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Terms Exam 1

Terms in this set (86)

Underwriting
an arrangement under which an investment banker agrees to purchase all shares of a public offering at an agreed-upon price
-buying securities in hopes of making a profit
residual claimant
a stockholder's right to receive whatever remains after all other claims against a firm's assets have been satisfied
investment banks
-facilitate sale of securities in the secondary market
money market
the trade in short-term loans between banks and other financial institutions. (one year or less)
Depository Institutions
Financial institutions that accept deposits from individuals and provide loans
-credit union
savings and loan association
a depository institution that has traditionally obtained most of its funds by accepting savings deposits, which have been used primarily to make mortgage loans.
-primary liabilities are deposits
-regulated by the office of thrift supervision
Contractual Savings Institutions
financial intermediaries that acquire funds at periodic intervals on a contractual basis
life insurance companies, fire and casualty insurance, pension funds, govt retirement funds
Adverse Selection
the situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction

A high-risk person benefits more from insurance, so is more likely to purchase it.
(suicide protection for life insurance companies)
-happens before the transaction
sales finance company
a lender that makes loans for the purchase of consumer goods, often working closely with the seller
-installment ks of auto dealers
consumer finance company
a firm that makes secured and unsecured personal loans to qualified individuals; also called a small loan company
-lisa couldn't get a bank loan so she went to a consumer finance company to get financing from an appliance)
Treasury Bonds
Bonds issued by the federal government, sometimes referred to as government bonds.
-maturity of 30 years
-longest maturity of securities issued by U.S. Treasury
Government National Mortgage Association (GNMA)
Commonly known as "Ginnie Mae," this agency of HUD operates in the secondary mortgage market. It is involved with special government financing programs.
-issues long term bonds
Federal Home Loan Mortgage Corporation (FHLMC)
"Freddie Mac" is a wholly owned subsidiary of the Federal Home Loan Bank System, which serves as a secondary mortgage market for savings and loan associations, who are members of the FHLBB; also referred to as The Mortgage Corporation.
-issues long term bonds
Federal National Mortgage Association (FNMA)
Commonly known as "Fannie Mae", this quasi-private corporation is the largest buyer of existing mortgages in the secondary mortgage market.
-issues long term bonds
equity markets
Financial markets where corporate stocks are traded.
primary market
new issues of a security are sold, often to investment banks that underwrite the securities
Credit Union
A nonprofit financial institution that is owned by its members and organized for their benefit.
-use for loan to purchase a new car
mutual funds
sell shares and use the proceeds to purchase porfolios of bonds and stocks and money market instruments
money market instruments. Provides diversification and professional management for investors.
money market
the trade in short-term loans (less than a year) between banks and other financial institutions.
Federal Deposit Insurance Corporation (FDIC)
the government agency that insures customer deposits if a bank fails if to $250,000
capital market
market in which money is lent for periods longer than a year
-state and local govt bonds
Office of the Comptroller of the Currency (OCC)
charters and regulates national banks. Examines the books of federally chartered commercial banks
thrift institutions
savings and loan associations, mutual savings banks and credit unions; depository institutions that historically lent money to households
economies of scope
savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology
financial markets
financial institutions through which savers can directly provide funds to borrowers
bond market
the collective buying and selling of bonds; most bond trading is done over the counter, rather than in organized exchanges.
-market where interest rates are determined
financial intermediation
primary route for moving funds from lenders to borrowers
direct finance
a flow of funds from savers to firms through financial markets, such as the New York Stock Exchange
-i borrow $300 from a friend
-corporation buys st security issued by another corporation
indirect finance
A flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers).
-corp takes out a loan from a bank
-people buy shares in a mutual fund
Securities
All of the investments, including stocks, bonds, mutual funds, options, and commodities, that are traded.
New York Stock Exchange (NYSE)
A New York City-based stock exchange, which is considered the largest equities-based exchange in the world based on total market capitalization
-secondary market
-physical trading floor
investment bank
a financial intermediary that specializes in helping firms raise financial capital by issuing securities in primary markets
commercial bank
A financial institution that accepts demand deposits and makes loans and provides other services for the public
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
diseconomies of scope
the simultaneous production of multiple products at a higher cost than if a firm made each product separately
Moral Hazard
When the act of insuring an event increases the likelihood that the event will happen
-problem created after transaction
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Depository Institutions
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Investment Intermediaries
finance companies, mutual funds, money market mutual funds
legal tender
Any kind of money that a creditor must by law accept in payment for debts
-seller cannot refuse payment made in that form
-neither necessary nor sufficient for a substance to be money
-change is not legal tender
commodity money
lacks a divisibility into small units
lacks durability and portability
lacks general acceptability
medium of exchange
Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.
durable
transportable
of standardized quality
fiat money
money that has value because the government has ordered that it is an acceptable means to pay debts
store of value
an item that people can use to transfer purchasing power from the present to the future
(example of poor standard of value is when prices double quickly)
standard of value
determines the economic worth in the exchange process
commodity money (full bodied)
objects that have value in themselves and that are also used as money
-stemmed from lack of portability
-least efficient (greatest transaction costs)
Gresham's Law
bad money drives out good money

