Finance tentaplugg Flashcards
(37 cards)
Lemons’ problem
It refers to the problem of the value of an investment or product due to asymmetric information possessed by the buyer and the seller. Using a used car for example we can assume that the seller has more knowledge of the car’s condition and thus is more aware of its valuation. This can lead to the buyer paying more for a car than what he would’ve done had he known the knowledge of the seller.
Too big to fail
Is a theory in banking and finance that asserts that certain financial institutions are so large and interconnected that their failure would be disastrous to the economic system.
Quantitative easing (QE)
Is a monetary policy central banks use to stimulate economic activity. It means that the central bank purchases securities in an attempt to reduce interest rates or increase the money supply to increase lending to consumers and corporations.
Real interest rate
The real interest rate is the interest rate that has been adjusted for the effects of inflation. It reflects the real costs of funds to a borrower and the real yield to a lender or investor.
Expectations theory
It tries to predict where short-term interest rates will be in the future based on current long-term interest rates. The theory suggests that an investor buying 2 one-year bonds will make the same return as if he had bought 1 two-year bond.
Asset price Bubble
This exists when the market price is far higher then what the fundamentals would suggest. It can be extremely devastating for individuals and corporations that invest too late.
Net interest margin
Is the difference between interest paid and interest received, adjusted for the total interest generating assets held by the bank. It can be an indicator of a bank’s profitability, seeing how much they make on loans and pay for deposits.
Federal Open Market Committee (FOMC)
Consists of 12 members , the seven board of governors, the president of New York reserve bank and 4 of the eleven reserve bank presidents. It controls the open market operations, The discount rate and reserve requirements.
Order driven trading
An order driven market is a financial market where all buyers and sellers display the prices at which they would like to buy and sell a particular security as well as the amount they are willing to buy or sell.
Adverse selection
Adverse selection is when a seller has more knowledge about the product’s quality then a buyer or vice versa. It is therefore that adverse selection is that people seek to exploit their knowledge advantage over the other party. Can be for a person living a risky life buying insurance to be able to finance his risky lifestyle with insurance covering his costs. The company in this case doesn’t know this condition.
Open market operations
Open market operation refers to the purchase or sale of securities in the open market performed by a central bank to regulate the supply of money in the market.
Reserve requirement
Is the amount of funds a bank needs to hold in its reserve to meet its liabilities in case of sudden withdrawals, it is set by the central bank to regulate the amount of money supply in the economy and also influence interest rates.
Nominal anchor
Is a way of making promises credible, 1 method this occurs in is using commodities such as gold or silver as money, or adopting a fixed exchange rate with a currency that has a reputation of stability such as the US dollar.
Taylor’s rule
Is an equation linking the federal reserve’s benchmark interest rate to levels of inflation and economic growth. It assumes an equilibrium federal funds rate 2% above the annual inflation rate.
Transparency
Is the extent to which investors have steady access to required financial information about a company, for example, price levels, market depth and audited financial reports.
Asymmetry of information
Occurs when one party to an economic transaction possesses greater knowledge than the other party. It can work both ways with the seller or buyer holding better knowledge over the other. For example buying a used car, the seller can know all the flaws with the vehicle and not disclose it and in the other way the seller might sit on a rare expensive car and not know its true value and the buyer can get a better deal than it should.
Moral hazard
Is the risk that a party has not entered the deal in good faith or has provided misleading information about for example, it’s assets, liabilities or credit capacity. Can also be that a party has incentive to take unusual risks in an attempt to earn a profit before the contract ends.
Shadow banking
Financial intermediaries that participate in creating credit but are not subject to regulatory oversight. Examples of these can be hedge funds, private equity funds, mortgage lenders and some large investment banks.
Deposits
Generally money held on a bank account or other financial institution but can also refer to the amount of money used as a security or collateral for delivery of goods and services.
TIER 1
Refers to the core capital held in a bank’s reserves and is used to fund business activities for the bank’s clients, Can include common stock as well as disclosed reserves and certain other assets. Under the Basel III accord, the minimum amount required is set to 6% of a bank’s risk-weighted assets.
Deposit taking institution
Refers to the receipt of funds from the general public, for example via deposits or the issuance of bonds. Examples for these institutions can be banks, trust companies and credit unions.
Risk-free rate
Is the theoretical rate of return on zero-risk assets. The rate should reflect the yield of return on default-free governmental bonds.
Maintenance margin
Is the minimal amount of equity an investor must hold in the margin account after a purchase has been made. The current amount FINRA has set is 25% of the total value in securities from the account. A margin account is an account with a brokerage that allows an investor to borrow money from the brokerage to invest in stocks, bonds and options. It exists to mitigate losses for both investors and brokerages.
Basel III Accord
It is an internationally agreed set of measures developed by the Basel Committee and the Banking Supervision in response to the 07-08 crisis. It consists of minimum requirements that apply to international active banks and exist to regulate and protect the financial systems that exist in our world.
