Exam 1 Flashcards
Representative/Fiduciary Money
- backed by “tangible goods”
- Receipt from gold’s smith is “as good as gold”
- prevents theft
Fiat Money is Latin for
Let it Be
Fiat Money
- NOT backed by tangible goods
- official (government recognizes it)
What are 3 “MUSTs” when you have Fiat Money
Government has to control money supply
Eliminate/Police Counterfeiting
-secret services job
Faith and Credit
- country has to act together
- other countries accept their currecy
What are the 3 Branches of Finance?
Corporate Finance
Investments
Markets/Institutions
What are the 5 obstacles to Direct Finance?
Maturity
- lenders want short maturity
- borrowers want long maturity
Denomination
- borrowers want money from all 1 source
- lenders don’t want to supply all their money to 1 person (riskier)
Risk Assessment
- lenders take financial risk
- borrowers take operational risk
Information Asymmetry
-“before the fact”
adverse selection
-when sellers have information buyers do not
Moral Hazard
- “after the fact”
- 1 party could take inappropriate advantages over the other because they can
What is Direct Finance?
When lenders (surplus units) and borrowers (deficit units) deal directly with one another
What are the 3 elements of a Financial System?
Instruments
- securities, bonds, stocks, etc.
- financial assets used to fund “real assets”
Markets
Institutions
-intermediary between lenders and borrowers
What is Best Efforts Underwriting?
When investment banks only pass capital off to clients as they successfully sell them off
*less profitable than normal
What is the Underwriting Spread
Difference between what an Investment bank buys securities from the Government and sells them for to Investors
-profit of the Investment Bank
What is the difference between Securities Brokers and Securities Dealers?
Securities Brokers
- are Not owners
- are “matchmakers”
- competes for customers through transaction costs
Securities Dealers
-are owners
What is a “Run”
When people show up all at once to withdraw money from the bank
*happened during Great Depression
What does FDIC stand for? When was it established?
Federal Depositor Insurance Corporation
Established during the Great Depression
What does the FDIC do?
- identifies failing depository institutions and mergers their depositors with other depository institutions in good health
- is a deposit insurance fund for banks undergoing a “Run”
- fiscally self-sufficient
How does an Insurance Company make money
Takes money(premiums) from people who buy their insurance policies and buys investments in Businesses and Governments