Revision Money and Banking

Revision Money and Banking - Asymmetric Information A...

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Asymmetric Information A situation where some participants in an economic transaction have access to more or better information than other participants. For instance an insurance company may not know whether an individual driver is good or bad, but the individual knows how often he or she drives when tired or drinking alcohol. Asymmetric information is a source of market failure. Yield curve A graph plotting the yield on fixed-interest securities against their years to maturity. As longer-dated securities are more subject to price fluctuations if interest rate change, and are thus less liquid than shorter-dated securities it is usually expected that if interest rates are equally likely to rise or fall the yield curve slopes upward; that is longer-dated securities will have higher yields than shorter-dated ones. This slope may be temporarily reversed if interest rates are generally expected to fall, as the expectation of higher capital gains on longer-dated securities makes them relatively attractive to hold.
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