Chapter 8

Question 1

Who are the true suppliers of loanable funds?

Answer 1

Consumers and businesses that save

Question 2

Interest Rate

Answer 2

Borrowers who wish to consume or invest more in the present and will pay for that privilege later.

Question 3

Direct Finance

Answer 3

A borrower deals directly with the lender

Question 4

Selling bonds is what type of finance?

Answer 4

Direct

Question 5

Maturity

Answer 5

The date that the bond payment will be made to the lender

Question 6

Face Value

Answer 6

Value paid at maturity. (Amount the person selling the bond will pay the buyer at a certain date)

Question 7

Zero Coupon Bond

Answer 7

Seller makes no interest payments

Question 8

In Jan 2014, what was the interest rate on US Government bonds with a maturity in 5 years?

Answer 8

1.5%

Question 9

Coupon Rate

Answer 9

Many corporate bonds also make interest payments twice per year until maturity, so the bond above would also have an interest rate quoted on it.

Question 10

Indirect Finance

Answer 10

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

Question 11

Financial intermediaries such as banks do what? (it’s gonna be purple for a while)

Answer 11

Spread the risk of non-payment, Develop comparative advantages in credit evaluation and collection, Divide denominations of loans, & Match time preferences.

Question 12

Spread the risk of non-payment?

Answer 12

Your chance of getting paid back is high.

Question 13

Develop comparative advantages in credit evaluation and collection?

Answer 13

Banks evaluate borrowers every day, have lawyers on retainer and have experience in getting borrowers to pay. (You can find a good deal, I think.)

Question 14

Divide denominations of loans

Answer 14

Banks take deposits from many savers, pool them, and can lend different amounts, depending on the borrower.

Question 15

Match time preferences

Answer 15

Yep, you can do that.

Question 16

With higher interest rates….

Answer 16

A larger quantity of loanable funds is supplied. However, the higher cost of early consumption and investment discourages borrowing, a lower quantity of loanable funds is demanded.

Question 17

Tests of large financial markets have found them to be highly efficient, reaching…

Answer 17

Equilibrium quickly in the absence of govt intrusion in the market

Question 18

Usury Law

Answer 18

Puts a price ceiling on interest rates, it would cause a shortage in the market if the ceiling was below the equilibrium interest rate.

Question 19

Loans to the US govt usually have the _____ interest rates.

Answer 19

Lowest; about 2.25%

Question 20

Mortgage loans have ___ interest rates.

Answer 20

Low; about 4%

Question 21

Credit card interest rates are?

Answer 21

High, since the loans are not secured by property and have high administrative costs due to high default rates and unpredictable increases and decreases in the loan amount.

Question 22

If the public decides to save money, the supply of loanable funds…

Answer 22

Increases, which lowers interest rates, encouraging investment.

Question 23

US govt is major borrowing that has a huge impact on?

Answer 23

Loanable funds market

Question 24

US govt borrows, increasing the demand for?

Answer 24

Loanable funds

Question 25

As govt demands more funds, it drives up the?

Answer 25

Interest rate

Question 26

Indirect Crowding Out

Answer 26

When an increase in govt spending is financed through borrowing, private spending decreases due to rising interest rates.

Question 27

Direct Crowding Out

Answer 27

Bastiat's central thesis; When govt spends, private markets spend less because their ability to spend is taxed away

Question 28

Leveraged Buyout

Answer 28

Extreme example of a financial transaction that creates value, where a firm borrows in order to purchase another firm, then immediately sells the firm in whole or in parts.

Question 29

Insolvent

Answer 29

A firms whose value is negative, it owes more than it owns.

Question 30

illiquid

Answer 30

Firm cannot pay its immediate obligations

Question 31

Absolute Priority Rule

Answer 31

The creditors are ranked with regard to how long ago the company became indebted to them, and then every penny is paid to the "senior" debt, before and less senior debit is paid.

Question 32

Community Reinvestment Act

Answer 32

In 1977, became law, instructed banks to make loans to poor people, who could not get home loans before because they could not pay

Question 33

Nonconforming Loans

Answer 33

FMs to purchase loans that banks made to risky borrowers who could not meet the old standard

Question 34

TARP

Answer 34

Troubled Assest Relief Program. Proposal that congress hand them $700B to buy all the bad mortgage backed bonds.

Question 35

What were some key points of the 2010 Dodd-Frank bill?

Answer 35

Created new govt regulatory agencies, created new regulations, & directed regulators to write additional regulations.

Question 36

Dodd-Frank does NOT

Answer 36

Restrict FM in any way

Question 37

Few things Dodd-Frank does?

Answer 37

Established the Financial Stability Oversight council, Instituted bailout insurance, & created the Consumer Financial Protection Bureau to regulate consumer credit

Question 38

Established the Financial Stability Oversight Council

Answer 38

Supposed to identify systemic risks, risk to the entire financial system.

Question 39

Instituted bailout insurance

Answer 39

Financial institutions pay into an insurance pool. If major financial failure occurs, the insurance pays the cost

Question 40

Created the Consumer Financial Protection Bureau to regulate consumer credit

Answer 40

Credit market for poor.

Question 41

What is the US Justice Department doing?

Answer 41

Forcing mortgage companies and banks to resume making loans to poor people

Question 42

Department of Housing and Urban Development approved Fannie and Freddie, offering?

Answer 42

Low down-payment loans to attract low income borrowers

Question 43

Fannie and Freddie have sued banks who sold them?

Answer 43

Bad loans that the Dept. of Housing insisted they buy

Question 44

Fed and US Treasury Dept. have done what?

Answer 44

Purchased over $200B of FM securities in order to supply them with cash

Question 45

Economic Growth

Answer 45

Healthy economy's increased production of goods and services, is at least around 3% per year.

Question 46

Recovery from 1980 recession saw growth of how much?

Answer 46

Around 8%

Question 47

Most recent quarter, growth was?

Answer 47

-2%

Question 48

Minimum growth rates during the 80s recovery are around the?

Answer 48

Max growth rates of the 08 recovery

Question 49

Previous financial crisis was caused by?

Answer 49

Bad govt housing policies and rapid money growth

Question 50

Dodd-Frank amplifies what?

Answer 50

The problems that caused the 08 crash.

Question 51

Fed has tried to cure the problems with credit markets by?

Answer 51

Rapid monetary growth, but this causes the potential for future disaster.