Beruflich Dokumente
Kultur Dokumente
Chapter 1: Introduction
1. What are financial market surplus unit and deficit unit?
Surplus unit- participants who receive more money than they spend,
provide savings to financial markets
Deficit unit- participants who spend more money than they receive, access
funds from financial markets
2. What are the different types of financial markets?
Primary Markets- facilitate the issuance of new securities
Secondary markets- facilitates the trading of existing securities, which
allows for a change in the ownership of the securities
3. What are the major types of capital market securities?
Money market securities- debt securities that have a maturity of one year
or less
Capital market securities- commonly issued to finance the purchase of
capital assets, such as buildings, equipment, or machinery
Bonds- long-term debt securities issued by the Treasury, government
agencies, and corporations to finance their operations
Mortgages- long-term debt obligations created to finance the purchase of
real estate
Mortgage-Backed Securities- debt obligations representing claims on a
package of mortgages
Stocks- equity securities, represent partial ownership in the corporations
that issue them
Derivatives- financial contracts whose values are derived from the values
of underlying assets (such as debt securities or equity securities)
4. What are the main depository and non-depository institutions?
Depository
o Commercial banks
o Savings institutions
o Credit unions
Nondepository
o Finance companies
o Mutual funds- dominant Nondepository financial institution
o Securities firms
o Insurance companies
o Pension funds
Chapter 2: Determination of Interest Rate
1. Be able to explain loanable funds theory.
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The market interest rate is determined by the factors that affect the supply
and demand for loanable funds. The sum of the quantities demanded by
the separate sectors at any given interest rate is the aggregate demand for
loanable funds.
Who demand funds? Who supply funds? What are the characteristics related to
each demander and supplier?
Demanders
o Households- finance housing expenditures, automobiles,
household items (inverse relationship, high interest rate = low
demand)
o Businesses- invest in fixed assets and short term assets, evaluate
projects using NPV (inverse relationship)
o Government- planned expenditures are not covered by incoming
revenues (interest inelastic)
o Foreign- influenced by the interest rate differential between
countries (inverse relationship)
Suppliers
o Households (net suppliers of funds)
o Government units and businesses (net borrowers of funds)
o Direct relationship graphs, positive correlation
How economic growth affect interest rate?
Shifts the demand schedule outward (to the right)
Increase in equilibrium interest rate
How inflation affect interest rate?
Shifts the supply schedule inward (to the left), households increase
consumption now if inflation is expected to increase
Shifts the demand schedule outward (to the right), households and
businesses borrow more to purchase products before prices rise
What is Fisher Effect? Be able to calculate real, nominal rate using fisher
equation.
The relationship between interest rates and expected inflation
How interest rate changed after September 11?
Firms cut back on expansion plans, households cut back on borrowing
plans, the demand of loanable funds declined
Reduced demand for loanable funds, the Fed increased the money supply
growth, interest rates reached very low levels
How budge deficit affect interest rate?
A high deficit means a high demand for loanable funds by the
government shifts the demand schedule outward (to the right)
The government may be willing to pay whatever is necessary to borrow
funds, but the private sector may not
How foreign flow of funds affect interest rate?
The interest rate for a currency is determined by the demand for and
supply of that currency
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