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Banking and Monetary Policy_Abrams_Date_031110_84

Banking and Monetary Policy_Abrams_Date_031110_84 - Exam 1...

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Exam 1: chps 1-4 (up to p 97) Chapter 1 Financial markets: refer to the people and firms that trade financial assets o Two types of financial assets’ Currencies Securities Bonds: debts or a fixed income security Bonds: o Is a security that promises fixed payments at a future date o Coupon payment is interest paid at specified intervals for the use of borrowed funds o Maturity is the life of the bond o Bonds with maturities less than a yr = many market securities Ex: commercial paper- issued by corporations Treasury bills: issued by the US gov Bond characteristics: o Zero- coupon bonds (DISCOUNT BONDS) No specified coupon or interest payment Sold at a discount from FV The interest rate is annualized Default risk: o A payment is not made – failure to pay coupon or FV Varies for different bonds: o Bonds are debt securities o Stocks are equity securities are ownership shares in a corporations Stockholders share corporate profits Profits are uncertain so stock return is uncertain Stockholder vote on corporate policies Bondholder don’t vote Asymmetric information: someone’s got more info than someone else o Produces two problems: it’s a problem for direct and indirect finance 1. Adverse selection: the vehicles that come to the market, are biased for being bad vehicles Borrows are adversely selected b/c need the money Banks are good at getting a lot of the information, research Banks reduce adverse selection by securing potential borrowers 2. Moral hazard problem: happens after the transactions when your lending the borrower some money, the bank wonders, how the borrower going to use it? As intended? Banks reduce moral hazard by monitoring borrower behavior o Covenants are agreements about how a borrower should behave. Covenants reduce moral hazard Medium and small firms and individuals need bank financing as only well-known cities can used direct financing A bank is a financial institution or financial intermediary o Banks raise funds by accepting deposits
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Depository institutions: if it’s a deposit account its federally insured (FDIC) (know this) o Commercial banks o Savings and loans o Mutual savings banks o Credit Unions Money Market Mutual Funds: investment club where people buy one dollar shares o With your money the investment clubs buy other things o Financial intermediaries o Mutual funds sell shares and use these funds to buy securities for its shareholders o Savings and loan association accept deposit and primarily make
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Banking and Monetary Policy_Abrams_Date_031110_84 - Exam 1...

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