government bonds and corporate bonds?

  • Back:

    • Government Bonds: Issued by national governments, generally lower risk.

    • Corporate Bonds: Issued by companies, with higher yields and risk depending on credit ratings.

Flashcard 11

  • Front: What is a zero-coupon bond?

  • Back: A bond that does not pay periodic interest but is sold at a discount and pays the full face value at maturity.

Flashcard 12

  • Front: What determines the price of a bond?

  • Back: The price is the present value of future cash flows (coupons + principal) discounted by the required rate of return.

Flashcards - Stock Markets

Flashcard 13

  • Front: What is the difference between an IPO and a seasoned offering?

  • Back:

    • IPO: First-time issuance of shares by a company.

    • Seasoned Offering: Additional shares issued by an already public company.

Flashcard 14

  • Front: What is the Efficient Market Hypothesis (EMH)?

  • Back: EMH suggests that stock prices fully reflect all available information:

    • Weak Form: Reflects past price data.

    • Semi-Strong Form: Reflects all public information.

    • Strong Form: Reflects all public and private information.

Flashcard 15

  • Front: Name two types of stock market indexes.

  • Back:

    1. Price-Weighted Index: Dow Jones Industrial Average (DJIA).

    2. Value-Weighted Index: S&P 500.

Flashcards - Insurance

Flashcard 16

  • Front: What are the two main types of insurance companies?

  • Back:

    1. Life Insurance Companies: Cover risks like death and longevity.

    2. Property-Casualty Insurance Companies: Cover property damage and liability risks.

Flashcard 17

  • Front: What is a loss ratio, and how is it calculated?

  • Back: Loss Ratio = Losses / Premiums. A loss ratio under 100% means premiums cover the insurer's losses.

Flashcard 18

  • Front: What are deductibles in insurance, and why are they used?

  • Back: Deductibles are the amount paid by the insured before insurance covers the rest. They reduce moral hazardby sharing risk.

Flashcards - Financial System Overview

Flashcard 19

  • Front: What is the primary function of financial markets?

  • Back: To facilitate the allocation of capital by connecting borrowers with lenders and investors.

Flashcard 20

  • Front: What is the difference between primary and secondary markets?

  • Back:

    • Primary Market: Where new securities are issued.

    • Secondary Market: Where existing securities are traded.

Flashcard 21

  • Front: What is the main role of financial intermediaries?

  • Back: To reduce transaction costs, provide liquidity, and manage risk by pooling resources (e.g., banks, insurance companies).