Finance

Question 1

Annual Percentage Yield APY

Answer 1

The annual percentage yield (APY) is the real rate of return earned on an investment, taking into account the effect of compounding interest. Unlike simple interest, compounding interest is calculated periodically and the amount is immediately added to the balance.

Question 2

High yield savings account

Answer 2

The interest rates on high-yield savings accounts can be 20 to 25 times higher than what traditional savings accounts offer.

Question 3

Federal Reserve

Answer 3

The federal reserve is tasked with setting interest rates, supervising and regulating financial institutions, providing national payment services, and maintaining the stability of the nation’s financial system

Question 3

PCE

Answer 3

An estimated total of personal consumption expenditures (PCEs) is compiled by the U.S. government monthly as one way to measure and track changes in the prices of consumer goods over time. PCEs are household expenditures.

Question 4

Federal fund rate

Answer 4

The federal funds rate refers to the interest rate that banks charge other banks for lending to them excess cash from their reserve balances on an overnight basis. The Federal Funds Rate is extremely important because it can act as the benchmark to set other rates.

Question 5

Federal Open Market Committee FOMC

Answer 5

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System (the Fed), is charged under United States law with overseeing the nation’s open market operations (e.g., the Fed’s buying and selling of United States Treasury securities). This Federal Reserve committee makes key decisions about interest rates and the growth of the United States money supply.

Question 5

United States Treasury Securities

Answer 5

United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation.

Question 5

Prime rate

Answer 5

A prime rate or prime lending rate is an interest rate used by banks, usually the interest rate at which banks lend to customers with good credit.

Question 5

Fixed-Rate Mortgage

Answer 5

A fixed-rate mortgage is a home loan with a fixed interest rate for the entire term of the loan.

Question 5

Credit

Answer 5

the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future:

Question 6

Fractional-Reserve Banking

Answer 6

Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital for lending. In the advent of a Bank Run, which too many individuals withdraw money at once, the bank experiencing the liquidity shortfall may borrow short-term funds in the interbank lending market from banks with a surplus. In exceptional situations, the central bank may provide funds to cover the short-term shortfall as lender of last resort.

Question 7

Bank Run

Answer 7

A bank run occurs when a large number of customers of a bank or other financial institution withdraw their deposits simultaneously over concerns of the bank’s solvency.

Question 8

Required Reserves

Answer 8

A reserve requirement is a central bank regulation that sets the minimum amount that a commercial bank must hold in liquid assets.

Question 9

Interbank Lending Market

Answer 9

The interbank lending market is a market in which banks lend funds to one another for a specified term. Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential bank runs by customers. If a bank cannot meet these liquidity requirements, it will borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements, and will lend money in the interbank market, receiving interest on such loans.

Question 9

Board of Directors

Answer 9

A board of directors is essentially a panel of people who are elected to represent shareholders. The board is responsible for protecting shareholders’ interests, establishing policies for management, oversight of the corporation or organization, and making decisions about important issues a company or organization faces.

Question 10

Negative Income Tax

Answer 10

A system of taxation that reverses the direction within which tax is paid below a certain threshold; in other words, earners above that level pay money to the state while earners below it receive money.

Question 11

Open Market Operations

Answer 11

Open market operations (OMO) refers to the Federal Reserve (the Fed) practice of buying and selling U.S. Treasury securities, along with other securities, on the open market in order to regulate the supply of money that is on reserve in U.S. banks.

Question 12

Open Market Operations

Answer 12

Open market operations (OMO) refers to the Federal Reserve (the Fed) practice of buying and selling U.S. Treasury securities, along with other securities, on the open market in order to regulate the supply of money that is on reserve in U.S. banks.

Question 13

Selling short / Short-Selling

Answer 13

In finance, being short in an asset means investing in such a way that the investor will profit if the value of the asset falls. Short selling is the act of borrowing assets (often securities such as shares or bonds) and selling them. The investor will later purchase the same number of the same type of securities in order to return them to the lender. If the price has fallen in the meantime, the investor will have made a profit equal to the difference.

Question 14

Primary capital markets

Answer 14

In a primary market, new stock or bond issues are sold to investors

Question 15

Secondary capital markets

Answer 15

In the secondary market, existing securities are sold and bought among investors or traders, usually on an exchange, over-the-counter, or elsewhere.

Question 16

Follow-on offering

Answer 16

a type of public offering of stock that occurs subsequent to the company’s initial public offering (IPO).

Question 17

Leverage

Answer 17

is any technique involving borrowing funds to buy things, hoping that future profits will be many times more than the cost of borrowing.

Question 18

Compound Interest

Answer 18

Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on principal plus interest.

Question 19

Simple Interest

Answer 19

Simple interest is the cost of borrowing money without accounting for the effects of compounding. In other words, simple interest only applies to the principal amount.

Question 20

How does deficit spending adversely influence the economy?

Answer 20

The clear, initial impact of government borrowing is that it reduces the pool of available funds to be lent to or invested in other businesses. This is necessarily true: an individual who lends $5,000 to the government cannot use that same $5,000 to purchase the stocks or bonds of a private company.

Additionally, the sale of government securities as a way to finance the deficit has a direct impact on interest rates. Government bonds are considered to be extremely safe investments, so the interest rate paid on loans to the government represent risk-free investments against which nearly all other financial instruments must compete.

If the government bonds are paying 2% interest, other types of financial assets must pay a high enough rate to entice buyers away from government bonds. This function is used by the Federal Reserve when it engages in open market operations to adjust interest rates within the confines of monetary policy.

Question 21

What is the debt limit?

Answer 21

The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.