** VU ** MONEY & BANKING (411)

Explanation	Terms
The interest rate that economists consider to be the most accurate measure is the	yield to maturity
The interest rate that equates the present value of payments received from a debt instrument with its value	Yield to maturity.
The concept of _____ is based on the common-sense notion that a dollar paid to you in the future is less	present value
To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million	discounting the future.
With an interest rate of 5 percent, the present value of $100 next year is approximately	$95.
If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200?	10 percent
A credit market instrument that provides the borrower with an amount of funds that must be repaid at the maturity date along with an interest payment is known as a	simple loan.
If $1102.50 is the amount payable in two years for a $1000 simple loan made today, the interest rate is	5%
A loan that requires the borrower to make the same payment every period until the maturity date is called	) fixed-payment loan.
A coupon bond pays the owner of the bond	a fixed-interest payment every period and repays the face value at the maturity date.
What is true for a coupon bond?	(a) When the coupon bond is priced at its face value, the yield to maturity equals the coupon rate. (b) The price of a coupon bond and the yield to maturity are negatively related. (c) The yield to maturity is greater than the coupon rate when the bond price is below the par value.
An $8,000 coupon bond with a $400 coupon payment every year has a coupon rate of	5 percent.
A $10,000 8 percent coupon bond that sells for $10,000 has a yield to maturity of	8 percent.
If a $20,000 coupon bond has a coupon rate of 4 percent, then the coupon payment every year is	$800.
A bond that is bought at a price below its face value and the face value is repaid at a maturity date is	discount bond.
If a $10,000 face-value discount bond maturing in one year is selling for $5,000, then its yield to maturity	100 percent.
The return on a 10 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year is	30 percent.
The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is	0 percent.
Interest-rate risk is	the riskiness of an asset's returns due to interest-rate changes.
Prices and returns for _____ bonds are more volatile than those for _____ bonds.	long-term; short-term
The Fisher equation states that	The nominal interest rate equals the real interest rate plus the expected rate of inflation. The real interest rate equals the nominal interest rate less the expected rate of inflation.
If you expect the inflation rate to be 15 percent next year and a one-year bond has a yield to maturity of 7 percent, then the real interest rate on this bond is	8 percent.
In which of the situations would you prefer to be the lender?	When the interest rate is greater than the inflation rate
In which situations would you prefer to be borrowing?	When the interest rate is far lower the the inflation rate.
If wealth increases, the demand for stocks _____ and that of long-term bonds _____.	increases; increases
If the expected return on ABC stockstock is rises from 5 to 10 percent and the expected return on CBS unchanged, then the expected return of holding CBS stock _____ relative to ABC stock and the demand for CBS stock _____.	falls, falls
If housing prices are suddenly expected to shoot up, then, other things equal, the demand for houses will _____ and that of Treasury bills will _____.	increase; decrease
As the price of a bond _____ and the expected return _____, bonds become more attractive to investors and the quantity demanded rises.	falls; rises
When stock prices become more volatile, the demand curve for bonds shifts to the _____ and the interest rate _____.	right; falls
When bonds become more widely traded, and as a consequence the market becomes more liquid, the demand curve for bonds shifts to the _____ and the interest rate _____.	right; falls
Factors that decrease the demand for bonds include	Wealth, Risk, Expected Return, Inflation
In an expanding economy with growing wealth, the demand for bonds _____ and the demand curve for bonds shifts to the _____.	rises; right
The risk structure of interest rates is	the relationship among interest rates of different bonds with the same maturity.
Bonds with no default risk are called	default-free bonds.
The spread between the interest rates on bonds with default risk and default-free bonds is called the	risk premium.
The theory of asset demand predicts that as the possibility of a default on a corporate bond increases, theexpected return on the bond _____ while its relative riskiness _____.	falls; rises
When the default risk in corporate bonds increases, other things equal, the demand curve for corporate bonds shifts to the _____ and the demand curve for Treasury bonds shifts to the _____.	left; right
A plot of the interest rates on default-free government bonds with different terms to maturity is called	a yield curve.
When yield curves are downward sloping,	short-term interest rates are above long-term interest rates.
If the expected path of 1-year interest rates over the next four years is 5 percent, 4 percent, 2 percent, and 1 percent, then the expectations theory predicts that today's interest rate on the four-year bond is	3%
According to the segmented markets theory of the term structure	interest rates on bonds of different maturities do not move together over time.
Which of the following theories of the term structure is (are) able to explain the fact that interest rates on bonds of different maturities tend to move together over time?	Expectations Theory and Liquidity premium theory
Which of the following are reported as liabilities on a bank's balance sheet?	Checkable deposits
Everything else equal, a bank will hold less excess reserves when	it expects to have a deposit inflow in the near future.
The First National Bank gains reserves when	a check written on an account at another bank is deposited in First National.
The purpose of regulation of financial markets is to	promote the provision of information to shareholders, depositors and the public.
Which of the following is not one of the eight basic puzzles about financial structure?	Direct finance, in which businesses raise funds directly from lenders in financial markets, is many times more important than indirect finance, which involves the activities of financial intermediaries.
The benefits financial intermediaries provide their customers include	increased diversification, reduced risk, reduced transaction costs
The presence of _____ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.	asymmetric information
Due to the problem of adverse selection, lenders	may lend only to those "who do not need the money." may be reluctant to make loans not secured by collateral.
Stoped at	number 55
Barter	Trade of one good for another without the use of money.
Double Coincidence of Wants	Makes barter difficult because both parties to a trade must be accepting of items offered in trade.
