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ECON 103: EXAM 2 Chapter 10 pgs 287-300
Terms in this set (47)
_____________ ____________ are where households can invest their current savings on their ______ by purchasing either _________ _________ or ________ _______.
Financial assets, wealth, financial assets, physical assets
A financial asset is a sellers __________
A well-functioning financial system reduces __________ _______, reduces __________ _______ by enabling diversification, and provides _______ assets.
transaction costs, financial risks, liquid
Investors prefer _______ assets to ___________ assets
The four main types of financial assets are ______, _______, _______ and ________ _______
loans, bonds, stocks, bank deposits
A recent innovation is _____ ________ _________, which are more liquid and more diversified than individual loans.
Bonds with a higher _______ ________ typically must pay a higher interest rate
The most important types of financial intermediaries are ______ ______,_____ ______, _______ ________ ________, and ______
mutual funds, pension funds, life insurance companies, and banks
A _______ accepts bank deposits, which obliges it to return depositors' cash on demand and lend those funds to borrowers for long lengths of time
Financial market fluctuations can be a source of
short-run macroeconomic instability
Asset prices are driven by
supply and demand as well as by the desirability of completing assets like bonds.
________ and _________
also reflect expectations about future asset prices.
One view of expectations is the ________ ________ ________, which leads to the new that stock prices follow a _______ _______
efficient markets hypothesis, random walk
Most important factor affecting nominal interest rates over time:
changing expectations about future inflation
r nominal -inflation
The true cost of borrow is the
real interest rate
the expected real interest rate is unaffected by changes in expected inflation
an increase in the expected inflation rate drives up the
nominal interest rate on a one-to-one basis
the purchase of any financial or physical asset
something used to generate future income
a paper claim that entitles the buyer to future income from the seller
a tangible object that can be used to generate future income
What problems might a saver/lender encounter if they make a loan?
-funds are tied up for an extended period
-risk: don't pay you back (default risk)
-structure the loan: e.g. collateral
What problems might a borrow encounter if they are looking to raise funds for an investment project?
-transaction costs of finding enough households to fund their project
What does the financial system do?
reducing transaction costs
reducing transaction costs
time and money spent negotiating the terms of a deal
verifying borrower's ability to pay (creditworthiness)
drafting and executing legal documents
any expense involved in putting together and executing a deal
most people are risk averse, although to differing degrees
financial markets allow savers to diversify- interest in several assets with unrelated or independent risks
uncertainty about future outcomes that involve financial losses and gains
Spreading out investments to reduce risk
liquid assets allow the saver to meet unforeseen expenditures (ex.a medical emergency)
a measure of how quickly you can get your cash without loss of value
How does the financial system reduce transaction costs reduce risk and provide liquidity?
issued by government and corporations. Pay fixed amount every period (coupon), repay principal (face value) when the bond matures
ownership in a company
an institution that transforms the funds it gathers from many individuals into financial assets
Examples of financial intermediaries
commercial banks, mutual funds, pension funds, life insurance companies
-provide liquidity services
-reduce transaction costs and risks for lenders and borrowers
-raise funds by issuing checkable deposits, savings deposits, and time deposits-certificates of deposit
-their funds are not directly tied up in a loan, so they can pay their bills easily
-can better manage the risk of unexpected expenditures
commercial banks use funds to
make commercial, consumer and mortgage loans and to buy U.S. government securities and municipal bonds
It's hard for people without large amounts of money to build a diversified portfolio. The solution is
a financial intermediary that creates a stock portfolio and then resells shares of this portfolio to individual investors
a type of mutual fund that holds assets in order to provide retirement income to its members
life insurance company
sells policies that guarantee a payment to a policyholder's beneficiaries when the policyholder dies
What does an investment bank do?
-helps firms issue securities
-advises firms on which types of securities to issue
-underwrites the securities by purchasing them at a predetermined price and reselling them in the market
how does investment bank earn fees
by helping corporations acquire other companies (mergers and acquisitions)
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