Economics 1022A/B Lecture Notes - Lecture 1: Loanable Funds, Nominal Interest Rate, Real Interest Rate

1-Principal __________________ fall into three categories: depository institutions (banks), contractual savings institutions, and investment intermediaries.

Financial markets security exchanges financial intermediaries’ investment funds

Savings institutions

bitcoin/annuity payments securities/investment advice

2-Deposits that are payable on demand but do not allow their owner to write checks are called _______________.

Restricted deposits savings deposits time sensitive deposits non-checkable deposits demand deposits

3-Deposit with fixed terms to maturity are called ___________.

Relative deposits term deposits fixed deposits restricted deposits time deposits

4-Commercial banks ___________ primarily by issuing checking deposits, savings accounts, and time deposits.

Increase profits decrease cost attract investors raise funds increase assets

5-A type of depository institution that over time has become more like commercial banks and are now more competitive with each other are called ______________ associations and mutual savings banks.

savings and loan contractual savings institutions, investment intermediaries

crowd funding sites deposit and loan

6-Credit unions are typically very small cooperative lending institutions organized around a particular _____________________: members of the same union, employees of a particular firm, and members of the same profession, such as teachers.

Type of investment corporation financial strategy risk avoidance strategy

group that have something in common

7-Insurance companies and pension funds are examples of ________________ institutions.

contractual savings depository institutions (banks), investment intermediaries entrepreneurial at risk

8-Contractual savings institutions (CSI’s) acquire funds at _______________ on a contractual basis.

Estate sales periodic intervals bankruptcy auctions liquidations initial offerings

9-CSI’s do not worry as much as banks about losing funds quickly because they can predict with reasonable accuracy how much they will have to pay out in ___________ in coming years.

Interest payments dividends bank notes benefits IOU’s

10-_______________ is not as important a consideration for CSI’s as it is for banks.

Types of customers adverse selection Liquidity of assets portfolio diversification liabilities

11-CSI investments are typically ____________ such as corporate bonds, stocks, and mortgages.

Short-term securities long-term securities 3-month term securities overnight securities short-term assets

12-Companies that insure people against financial hazards following a death and sell annuities are called ________________________.

Predatory companies over-the-counter companies risky companies life insurance companies depository companies

13-_________________ that people pay to keep their policies in force constitute the funds life insurance companies use to buy corporate bonds and mortgages.

Interest dividends installments late fees Premiums

14-Companies that ___________ their policyholders against loss from theft, fire, and accidents are called fire and casualty insurance companies.

Insure Hold harmless guarantee advise oversee

15-Fire and casualty insurance companies acquire funds through the _________________ for their policies.

Sale of stock liquidation of collection of premiums interest payments dividends

16-Because of the greater possibility of loss of funds if major disasters occur, fire and casualty companies buy more ________________ than life insurance companies do.

Comprehensive insurance liquid assets risky assets corporate insurance bankruptcy insurance

17-Private pension funds and state and local retirement funds provide _______________ in the form of annuities to employees who are covered by a pension plan.

Dividends revenue stock options retirement income loans

18-Pension funds acquire funds from _____________ from employers and employees.

Fees pledges contributions garnishments payroll deductions

19-The largest ______________ of pension funds are corporate bonds and stocks.

Liability holdings asset holdings interest payments dividend payments fees

20-_________________________ include; finance companies, mutual funds and money market mutual funds.

depository institutions (banks), contractual savings institutions, stock markets

bond markets Investment intermediaries

21-Finance companies raise funds by ___________ commercial paper and by ____________ stocks and bonds.

Issuing/selling selling/buying selling/ issuing buying/issuing discounting/shorting

22-Finance companies lend these funds to __________, who make purchases of such items as furniture, automobiles, and home improvements, and to small businesses.

-depository institutions (banks), consumers contractual savings institutions,

investment intermediaries corporations

23-It is common for a finance company to be organized by a parent corporation to help _______________, such as; ford motor credit company.

Diversify its portfolio acquire assets liquidate liabilities sell its product off set profits

24-Selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds describes how _______________ acquire funds.

depository institutions (banks), mutual funds contractual savings institutions

stock markets bond markets

25-Shareholders can sell shares at any time but shares are subject to value fluctuations therefore mutual fund investments can be _______.

risky Subject to high returns certain investments interest rate neutral misunderstood

26-Money market funds sell _______ like mutual funds and offer checking accounts like ___________.

