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66 terms

Money and banking ch. 2

IOUs or debts
wealth, either financial or physical, that is employed to produce more wealth
maturity (of a debt instrument)
the number of years unitl that instuments expiration date
short term debt instrument
maturity is less than a year
long term debt instrument
maturity is ten years or longer
intermediate debt instrument
maturity is between one and ten years
claims to share in the net income and the assets of a business
periodic payments that equities make
residual claimant
must pay all its debt holders before it pays it equity holders
primary market
a financial market in which new issues of a security are sold to initial buyers by the corporation or government agency borrowing the funds
secondary market
a financial market in which securities that have been previously issued can be resold
investment bank
assists in the initial sale of securities in the primary market. guarantees a corporation's and than seels them to the public
guaranteeing a corporation's securities and then selling them to the public
agents of investorswho match buyers with sellers of securities
link buyers and sellers by buying and selling securities at stated prices
how fast a financial instrument can turn to cash
where buyers and sellers of securities meet in one central location to conduct trades
over-the-counter market
dealers at different locations who have an inventory of securities stand ready to buy and sell securities to anyone who comes to them and is willing to accept their prices
money market
a financial market in which only short term debt instruments are traded
capital market
the market in which longer term debt and equity instruments are traded
money market instruments
1. united states treasury bills
2. negotiable bank certificates of deposit
3.commercial paper
4.repurchase agreements
5.federal funds
United States Treasury Bills
ST debt instruments 1,3,6 month maturities
pay a set amount at maturity but have no interest payments, however, they sell initially at a discount so interest can be made.
Negotiable bank certificates of deposit
debt instrument sold by a bank to depositors that pays annual interest of a given amount and at maturity pays back the initial price
Commercial paper
st debt instrument issued by large banks and weel known corporations
Repurchase Agreements
st loans (usually with a maturity less than two weeks) for which treasury bills serve as collateral. a large corporation lends a bank a certain amount of money in return for treasury bills. if the bank can't pay back the loan than the corporation keeps the treasury bills.
federal funds
overnight loans between banks of thier deposits at the Federal Reserve.
federal funds rate
a closely watched barometer of the tightness of credit market conditions in the banking system and the stance of monetary policy
capital market instruments
debt and equity instruments with maturities of greater than one year.
equity claims on the net income and assets of a corporation
loans to household or firms to purchase housing, land, or other real structure.
corporate bonds
long term bonds issued by corporations with very strong credit ratings. interest payments to the holder twice a year and face value payoff at the end of maturity
US government Securities
issued to finance the deficits of the federal government
us government agency securities
long term bonds issued by government agencies such as ginnie mae
state and local government bonds/municipal
issued by state and local governments to finance expenditures on schools roads and other large programs
consumer and bank commercial loans
loans to consumers and businesses. mostly by banks but sometimes from finance companies
foreign bonds
sold in a foreign country and are denominated in that countries currency
a bond denominated in a currency other than that of the country in which it is sold
foreign currencies deposited in banks outside the home country
US dollars deposited in foreign banks outside the United States or in foreign branches of US banks
financial intermediation
the primary route for moving funds from lenders to borrowers
transaction costs
the time and money spent in carrying out financial transactions
economies of scale
the reduction in transaction costs per dollar of transactions as the size of transactions increases
liquidity services
services that make it easier for customers to conduct transactions
uncertainty about the returns investors will earn on assets
risk sharing/asset transformation
create and sell assets with risk characteristics that people are comfortable with. then FI's use these assets to purchase other assets that may have far more risk
adverse selection
(Before transaction)occurs when the potential borrowers who are most likely to produce an undesirable outcome are the ones who most actively seek out a loan and are thus most likely to be selected
moral hazard
(After transaction) risk that the borrower might engage in activities that are undesirable from the lender's point of view, because they make it less likely that the loan will be paid back.
thrift institutions
savings and loan associations, mutual savings banks, and credit unions
commercial banks
financial intermediary that raises funds primarily by issuing checkable deposits, savings deposits, and time deposits
savings and loan associations/mutual savings banks
obtain funds primarily through savings deposits and time and checkable deposits
credit unions
small cooperative lending instituions organized around a particular group. obtain funds from deposits called shares and primarily make consumer loans
contractual savings institutions
obtain funds on periodic intervals on a contractual basis. tend not to worry about liquidity of their assets
investment intermediaries
includes finance companies, mutual funds,and money market funds
finance companies
raise funds by issuing commercial paper, stocks, and bonds
mutual funds
these financial intermediaries acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds
money market mutual funds
all characteristics of mutual funds but offer deposit type accounts. can write checks against the value of shareholding
investment banks
helps a corporation issue securities by first advising the corporation on what type of securities to issue than helping to sell, or underwrite, the securities by purchasing them fromthe corporation at a predetermined price and then selling them into the market.
securities and exchange comission
organized exchanges and financial markets
requires disclosure of information, restricts insider trading
Commodities futures trading
Futures market exchanges
regulates procedures for trading in futures markets
office of the comptroller of the currency
Federally chartered commercial banks
charters and examines the books of federally chartered commercial banks and imposes restrictions on assets they can hold
National credit union administration
Federally chartered credit unions
charters and examines the books of federally chartered commercial banks and imposes restrictions on assets they can hold
State banking and insurance commissions
state chartered depository institutions
charter and examine the books of state chartered banks and insurance companies, impose restrictions on assets they can hold, and impose restrictions on branching
Federal Deposit Insurance Corporation
comercial banks, mutual savings banks, savings and loan associations
provides insurance of up to 100,000 for each depositor at a bank, examines the books of insured banks, and imposes restrictions on assets they can hold
Federal reserve system
all depository institutions
examines the books of commercial banks that are members of the system, sets reserve requirements for all banks
office of thrift supervision
savings and loan associations
Examines the books of savings and loan associations, imposes restrictions on assets they can hold
financial panic
widespread collapse of financial intermediaries