Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Money, Banking and Financial Markets > The Financial System > Flashcards

The Financial System Flashcards

1
Q

What is a bond?

A
  • Is a security issued by a corporation or government that promises to pay the buyer predetermined amounts of money at certain times in the future
  • also called debt securities.
  • called a fixed-income security
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what name have the Bonds with maturities of less than a year?

A
  • It is called commercial paper
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is a stock ?

A
  • It is an ownership share in a corporation - or equity
  • Corporation issue bonds: to raise funds for investment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Why is riskier to buy a stock?

A
  • The earnings from a company’s stock are a share of profits, and profits are unpredictable.

Consequently, buy- ing stocks is usually riskier than buying bonds - People buy stocks despite the risk because stocks often produce higher returns.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Difference between the control that give the bonds and the stocks?

A
  • stock is an ownership share, stockholders have ultimate control over a corporation
  • bondholders have no control over a corporation; a bond is simply a corporation’s promise of future payments to the bond’s buyer.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is savers ?

A
  • people that accumulate wealth by spending less than they earn
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

who are investor ?

A
  • people who expand the productive capacity of businesses by buying and/or hiring
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Common misperception in the word “invest” when buying stocks and bonds ?

A
  • purchasing securities is a form of saving.
  • investment is when someone hire and/or buy product to create sometime
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

First role of the finance sector ? and second ?

A
  1. To be an intermediary
  2. help people to share risks (with shareholders) - This strategy means giving up a chance for high profits, but it is less risky.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is diversification ?

A
  • the distribution of wealth among many assets, such as securities issued by different firms and governments
  • Divide the risk by buying assets in many corporations
  • Diversification lets savers earn healthy returns from securities while minimizing the risk of financial disaster.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is mutual funds ?

A
  • financial institutions that holds a diversified set of securities and sells shares to savers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is asymmetric information ?

A
  • situation in which one participant in an economic transaction has more information than the other participant
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

types of asymmetric information ?

A
  • adverse selection
  • moral hazard
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

what is adverse selection? (asymmetric information)

A
  • A situation where one menber of a transaction (buyer or seller) have more information and It may lead to an adverse desicion prior the transaction
  • the problem that the people or firms that are most eager to make a transaction are the least desirable to parties on the other side of the transaction
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What is moral hazard ? (asymmetric information)

A

the risk that one party to a transaction will act in a way that harms the other party (after transaction)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what is a bank ?

A
  • A bank is one kind of financial institution.
  • also called a financial intermediary
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

difference between adverse selection and moral hazard?

A
  • The main difference between the two:

Is that adverse selection occurs when there’s lack of symmetric information prior to a transaction/deal between borrower/buyer and lender/seller.

Whereas moral hazard occurs when there is asymmetric information between parties after the transaction has taken place.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

two main characteristic of banks ?

A

financial institution that:

  • accepts deposits
  • makes private loans
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

what is private loan ?

A
  • Loan negotiated between one borrower and one lender (not intermediaries)
20
Q

what is indirect finance ?

A
  • savers deposit money in banks that then lend to investors
21
Q

what is direct finance ?

A
  • savers provide funds to investors by buying securities in financial markets
22
Q

what is a covenant ?

A
  • provision in a loan contract that restricts the borrower’s behaviour
23
Q

how banks reduce adverse selection? (asymmetric information)

A

Reducing Adverse Selection:

  • by screening potential borrowers, therefore, allowing funds flow to the most productive investment.
  • by gathering information with higher changes of success than an individual non-expert inn the field.
24
Q

how banks reduce Moral Hazard ?(asymmetric information)

A
  • By using Covenants
25
Q

What is economic growth ? (finance)

A
  • increases in productivity and living standards; growth in real GDP
26
Q

what is Real gross domestic product (real GDP)?

