econ 305

Question 1

financial market

Answer 1

a market in which funds are transferred from people who have excess funds to people who have shortages

Question 2

security

Answer 2

claim on the issuer’s future income or asset

Question 3

bond

Answer 3

debt security that promises to make periodic payments for a specified period of time

Question 4

interest rate

Answer 4

cost of borrowing

Question 5

stocks

Answer 5

represents a share of ownership in a corporation

Question 6

financial intermediaries

Answer 6

institutions that borrow funds from people who have saved and in turn make loan to people who need funds

Question 7

banks

Answer 7

financial institutions that accept deposits and make loans

Question 8

financial institutions

Answer 8

includes insurance companies, finance companies, pension funds, mutual funds, and investment banks

Question 9

financial innovation

Answer 9

the development of new financial products and services (crypto currency)

Question 10

money

Answer 10

anything that is generally accepted as payment for goods or services or in the repayment of debts

Question 11

aggregate price level

Answer 11

the average price of goods and services in an economy

Question 12

inflation

Answer 12

continuous increases in price levels

Question 13

monetary policy

Answer 13

the management of money and interest rates

Question 14

fiscal policy

Answer 14

involves decisions about government spending and taxation

Question 15

foreign exchange market

Answer 15

converts a country’s currency to another country’s currency

Question 16

foreign exchange rate

Answer 16

the price of one country’s currency in terms of another’s

Question 17

function of financial markets

Answer 17

channelling funds from households, firms that have saved surplus funds to those who are in need of funds

Question 18

maturity of debt instrument

Answer 18

number of years until the instrument’s expiration date

Question 19

primary market

Answer 19

financial market in which new issues of security, such as bond or stock are sold to initial buyers

Question 20

secondary market

Answer 20

a financial market in which securities that have been previously issued can be resolved

Question 21

brokers

Answer 21

agents of investors who match buyers with sellers of securities

Question 22

money market

Answer 22

financial market in which short-term debt instruments are traded

Question 23

capital market

Answer 23

financial market in which longer-term debt instruments and equity instruments are traded

Question 24

mortgages

Answer 24

loans to households or firms to purchase land, housing, which that land itself serves as collateral

Question 25

mortgage-backed securities

Answer 25

bond-like debt instruments backed by a bundle of individual mortgages

Question 26

foreign bonds

Answer 26

bonds that are sold in a foreign country and use that country's currency

Question 27

eurobonds

Answer 27

a bond denominated in a currency other than that of the country in which it is sold

Question 28

eurocurrency

Answer 28

a variant of Eurobonds and are foreign currencies deposited in banks outside the home country

Question 29

transaction costs

Answer 29

the time and money spent in carrying out financial transactions. Are a major problem for people who have excess funds to lend

Question 30

moral hazard

Answer 30

the problem created by asymmetric information after the transaction occurs

Question 31

economies of scope

Answer 31

says that they can lower the cost of information production for each service by applying one information to many different services

Question 32

conflict of interest

Answer 32

since banks can provide multiple services, it may incentivize individuals to conceal information or provide misleading information

Question 33

currency

Answer 33

consist of paper bills and coins. Currency is one form of money

Question 34

commodity money

Answer 34

things such as gold and silver and was used many years ago

Question 35

fiat money

Answer 35

paper currency decreed by governments as legal tender but not convertible into coins or precious metal

Question 36

cash flow

Answer 36

different debt instruments have different streams of cash payments

Question 37

present value (PV)

Answer 37

the amount you need to give up today to have F dollars in the future

Question 38

future value (FV)

Answer 38

what you must give up one year from now to have P dollars now

Question 39

yield to maturity

Answer 39

the interest rate that equates the present value of cash flow payments received from a debt instrument with its value today

Question 40

rate of return

Answer 40

the amount of each payment to the owner plus the change in the security value

Question 41

interest rate risk

Answer 41

the risk level associated with an asset's return that results from interest-rate changes

Question 42

four types of credit market instruments

Answer 42

simple loan, fixed payment loan, coupon bond, discount bond

Question 43

4 factors to consider when buying an asset

Answer 43

risk, liquidity, wealth, expected return