Money	Anything generally accepted in exchange for goods and services that acts as a medium of exhange, a measure of value, and a store of value.
Desirable Characteristics of Money	Durable, portable, divisible, recognizable, stable, and identical (homogenous.)
Functions of Money	Medium of exhange, a measure of value, and a store of value.
Medium of Exchange	Generally accepted as a means of payment - pays for goods and services. Using money to buy your groceries.
Measure of Value	A tool by which to measure the "worth" of an item. A 2-karat "diamond" costing $275 is probably not a "real" diamond.
Store of Value	A way to hold wealth for the future. Saving your money for use at a later date.
Gresham's Law	"Bad money drives out good money." As money of different quality circulates, people tend to trade away inferior quality money and keep superior quality money.
Fiduciary Money	Exchangeable for full value in gold or silver.
Fractional Reserve Money	Money that is only partially backed by gold or silver.
Fiat Money	Money that is deemed legal or tender by the government, and it is not based on or convertible into a commodity.
Legal Tender	Declared by law for the retirement of all debt, either public or private.
Value of Money	Value of money is reflected in its purchasing power.
Currency	Coins and paper money.
Federal Reserve Notes	Paper money used in the United States that is issued by the Federal Reserve System.
Liquidity	The degree to which an assest is easliy converted into or exhanged for money.
Money Supply	The supply of M1 - currency, checking account funds, and traveler's checks. These items are counted as money because they are used as the means of payment for purchases.
M1	Most immediate form of money which includes currency, demand deposits, and traveler's checks.
M2	All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits.
M3	All of M1 + M2 + large denomination time deposits and large-denomination repurchase agreements.
Demand Deposits	Another name for checkable accounts.
Near Money	U S Savings Bonds and Corporate Bonds are financial assets or near monies.
Credit Cards	Instruments of debt - credit cards are NOT money.
Velocity of Money	The average number of times a dollar is used to purchase final goods and services during a year. It is equal to GDP divided by the stock of money.
Equation of Exchange	MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of output of goods and services produced in an economy.
Quantity Theory of Money	P = MV/Q A theory that hypothesizes that a change in the money supply will cause a proportional change in the price level because velocity and real output are unaffected by the quantity of money.
Transactions Demand for Money	The amount of money demanded by houses and businesses to conduct their transactions - the buying and selling of goods and services.
debt	money which is owed to someone
salary	regular payment, typically paid on a monthly basis by an employer to an employee
lend	to let someone use something (often money) on the understanding that it will be returned
earn	receive money in return for work or services
borrow	take something belonging to someone else (often money) with the understanding it will be returned
bill	a document with details of an amount of money owed for goods or services supplied
rent	a tenant's regular payment to a landlord for the use of property or land
currency	a system of money in use in a country
standing order	instruction to a bank to pay a fixed sum of money from your account on a regular basis to a specified person
direct debit	instruction to a bank to make a one-off payment or regular payments of varying amounts of money from your account to a specified person
loan	money lent: a sum of money that is expected to be paid back
interest	money earned from investments, or money paid at a particular rate for the use of money lent
current account	account used for day-to-day banking
deposit	put money into a bank account
mortgage	loan to buy property (real estate)
withdraw	take money out of a bank account
overdraft	short-term loan that allows a bank account holder to spend more than is in the account
transaction	a business deal done, or any transfer of money in or out of a bank account
payment card	a card issued by a bank allowing the holder to transfer money electronically to another bank account when making a purchase
direct debit	a payment system whereby creditors are authorized to debit a customer's bank account directly at regular intervals
Money	anything that is generally accepted as payment for goods and services; that is, it is anything that performs the medium of exchange function.
bank	a private business firm whose defining functions are holding deposits for the public, and making loans to the public.
financial intermediary	a private business firm whose defining function is to gather relatively small amounts of money from a large group of people, bundle that money into large amounts, and lend it to a relatively small group of people. This is known as financial intermediation.
Federal Reserve	the central bank of the U.S. economy. The primary function of any central bank, including the Federal Reserve, is to control and limit the growth of the money stock. All banks in the U.S. are subject to a special set of rules, regulations, requirements, and restrictions, including special rules of the Federal Reserve. The Fed does not create money directly (with one small exception), but is able to control the ability of the banking system to expand the money stock using the tools of monetary policy.
Monetary policy	the use of the government's power to control the money stock in order to stabilize the economy at high production and employment with stable prices. It is part of the stabilization function of the federal government, along with fiscal policy and commercial policy.
discount rate	is the interest rate the Fed charges banks for short-term (one or two day) loans of reserves.
federal funds rate	the interest rate banks charge one another for short-term loans of reserves.
Reserves	special deposits banks have with the regional federal reserve bank in their district. Each bank in the U.S. are required to have a reserve account in the regional federal reserve bank of the district in which it is located.
required reserve ratio	determines amount banks must have in reserve
excess reserves	the amount over the minimum required reserves
Expansionary monetary policy actions	lower discount rate, lower federal funds rate, lower required reserve ratio, and open market purchases.
Contractionary monetary policy actions	higher discount rate and federal funds rate, higher required reserve ratio, and open market sales.

--
You received this message because you are subscribed to the Google Groups "Virtual University of Pakistan 2009" group.
To post to this group, send email to virtual-university-of-pakistan-2009@googlegroups.com.
To unsubscribe from this group, send email to virtual-university-of-pakistan-2009+unsubscribe@googlegroups.com.
For more options, visit this group at http://groups.google.com/group/virtual-university-of-pakistan-2009?hl=en.