Deposits/insurance companies bonds/banks shares/insurance companies

Shares/ banks stock options/crowd sourcing sites

27-Money market funds invest in ________ and very ____________ and interest on these assets is paid out to the shareholders.

High risk/non-liquid junk bonds/risky assets low risk/ liquid assets low risk/junk bonds sub-prime securities/liquid assets

28-Money market funds have experienced extraordinary growth primarily because people like the idea of having a checking account that ____________________.

Has no fees pays them interest offers overdraft protection pays dividends

always has money in it

29-Investment banks help a ______________ issue securities.

Person foreign country stock market corporation bond market

30-Investment banks advises the corporation on which type of ______________ to issue; stocks or bonds.

Insurance loans interest rates dividends products securities

31-Investment banks help sell the corporations securities by purchasing them from the corporation and _______ them in the market.

Discounting re-selling insuring advertising financing

32-Investment banks also act as ___________ and earn enormous fees by helping corporations acquire other companies through mergers or acquisitions.

Depositories money launders deal makers insurance companies entrepreneurs

7- What steps can be taken by both individuals and companies to generally reduce the cost of external Financing?

1-An inequality in knowledge between two financial parties is called ___________ __________.

symmetrical information ignorance asymmetric information asymmetric investing asymmetric lending

2-When bad credit risks are the ones who most actively seek out a loan they are also the ones most likely to produce an __________ ___________.

immoral outcome unexpected profit adverse outcome adverse rate of return adverse interest rate

3-Asymmetric information and the adverse selection and moral hazard concepts are also crucial problems for the ________________.

health industry professional sports industry automobile industry insurance industry technology industry

4-Important impediments to well-functioning financial markets are created by adverse selection and moral hazard and ___________________ can alleviate these problems.

stock markets financial advisors savants financial intermediaries

5-Improving _________________ is a key role for financial intermediaries because they help financial markets channel funds to people that are a better investment risk.

Economic growth economic expansion economic ineptitude the inflation rate economic efficiency

6-Lending to individuals; ________________ can be minimized because lenders can check the loan applicant’s credit files and credit scores, their employment history, and with the permission of the borrowers, lenders can even verify their income with the internal revenue service.

moral hazard adverse selection inverse selection prudent selection guessing

Answer the following questions: (Do not attempt if you cannot answer all)

1) Which of the following is true?

Select one:

A. Financial intermediaries transform claims in the process of channeling funds.

B. Securities firms transfer, but do not transform, claims in the process of channeling funds.

C. Both of the above.

D. None of the above.

2) A large domestic bank with headquarters in New York City that provides international lending and payment services to large, multinational business firms is most likely to be a:

Select one:

A. Money Center Bank

B. Regional Bank

C. Mid-Market Bank

D. Community Bank

3) Which of the following is true regarding bank charters?

Select one:

A. All U.S. commercial banks must be chartered in order to operate.

B. All U.S. banks must be federally chartered.

C. National banks are chartered by the Federal Reserve.

D. All of the above.

4) Which of the following is characteristic of fractional reserve banking?

Select one:

A. Restricting the access of depositors to money in their passbook savings accounts.

B. Maintaining sufficient bank reserves to cover all outstanding loans.

C. Making only long-term loans to both consumers and businesses.

D. None of the above.

5) When an investment bank underwrites a new security offering it

Select one:

A. makes a loan to the issuing firm.

B. sells securities to a company in need of capital.

C. transforms the claims of the issuing firm.

D. purchases the new securities and resells them to investors.

6) Which of the following is true of securities dealers?

Select one:

a. They are active in the secondary market, buying and selling previously issued securities.

b. They may own securities, which they inventory prior to selling to investors.

c. They may be involved in the distribution process for a new securities issue.

d. All of the above.

7) Which of the following statements is true regarding credit unions?

I. Credit unions specialize in making home mortgage and auto loans
II. Credit unions are tax-exempt institutions
III. Credit unions do not offer any insurance protection against the loss of member deposits

Select one:

a. I only

b. I and II only

c. I and III only

d. II and III only

8) The two broadest groups of financial institutions in the U.S. can be classified as

Select one:

a. financial intermediaries and securities firms.

b. depository and non-depository intermediaries.

c. commercial banks and thrift institutions.

d. money market firms and capital market firms.