Flashcards in Chapter 8 Deck (29):
Through Bastiat's essay on thrift and luxury,
Bastiat believes that thrift is greater than luxury, because saving will never run out, while spending luxurious amounts of money will.
The true suppliers of loans are
consumers and business that save.
What do savers pay for?
The price savers pay for delaying consumption is
the interest rate.
With direct finance
a borrower deals directly with the lender.
The date that a payment will be made is
The value paid at maturity is the
Bonds with no interest rates are called
zero coupon bonds.
Interest rates quoted on bonds are called
the coupon rate.
When middlemen are used for lending and borrowing, such as banks, this is called
Middlemen in indirect finance are paid because
they add value to the consumer.
FInancial intermediates such as banks,
spread the risk of non-payment, develop advantages in credit evaluation and collection, divide denominations of loans, and match time preferences.
The interest rate is
the savers reward for waiting to consume, and the borrower's cost of consuming or investing early.
Higher interest rates
encourage more saving, but discourages borrowing because a higher interest rate means they will have to pay back more.
As with any supply and demand,
borrowers would prefer lower rates and lenders would prefer higher rates.
What does usury law do?
It puts a price ceiling on interest rates, potentially causing a shortage if the ceiling was below the equilibrium point.
If the public decides to save more,
the supply of loanable funds increases, lowering interest rates and encouraging investment.
An increase in investment caused by an increase in money is only sustainable
by more money being created, creating a bubble.
When an increase in government spending is financed through borrowing,
this is indirect crowding out
When the government spends, private markets spend less because their ability to spend is taxed away--
this is called direct crowding out.
A leveraged buyout is when
a firm borrows to purchase another firm, then turning around to sell that firm.
When firms can not pay their obligations nor borrow money to pay, they can
A firm whose value is negative--owes more than it owns--
A solvent firm might be forced to declare bankruptcy when it cannot pay back its immediate obligations and become
A major contribution of bankruptcy to economic health is
to move resources to more productive users, creating value.
If a firm becomes bankrupt, it pays its debts according to
the absolute priority rule-- the oldest debts get paid first
Fannie Mae was created in the sixties to
buy safe home loans that banks had made
Freddie Mac was created to
compete with Fannie Mae.