Flashcards in Chapter 8 Deck (51):
Who are the true suppliers of loanable funds?
Consumers and businesses that save
Borrowers who wish to consume or invest more in the present and will pay for that privilege later.
A borrower deals directly with the lender
Selling bonds is what type of finance?
The date that the bond payment will be made to the lender
Value paid at maturity. (Amount the person selling the bond will pay the buyer at a certain date)
Zero Coupon Bond
Seller makes no interest payments
In Jan 2014, what was the interest rate on US Government bonds with a maturity in 5 years?
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.
When individuals and businesses use middlemen, such as banks, for borrowing and lending
Financial intermediaries such as banks do what? (it's gonna be purple for a while)
Spread the risk of non-payment, Develop comparative advantages in credit evaluation and collection, Divide denominations of loans, & Match time preferences.
Spread the risk of non-payment?
Your chance of getting paid back is high.
Develop comparative advantages in credit evaluation and collection?
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.)
Divide denominations of loans
Banks take deposits from many savers, pool them, and can lend different amounts, depending on the borrower.
Match time preferences
Yep, you can do that.
With higher interest rates....
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.
Tests of large financial markets have found them to be highly efficient, reaching...
Equilibrium quickly in the absence of govt intrusion in the market
Puts a price ceiling on interest rates, it would cause a shortage in the market if the ceiling was below the equilibrium interest rate.
Loans to the US govt usually have the _____ interest rates.
Lowest; about 2.25%
Mortgage loans have ___ interest rates.
Low; about 4%
Credit card interest rates are?
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.
If the public decides to save money, the supply of loanable funds...
Increases, which lowers interest rates, encouraging investment.
US govt is major borrowing that has a huge impact on?
Loanable funds market
US govt borrows, increasing the demand for?
As govt demands more funds, it drives up the?
Indirect Crowding Out
When an increase in govt spending is financed through borrowing, private spending decreases due to rising interest rates.
Direct Crowding Out
Bastiat's central thesis; When govt spends, private markets spend less because their ability to spend is taxed away
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.
A firms whose value is negative, it owes more than it owns.
Firm cannot pay its immediate obligations
Absolute Priority Rule
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.
Community Reinvestment Act
In 1977, became law, instructed banks to make loans to poor people, who could not get home loans before because they could not pay
FMs to purchase loans that banks made to risky borrowers who could not meet the old standard
Troubled Assest Relief Program. Proposal that congress hand them $700B to buy all the bad mortgage backed bonds.
What were some key points of the 2010 Dodd-Frank bill?
Created new govt regulatory agencies, created new regulations, & directed regulators to write additional regulations.
Dodd-Frank does NOT
Restrict FM in any way
Few things Dodd-Frank does?
Established the Financial Stability Oversight council, Instituted bailout insurance, & created the Consumer Financial Protection Bureau to regulate consumer credit
Established the Financial Stability Oversight Council
Supposed to identify systemic risks, risk to the entire financial system.
Instituted bailout insurance
Financial institutions pay into an insurance pool. If major financial failure occurs, the insurance pays the cost
Created the Consumer Financial Protection Bureau to regulate consumer credit
Credit market for poor.
What is the US Justice Department doing?
Forcing mortgage companies and banks to resume making loans to poor people
Department of Housing and Urban Development approved Fannie and Freddie, offering?
Low down-payment loans to attract low income borrowers
Fannie and Freddie have sued banks who sold them?
Bad loans that the Dept. of Housing insisted they buy
Fed and US Treasury Dept. have done what?
Purchased over $200B of FM securities in order to supply them with cash
Healthy economy's increased production of goods and services, is at least around 3% per year.
Recovery from 1980 recession saw growth of how much?
Most recent quarter, growth was?
Minimum growth rates during the 80s recovery are around the?
Max growth rates of the 08 recovery
Previous financial crisis was caused by?
Bad govt housing policies and rapid money growth
Dodd-Frank amplifies what?
The problems that caused the 08 crash.