A
  • the measure of an economy’s total output of goods and services
27
Q

Basic macro theories assume: (savings rate)

A
  • that saving flows automatically to investors with productive projects
  • In fact, the right investors get funds only if the economy has a strong financial system that functions well
  • An economy can save a lot and still remain poor if saving is not channeled to its best uses.
28
Q

What happens when a country have a inefficient financial system ?

A
  • When a financial system cannot work properly, investors have trouble financing their projects and economic growth slows.
29
Q

what come first growth or financial development ?

A

According to the author:

-“This suggests that financial development comes first and causes growth, rather than vice versa.” - base on World Bank’s research that addresses the question of causality.

30
Q

What is unit banking?

A
  • federal law allowed a bank to operate in only one state
  • Some states went further and restricted each bank to a single branch
  • A bank’s customers could make deposits or seek loans at only one location
31
Q

what the Proponents of unit banking believed?

A
  • that multiple branches would allow banks to become too large and powerful
  • Large banks might drive smaller banks out of business and exploit customers.
  • Unit banking was most com- mon in the Midwest, the home of the Populist political movement of the nineteenth century. Populists were angry at banks for seizing property from farmers who defaulted on loans.
32
Q

Why most economist most economists think unit banking was a mistake?

A
  • Economies of scale (it didn’t allow)
  • Risk diversification
  • Monopolists
33
Q

why most economist think that economies of scale is good? (unit banking counter-argument)

A
  • They can operate more efficiently than small banks because they can offer services at a lower cost per customer
  • Unit banking increased banks’ costs by keeping them small.
34
Q

why most economist think that Risk diversification was a problem in a unit banking system ?

A
  • a bank operated in only one town. If the town’s economy did poorly, many borrowers defaulted on loans.
  • The bank lost money and might be forced out of business.
  • Having branches in different towns reduce the risk of default
35
Q

why most economist think unit banking system allow monopolies ?

A
  • many small towns had only one bank
  • Customers had nowhere else to go if the bank charged high interest rates on their loans or provided poor service
  • In states that allowed multiple branches, banks from throughout the state could enter a town and increase competition.
36
Q

what is Microfinance ?

A
  • small loans that allow poor people to start businesses - or micro-lending
  • fill the gap in developing countries’ banking systems by providing small loans to poor people
  • The idea was pioneered by Muhammad Yunus, an economics professor in Bangladesh,
37
Q

Why there is contradictory opinion about Microfinance and Commercial banks?

A
  • Many supporters of microfinance welcome the involvement of commercial banks because it increases the availability of micro loans
  • Others allege hat for profit lenders charge excessive interest rates and deny loans to the poorest of the poor even Muhammad Yunus has criticized “Compartamos” (commercialize), saying it is “raking in money off poor people desperate for cash.”*
38
Q

what is Central planned economy or command economy?

A
  • system in which the government decides what goods and services are produced, who receives them, and what investment projects are undertaken
39
Q

What went wrong with the Soviet Union? (common factors pointed by economist historians)

A

an important factor was a misallocation of investment:

  • Planners did not allocate resources in a proper way
  • Overemphasized short-run increases in productivity.
  • Managers focused on meeting current quotas rather than increasing long-run productivity
  • The power of government bureaucrats reduced efficiency. Plant managers were rewarded for following orders, not for thinking of innovative ways to raise output and lobbying
40
Q

what is a financial crisis?

A
  • major disruption of the financial system, typically involving sharp drops in asset prices and failures of financial institutions
41
Q

What is Nominal GDP ?

A
  • the total value of all final goods and services produced in an economy in a given period
42
Q

What is Aggregate price level ?

A
  • an average of the prices of all goods and services
43
Q

What is Inflation rate ?

A
  • percentage change in the aggregate price level over a period of time
44
Q

Real GDP formula:

A

Real GDP = nominal GDP/ Aggregate price level

45
Q

Asymetric Information in financial markets: graph

A
46
Q

The flow of funds from savers to investors: graph

A

Money, Banking and Financial Markets (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions