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FINC 381 > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

Who handles Fiscal Policy? Who handles Monetary Policy?

A

Fiscal Policy - government

Monetary Policy - Federal Reserve

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2
Q

What are the 3 ways the Federal Reserve changes monetary policy?

A

Ease
-increase money supply, decrease interest rates

Tighten
-decrease money supply, increase interest rates

Pause
-keep money supply and interest rates where they are

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3
Q

The Federal Reserve is the ___

A

Lender of Last Resort

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4
Q

What happens to the U.S. dollar when interest rates are lowered

A

Purchases power of U.S. decreases compared to foreign currency

-makes exports more attractive

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5
Q

Disinflation

A
  • slowing of inflation rate

- inflation is still positive

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6
Q

Hyperinflation

A
  • extreme change in inflation rate

- no agreement on rate

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7
Q

Deflation

A
  • decrease in CPI (consumer price index)
  • disrupts housing market
    • value of house decreases, you owe more on mortgage than house is worth
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8
Q

Does the Federal Reserve has absolute control to change the Interest rates or Discount Rates?

A

Discount Rates

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9
Q

Who votes whether or not to Pause, Tighten, or Ease?

A

FOMC

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10
Q

What are known as “signal rates”

A

Target Rates and Discount Rates set by Federal Reserve

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11
Q

Window Scrutiny

A
  • negative opinion
  • about banks going to Federal Reserve for funds when they have “high loan demand”
  • Results in many banks not going to Fed for money
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12
Q

Interest Rate is which banks borrow from other banks

A

Federal Funds Rate

-set by Fed

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13
Q

Open Market Operations

A

where you can buy/sell U.S. Government Securities

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14
Q

Treasury Securities yields/rates are the ___

A

Floor of the Elevator

-basis for determining other interest rates

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15
Q

How does buying a lot of Treasury Securities affect Interest Rates?

A

Decreases Interest rates

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16
Q

3 Goals of a Federal Reserve Bank

A
  • stable prices
  • max employment
  • keep moderate long-term interest rates
17
Q

What does Duration measure

A

Interest Rate risk

-accounts for Coupon Rate and Time to Maturity

18
Q

What are the 3 mandates(orders) of the Federal Reserve?

A
  • open market operations
  • reserve requirements
  • Discount Window Lending
19
Q

What is the FOMC’s % inflation goal?

A

2%

20
Q

Which of these have zero reinvestment rate risk?

Discount Bonds
Zero Coupon Bonds
Premium Bonds

A

Zero Coupon Bonds

21
Q

What are low and high interest rates affect on the U.S. Currency

A

Low interest rates

  • low # of foreign investors in U.S.
  • low demand for U.S. dollar
  • value of dollar decreases

High Interest Rates

  • high foreign investments
  • high demand for U.S. dollar
  • U.S. dollar value INCREASES
22
Q

Zero Coupon bonds always have a Duration equal to ___

A

the Time to Maturity

23
Q

High Coupon rates equal a ___ Duration

A

Shorter

24
Q

Low Coupon rates equal a ___ Duration

A

Longer

25
Q

The more frequent the pay period, the ___ the Duration

A

Shorter

26
Q

The less frequent the pay period, the ___ the Duration

A

Longer

27
Q

2 types of Interest Rate Risk

A

Price Risk

Re-Investment Rate Risk

28
Q

What type of Duration Gap do you want if Interest rates rise?

A

Negative Duration Gap

-liability sensitive

29
Q

What type of Duration Gap do you want if Interest rates decrease?

A

Positive Duration Gap

-asset sensitive

30
Q

What is a Private Placement?

A

unregistered securities sold to large investors

31
Q

TIPS - Treasury Inflation Protection Securities

A

protect investors against inflation

32
Q

Separate Trading of Registered Interest and Principal of Securities (STRIPS)

A

Strips trading securities into its component parts

33
Q

Yankee Bonds

A

Bonds issued by foreign entities in the United States

34
Q

Euro Bonds

A

Bonds denominated by different currency

35
Q

___ measure differences in yields between bonds

A

Credit Spreads

36
Q

Foreign bonds denomiated by Japan Currency

A

Yen Bond

37
Q

Financial Guarantees

A

guarantee principal and interest payments to Investor in event that of a Default

FINC 381 (3 decks)

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