FIN3244 Exam 1 Study Guide Peterson Chapter 1 Introducing Money and the Financial System Key components of the financial system financial assets financial institutions the Federal Reserve and other financial regulators o 1 Financial assets Asset anything of value owned by a person or firm 5 key categories money stocks bonds foreign exchange securitized loans 1 Money anything that is generally accepted in payment for goods or services or to pay off debts o Money supply the total quantity of money in the economy 2 Stocks equities financial securities that represent partial ownership of a corporation o When you buy a share you become a shareholder you have a legal claim to a share of the corporation s assets and to a share of its profits o Financial capital funds available to the firm o Dividends a payment that a firm makes out of its profits to its shareholders typically every quarter 3 Bonds a financial security issued by a corporation or a government that represents a promise to repay a fixed amount of money o Interest rate the cost of borrowing funds or the payment for lending funds usually expressed as a percentage of the amount borrowed o bonds typically pay interest in fixed dollar amounts called o when a bond matures the seller of the bonds repays the o short term bond a bond that matures in one year or less o long term bond a bond that matures in more than one coupons principal year 4 Foreign exchange units of foreign currency o Banks are most important buyers and sellers of foreign exchange they engage in foreign currency transactions on behalf of investors and firms 5 Securitized loans 1 P a g e o Securitization the process of converting loans and other financial assets that are not tradable into securities o Mortgage a loan a borrower uses to buy a home o Mortgage backed security a bundle of mortgage that o Financial liability a financial claim owed by a person or functions like a bond a firm o 2 Financial Institutions Financial asset an asset that represents a claim on someone else for payment eg A checking account Security a financial asset that can be bought and sold in a financial market tradable Financial market a place or channel for buying or selling trading stocks bonds and other securities New York Stock Exchange The financial system matches savers and borrowers through 2 channels financial intermediaries and financial markets 1 Financial intermediary a financial firm such as a bank that borrows funds from savers and lends them to borrowers o Funds flow from lenders to borrowers indirectly o Commercial bank a financial firm that serves as a financial intermediary by taking in deposits and using them to make loans most important financial intermediaries Take deposits from households and firms and invests most of those deposits by buying securities Most households rely on borrowing money from banks when they purchase big ticket items Many firms rely on banks to meet their needs for credit o Nonbank financial intermediaries Savings and loans savings banks and credit unions are legally distinct from banks although they operate similarly Insurance companies Specialize in writing contracts to protect their policyholders from the risk of financial losses associated with particular events Premiums money insurance companies collect from their policyholders that they invest 2 P a g e Pension funds invest contributions from workers and firms in stocks bonds and mortgages to earn the money necessary to pay pension benefit payments during workers retirements Mutual funds obtain money by selling shares to investors that are then invested in a portfolio Fidelity Investment s Magellan Fund Portfolio a collection of assets such as stocks and bonds no more Hedge funds accept money from investors and use the money to buy a portfolio of assets but typically has than 99 wealthy individuals institutions charge investors higher fees and make riskier investments Quantam Group Investment banks do not take deposits and rarely lend directly to households concentrate on providing advice to firms issuing stocks and bonds or considering mergers underwriting guarantee a price to a firm issuing stocks or bonds and then make a profit by selling them at a higher price heavily involved in the securitization of loans proprietary trading making a profit by buying and selling securities Goldman Sachs Morgan Stanley 2 Financial markets places or channels for buying and selling stocks bonds and other securities o Funds flow directly from lenders to borrowers o Physical places New York Stock Exchange London Stock Exchange face to face Stocks and bonds were traded by dealers who met o Over the counter trading securities trading that takes place electronically between dealers linked to computers NASDAQ high tech firms like Apple and Intel 3 P a g e o Primary market a financial market in which securities are sold for the first time o Secondary market a financial market in which investors buy and sell existing securities 3 The Federal Reserve and Other Financial Regulators o US agencies devoted to regulating the financial system Securities and Exchange Commission SEC regulates financial markets Federal Deposit Insurance Corporation FDIC insures deposits in banks up to 250 000 per account Office of the Comptroller of the Currency regulates federally chartered banks Federal Reserve the central bank of the United States Established in 1913 to deal with problems in the banking system Lender of last resort make short term loans that provide banks with funds to pay out their depositors Monetary policy the actions the Fed takes to manage the money supply and interest rates to pursue macroeconomic policy objectives o High levels of employment low rate of inflation high rates of growth stability in the financial system Run by the Board of Governors 7 members appointed by the president and confirmed by the Senate 1 member is chair Ben Bernanke 12 districts each with a district bank Federal Open Market Committee FOMC main policymaking body 7 members of the Board of Governors the president of the Federal Reserve Bank of New York 4 presidents from the other 11 district banks meets 8 times per year in DC Federal funds rate the interest rate that banks charge each other on short term loans 4 P a g e Indirect finance the bank isn t lending its own funds directly to you it loans you funds from people who have put money in checking or savings deposits Direct finance if you buy stock that a firm has just issued the funds
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