CHAPTER 1 WHY STUDY MONEY BANKING AND FINANCIAL MARKETS Financial Markets markets in which funds are transferred from people who have an excess of funds to people who have a shortage Securities claims on the issuer s future income or assets Assets any financial claim or piece or property that is subject to ownership Bond a debt security that promises to make payments periodically for a specified period of time Interest Rate the cost of borrowing or the price paid for the rental of funds Common Stock a share of ownership in a corporation Financial Intermediaries institutions that borrow funds from people who have saved and in turn make loans to others Financial Crisis major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms Banks financial intermediaries that accept deposits and make loans Financial Innovation the development of new financial products and services E finance the ability to deliver financial services electronically Money anything that is generally accepted in payment for goods or services or in the repayment of debts Aggregate Output total production of goods and services Unemployment Rate percentage of the available labor force unemployed Business Cycles the upward and downward movements of aggregate output produced in the economy Recessions periods of declining aggregate output Aggregate Price Level the average price of goods and services in an economy Inflation a continual increase in the price level Inflation Rate the rate of change of the price level usually measured as a percentage change per year Monetary Policy the management of money and interest rates Central Bank the organization responsible for the conduct of the nation s monetary policy Federal Reserve System the central bank in the US Fiscal Policy decisions about government spending and taxation Budget Deficit the excess of government expenditures over tax revenues for a particular time Budget Surplus tax revenues exceed government expenditures Gross Domestic Product a measure of aggregate output Foreign Exchange Market the market in which exchange rates are determined Foreign Exchange Rate the price of one country s currency in terms of another s Equations GDP Deflator Nominal GDP Real GDP PCE Deflator nominal personal consumption expenditures real PCE Growth rate of x xt xt 1 xt 1 100 where t indicates today and t 1 is a year ago CHAPTER 2 AN OVERVIEW OF THE FINANCIAL SYSTEM Direct Finance borrowers borrow funds directly from lenders in financial markets by selling securities Indirect Finance a financial intermediary borrows funds from lender savers and then uses these funds to make loans to borrower spenders Securities claims on the borrower s future income or assets securities are assets for the person who buys them but liabilities for the individual or firm who sells them Capital wealth either financial or physical that is employed to produce more wealth Maturity the number of years term until the debt instrument s expiration date Short term debt instrument maturity is less than a year Long term debt instrument maturity is more than 10 years Intermediate Term maturity in between 1 10 years Equities claims to share in the net income and the assets of a business Dividends periodic payments to their equity holders Primary Market financial market in which new issues of a security such as a bond or stock are sold to initial buyers by the corporation or government agency borrowing the funds Secondary Market financial market in which securities that have been previously issued can be resold Investment Bank financial institution that assists in the initial sale of securities in the primary market Brokers agents of investors who match buyers with sellers of securities Dealers link buyers and sellers by buying and selling securities at stated prices Exchanges where buyers and sellers of securities meet in one central location to conduct trades Over the Counter Market OTC dealers of different locations who have an inventory of securities stand ready to buy and sell securities over the counter to anyone who comes to them and is willing to accept their prices Money Market financial market in which only short term debt instruments are traded less than one year Capital Market market in which longer term debt and equity instruments are traded more than one year US Treasury Bills short term debt instruments issued in one three six month maturities to finance the fed government pay set amount of maturity and have no interest payments Default a situation in which the party issuing the debt instrument is unable to make interest payments or pay off the amount owed when the instrument matures Negotiable Bank Certificates of Deposits debt instrument sold by a bank to depositors that pays annual interest of a given amount and at maturity pays back the original purchase price Commercial Paper short term debt instrument issued by large banks and well known corporations Repurchase Agreements short term loans maturity less than 2 weeks for which treasury bills serve as collateral Federal Funds overnight loans between banks of their deposits at the Federal Reserve Stocks equity claims on the net income and assets of a corporation Mortgages loans to households or firms to purchase land housing or other real structures in which the structure or land itself serves as collateral for the loans Mortgage backed Securities a bond like debt instrument backed by a bundle of individual mortgages whose interest and principal payments are collectively paid to the holders of the security Corporate Bonds long term bonds are issued by corporations with very strong credit ratings sends the holder an interest payment twice a year and pays off the face value when the bond matures Convertible Bonds corporate bonds that also allow the holder to convert the bonds into a specified number of shares of stock at anytime up to the maturity date US Govt Agency Securities long term bonds issued by various govt agencies Municipal Bonds long term debt instruments issued by state and local governments to finance expenditures on schools roads afind other large programs Consumer and Bank Commercial Loans loans to consumers and business by banks and finance companies Eurobond a bond denominated in a currency other than that of the country in which it is sold Eurocurrencies foreign currencies deposited in banks outside the home country Eurodollars US dollars