FIN3244 Exam 1 Vocab 69 terms Quizlet link http quizlet com 19093073 fin3244 exam 1 terms flash cards password dougsmith Chapter 1 Introducing Money and the Financial System pg 1 20 1 asset anything of value owned by a person or a firm 2 financial asset an asset that represents a claim on someone else for a payment 3 security a financial asset that can be bought and sold in a financial market 4 financial market a place or channel for buying or selling stocks bonds and other securities off debts 5 money anything that is generally accepted in payment for goods and services or to pay 6 money supply the total quantity of money in the economy 7 stock financial securities that represent partial ownership of a firm Also called equities 8 dividend a payment that a corporation makes to its shareholders 9 bond financial security issued by a corporation or a government that represents a promise to repay a fixed amount of money 10 interest rate the cost of borrowing funds or the payment for lending funds usually expressed as a percentage of the amount borrowed 11 foreign exchange units of foreign currency 12 securitization the process of converting loans and other financial assets that are not tradable into securities 13 financial liability a financial claim owed by a person or a firm 14 financial intermediary a financial firm such as a bank that borrows funds from savers and lends them to borrowers 15 commercial bank a financial firm that serves as a financial intermediary by taking in deposits and using them to make loans 16 portfolio a collection of assets such as stocks and bonds 17 primary market a financial market in which stocks bonds and other securities are sold for the first time 18 secondary market a financial market in which investors buy and sell existing securities 19 federal reserve the central bank of the United States usually referred to as the Fed 20 monetary policy the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives 21 federal funds rate the interest rate that banks charge each other on short term loans 22 diversification splitting wealth among many different assets to reduce risk 23 risk sharing a service the financial system provides that allows savers to spread and transfer risk 24 liquidity the ease with which an asset can be exchanged for money 25 information facts about borrowers and about expectations of returns on financial assets 26 bubble an unsustainable increase in the price of a class of assets Chapter 2 Interest Rates and Rates of Return pg 21 29 1 future value the value at some future time of an investment made today 2 compounding the process of earning interest on interest as savings accumulate over 3 present value the value today of funds that will be received in the future 4 time value of money the way that the value of a payment changes depending on when time the payment is received 5 discounting the process of finding the present value of funds that will be received in the future System pg 30 51 Chapter 3 Transactions Costs Asymmetric Information and the Structure of the Financial 1 transactions costs the cost of a trade or exchange for example the brokerage commission charged for buying or selling a financial asset 2 information costs the costs that savers incur to determine the creditworthiness of borrowers and to monitor how they use the funds acquired 3 economies of scale the reduction in average cost that results from an increase in the volume of a good or service produced 4 asymmetric information the situation in which one party to an economic transaction has better information than does the other party 5 adverse selection the problem investors experience in distinguishing from low risk borrowers from high risk borrowers before making an investment in insurance the problem that those most likely to buy insurance are also most likely to file claims 6 moral hazard the risk that people will take actions after they have entered into a transaction that will make the other party worse off in financial markets the problem investors experience in verifying that borrowers are using their funds as intended 7 credit rationing the restriction of credit by lenders such that borrowers cannot obtain the funds they desire at the given interest rate 8 collateral assets that a borrower pledges to a lender that the lender may seize if the borrower defaults on the loan 9 net worth the difference between the value of a firm s assets and the value of its liabilities 10 relationship banking the ability of banks to assess credit risks on the basis of private information about borrowers 11 principal agent problem the moral hazard problem of managers the agents pursuing their own interests rather than those of shareholders the principals 12 restrictive covenant a clause in a bond contract that places limits on the uses of funds 13 venture capital firm a firm that raises equity capital from investors to invest in start up that a borrower receives firms 14 private equity firm aka corporate restructuring firm a firm that raises equity capital to acquire shares in other firms to reduce free rider and moral hazard problems Chapter 4 The Economics of Banking pg 52 75 1 balance sheet a statement that shows an individual s or firm s financial position on a 2 asset something of value that an individual or a firm owns in particular a financial claim 3 liability something that an individual or a firm owes particularly a financial claim on an particular day individual or a firm 4 bank capital the difference between the value of a bank s assets and the value of its liabilities also called shareholders equity 5 checkable deposits accounts against which depositors can write checks 6 federal deposit insurance a government guarantee of deposit account balances up to 250 000 via the FDIC or Federal Deposit Insurance Corporation 7 reserves a bank asset consisting of vault cash plus bank deposits with the Federal 8 vault cash cash on hand in a bank includes currency in ATMs and deposits with other Reserve banks 9 required reserves reserves the Fed requires banks to hold against demand deposit and 10 excess reserves any reserves that banks hold above those necessary to meet reserve NOW account balances requirements 11 credit risk the risk that borrowers might default on their loans 12 credit risk analysis the process that bank loan officers use to screen loan applicants 13 prime rate formerly the interest rate banks
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