Chapter 8- Credit Markets Flashcards
(39 cards)
interest rate
Savers (lenders) are paid for delaying
consumption until the future, by borrowers, who wish to consume or invest more in the present and will
later pay for that privilege
direct finance
a borrower deals directly with the lender: Businesses and
governments who “sell bonds” to consumers, businesses, and governments, also are engaging in direct
finance
maturity
Someone buys the bond, then can redeem the bond at a later date.
The date that the payment will be made to the lender is called maturity
face value
The value paid at maturity
zero coupon bond
no interest payments are made on the bond
coupon rate
interest rate quoted on a bond (Many corporate bonds also make interest payments twice per year until maturity)
indirect finance
When individuals and businesses use middlemen, such as banks, for borrowing and lending
financial intermediaries such as banks (advantages over direct lenders) :
- Spread the risk of nonpayment
- comparative advantage in credit evaluation and collection
- divide denominations of loans
- match time preferences
usury law
puts a price ceiling on interest rates: would cause a shortage in the market if the ceiling was
below the equilibrium interest rate
public saves more
supply of loanable funds increase, interest rates decrease
if people view future as being bright
demand for loanable funds increases, which raises interest rates and amount saved/borrowed
government borrowing =
increased demand for loanable funds
indirect crowding out
When an increase in government spending is financed through borrowing, private spending decreases due to rising interest rates
direct crowding out
when government spends, private markets spend less because their ability to spend is taxed away (Bastiat’s main thing)
leveraged buyout
a firm borrows in order to purchase another firm, then immediately sells the firm in whole or in parts
insolvent
a firm who owes more than it owns (includes assets)
illiquid
firm that can’t pay its immediate obligations (can be illiquid without being insolvent)
bankruptcy
When firms cannot pay their obligations and cannot borrow more to pay, they may declare bankruptcy
bankruptcy and economic health
contributes to economic health by moving resources to more productive uses, creating value: facilities would not disappear with a bankruptcy and neither would
all the jobs
absolute priority rule
rule courts are supposed to follow that says: creditors are ranked with regard
to how long ago the company became indebted to them, then every penny is paid to the “senior” debt,
before any less senior debt is paid. Then every penny is paid to the next senior debt class, and so on. The
stockholders—the owners—are last on the list (was not followed in General Motors example)
Community Reinvestment Act of 1977
made banks give loans to poor people (who couldn’t get home loans before because they couldn’t pay)
US Department of Housing and Urban Development in the early/mid 1990s
directed FMs to purchase loans that banks made to risky borrowers
nonconforming loans
loans that banks made to risky borrowers who could not meet the old standards for housing loans
Federal Reserve in the early 2000s (money supply and interest rates)
greatly increased the money supply, lowering interest rates, fueling even more home loans
