FIN3244 Exam 1 Vocab (69 terms)Quizlet link: http://quizlet.com/19093073/fin3244exam1termsflashcards/password: dougsmithChapter 1: Introducing Money and the Financial System (pg. 120)1. asset: anything of value owned by a person or a firm2. financial asset: an asset that represents a claim on someone else for a payment3. security: a financial asset that can be bought and sold in a financial market4. financial market: a place or channel for buying or selling stocks, bonds, and othersecurities5. money: anything that is generally accepted in payment for goods and services or to payoff debts6. money supply: the total quantity of money in the economy7. stock: financial securities that represent partial ownership of a firm. Also called equities.8. dividend: a payment that a corporation makes to its shareholders9. bond: financial security issued by a corporation or a government that represents apromise to repay a fixed amount of money10. interest rate: the cost of borrowing funds (or the payment for lending funds), usuallyexpressed as a percentage of the amount borrowed11. foreign exchange: units of foreign currency12. securitization: the process of converting loans and other financial assets that are nottradable into securities13. financial liability: a financial claim owed by a person or a firm14. financial intermediary: a financial firm, such as a bank, that borrows funds from saversand lends them to borrowers15. commercial bank: a financial firm that serves as a financial intermediary by taking indeposits and using them to make loans16. portfolio: a collection of assets, such as stocks and bonds17. primary market: a financial market in which stocks, bonds, and other securities are soldfor the first time18. secondary market: a financial market in which investors buy and sell existing securities19. 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 andinterest rates to pursue macroeconomic policy objectives21. federal funds rate: the interest rate that banks charge each other on shortterm loans22. diversification: splitting wealth among many different assets to reduce risk23. risk sharing: a service the financial system provides that allows savers to spread andtransfer risk24. liquidity: the ease with which an asset can be exchanged for money25. information: facts about borrowers and about expectations of returns on financial assets26. bubble: an unsustainable increase in the price of a class of assetsChapter 2: Interest Rates and Rates of Return (pg. 2129)1. future value: the value at some future time of an investment made today2. compounding: the process of earning interest on interest as savings accumulate overtime3. present value: the value today of funds that will be received in the future4. time value of money: the way that the value of a payment changes depending on whenthe payment is received5. discounting: the process of finding the present value of funds that will be received in thefutureChapter 3: Transactions Costs, Asymmetric Information, and the Structure of the FinancialSystem (pg. 3051)1. transactions costs: the cost of a trade or exchange; for example, the brokeragecommission charged for buying or selling a financial asset2. information costs: the costs that savers incur to determine the creditworthiness ofborrowers and to monitor how they use the funds acquired3. economies of scale: the reduction in average cost that results from an increase in thevolume of a good or service produced4. asymmetric information: the situation in which one party to an economic transaction hasbetter information than does the other party5. adverse selection: the problem investors experience in distinguishing from lowriskborrowers from highrisk borrowers before making an investment; in insurance, theproblem that those most likely to buy insurance are also most likely to file claims6. moral hazard: the risk that people will take actions after they have entered into atransaction that will make the other party worse off; in financial markets, the probleminvestors experience in verifying that borrowers are using their funds as intended7. credit rationing: the restriction of credit by lenders such that borrowers cannot obtain thefunds they desire at the given interest rate8. collateral: assets that a borrower pledges to a lender that the lender may seize if theborrower defaults on the loan9. net worth: the difference between the value of a firm’s assets and the value of its liabilities10. relationship banking: the ability of banks to assess credit risks on the basis of privateinformation about borrowers11. principalagent problem: the moral hazard problem of managers (the agents) pursuingtheir 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 fundsthat a borrower receives13. venture capital firm: a firm that raises equity capital from investors to invest in startupfirms14. private equity firm (aka corporate restructuring firm): a firm that raises equity capital toacquire shares in other firms to reduce freerider and moral hazard problemsChapter 4: The Economics of Banking (pg. 5275)1. balance sheet: a statement that shows an individual’s or firm’s financial position on aparticular day2. asset: something of value that an individual or a firm owns; in particular, a financial claim3. liability: something that an individual or a firm owes, particularly a financial claim on anindividual or a firm4. bank capital: the difference between the value of a bank’s assets and the value of itsliabilities; also called shareholders’ equity5. checkable deposits: accounts against which depositors can write checks6. federal deposit insurance: a government guarantee of deposit account balances up to$250,000 via the FDIC, or Federal Deposit Insurance Corporation7. reserves: a bank asset consisting of vault cash plus bank deposits with the FederalReserve8. vault cash: cash on hand in a bank; includes currency in ATMs and deposits with otherbanks9. required reserves: reserves the Fed requires banks to hold against demand deposit andNOW account balances10. excess reserves: any reserves that banks hold above those necessary to meet reserverequirements11. credit risk: the risk that borrowers might default on their loans12. creditrisk
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