Chapter 8

Question 1

Interest Rate

Answer 1

Savers (lenders) are paid for delaying consumption until future, by borrowers, who wish to consume or invest more in present and will later pay for privilege

Question 2

Direct Finance

Answer 2

Borrower deals directly with lender

Question 3

Maturity

Answer 3

Date that payment will be made to lender

Question 4

Face Value

Answer 4

Value paid at maturity

Question 5

Zero Coupon Bond

Answer 5

Someone buys bond, can redeem bond at later date

Question 6

Coupon Rate

Answer 6

Interest rate quoted on corporate bonds (interest payments twice per year until maturity)

Question 7

Indirect Finance

Answer 7

When individuals and businesses use middlemen, such as banks, for borrowing and lending

Question 8

Usury Law

Answer 8

Puts price ceiling on interest rates

Question 9

True suppliers of loanable funds are …

Answer 9

Consumers and businesses that save

Question 10

Higher interest rates, greater rewards encourage more savings,

Answer 10

larger amount of loanable funds supplied.

Question 11

Higher interest rates, higher cost of early consumption and investment discourages barrowing,

Answer 11

lower amount of loanable funds demanded

Question 12

Borrowers prefer lower rates,

Answer 12

lenders prefer higher rates

Question 13

loans to US gvt usually have lowest interest rate

Answer 13

about 2.25%

Question 14

Mortgage loans interest rates

Answer 14

4%

Question 15

Public saves more, supply of loanable funds increase,

Answer 15

decrease in interest rates, encourages investment

Question 16

Indirect Crowding Out

Answer 16

Increase in government spending is financed through borrowing, private spending decreases due to higher interest rates

Question 17

Direct Crowding Out

Answer 17

When government spends, private markets spend less because their ability to spend is taxed away

Question 18

Leveraged Buyout

Answer 18

Firm borrows in order to purchase another firm, then immediately sells in whole or in parts

Question 19

Insolvent

Answer 19

Firm whose value is negative; owes more than it owns

Question 20

Illiquid

Answer 20

Cannot pay its immediate obligations

Question 21

Absolute Priority Rule

Answer 21

Creditors are ranked with regard to how long ago company became indebted, every penny is paid to “senior” debt, then paid to next senior, and so on. Stockholders and owners are last on list.

Question 22

Community Reinvestment Act

Answer 22

Instructed banks to more loans to poor people

Question 23

Nonconforming Loans

Answer 23

Loans that banks made to risky borrowers who cold not meet old standards

Question 24

Dodd-Frank bill of 2010

Answer 24

• Created new government regulatory agencies
• Created new regulations
• Directed regulator to write additional regulations

Question 25

Systemic Risks

Answer 25

Risks to the entire financial system

Question 26

Normal unemployment rate

Answer 26

4-5.5%

Question 27

Economic Growth

Answer 27

Increased production of goods and services

Question 28

Paul Volcker caused

Answer 28

1980 recession.

Question 29

Credit institutions can make it easier for…

Answer 29

borrowers and lenders to find each other

Question 30

Lending depends on …

Answer 30

available resources

Question 31

to save is

Answer 31

to spend