implied the US monetary system would evolve into a de-facto silver standard
token coin
a coin that contains a quantity of metal worth less than its face value
bimetallic standard
1st monetary system of US
Currency of the United States, prior to 1873, which consisted of gold or silver coins as well as U.S. treasury notes that could be traded in for gold or silver
Gold Act 1974
demonetized gold from the monetary system
checkable deposits
any deposit in a commercial bank or thrift institution against which a check may be written

checkable deposits that pay interest on their balances include:
NOW accounts, share draft accounts, ATS accounts
M1
currency, demand deposits, traveler's checks, and other checkable deposits
M2
M1 (currency, demand deposits, traveler's checks, and other checkable deposits) plus savings accounts, certificates of deposit, and other liquid assets
money
medium of exchange
store of value,
unit of account
certified check
a personal check that the bank guarantees or certifies to be good
checks
cons:
costly to process, can be forged, take time to move through check-clearing system
franc
starting jan 1, 1999 this became official currency of countries joining the European monetary system
M1 and M2
tend to rise and fall together but can grow at very different rates
representative full bodied money
bank notes that exchange for a specific commodity, such as gold
personal check
A hand-written document used to pay for purchases using funds in a personal checking account
imprinted at bottom in magnetic ink:
bank's federal reserve district and institutional id
your checking account number
dollar amount of your check
Certificate of Deposit
a certificate issued by a bank to a person depositing money for a specified length of time.
if withdrawn before maturity date, interest penalty is imposed, that is, Interest rate paid on deposit is reduced
full-bodied
money who's values as a commodity equals its value as money
Gold Standard
A monetary system in which paper money and coins are equal to the value of a certain amount of gold

to ensure it was full-bodied, govt had to:
-define mint value (monetary value) of gold
-set price ceiling on commodity price of gold (=mint price of gold)
-set price floor on commodity price of gold (=mint price of gold)

when the commodity value (market value) of gold rose above the mint price of gold, govt had to permit melting of gold coins to reduce money supply

proponents of GS:
ron paul, steve forbes maintain this system would help
create public confidence regarding stability and quality of money
prevent inflationary expansion in MS
put the dollar on a fixed exchange rate with other national currencies
Silver standard
in 1993 went off the silver standard and prohibited the owning of silver coins, bars of silver bullion, and silver certificates
limited gold bullion standard
1934-1971
foreign central banks/licensed private users could cash in dollars for bars of gold bullion
Gold Act
1974
demonetized gold
NOW account
an interest-paying checking account; NOW stands for negotiable order of withdrawal
included in M1 MS
time deposit
The technical name for a savings account; the bank can require prior notice before the owner withdraws money from a time deposit.

m2
demand deposit account
a type of checking account that pays no interest on your balance
m1
Current Yield Formula
annual coupon/price
coupon rate formula
annual coupon /par value
bond fund risk
inflation risk
default risk
interest rate risk
inflation risk
The danger that money won't be worth as much in the future as it is today
default risk
the risk that the borrower will not pay the face value of a bond on the maturity date
interest rate risk
the risk of capital losses to which investors are exposed because of changing interest rates
Total Return
(capital gain or capital loss) + direct interest payment
real interest rate
nominal interest rate - inflation rate.
expected real interest rate
nominal interest rate - expected inflation rate
TIPS Treasury Inflation-Protected Securities
An inflation-indexed bond issued by the U.S. Treasury with maturities of 5, 10, and 20 years. They are standard coupon bonds with one difference: The outstanding principle is adjusted for inflation (changes in consumer price index)

Tips Interest Payment = Interest Rate X Principal Amount of Tips Security
fixed-payment loans
student loans, auto loans, mortgage loans
discount bonds
bonds selling below par value
-US savings bonds, Tbills
Average Daily Balance Method
A method of computing finance charges that uses a weighted average of the account balance throughout the current billing period.
-most common method of calculating finance charges
Credit Card Act of 2009
a comprehensive reform to credit card law to establish fair practices related to credit
-limited fees banks charge for going over credit card limits
-limited issuance of credit to someone under 21
-outlaws banks from providing gifts to entice debtors to sign with their credit cards
After tax real interest rate
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I-Bonds (also known as Series I savings bonds)
includes two components. The first component is a fixed rate which applies for the life of the bond. The second component is a variable rate that is adjusted semiannually according to the rate of inflation as measured by the CPI. Therefore, the I-Bond rate is a composite of a fixed rate and an inflation rate.

I-Bond Interest Rate = Fixed Rate + Variable Rate

With deflation, the variable rate component becomes negative (less than 0%) and it is subtracted from the positive fixed rate, thus diminishing investors' returns. With substantial deflation, all of the investors' returns could be eliminated, but they would never become negative.
marginal tax rate
the extra taxes paid on an additional dollar of income
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