week 2 notes
week 2 notes Econ 3303-001
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This 0 page Class Notes was uploaded by IHUOMA ECHENDU on Wednesday February 10, 2016. The Class Notes belongs to Econ 3303-001 at University of Texas at Arlington taught by kathy kelly in Winter 2016. Since its upload, it has received 34 views. For similar materials see money and banking in Economcs at University of Texas at Arlington.
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Date Created: 02/10/16
Week 2 Notes Chapter 2 amp 3 CHAPTER 2 DIRECT FINANCE borrowers choose whom to lend from ie the nancial market ows from saver to borrower INDIRECT FINANCE savers do not decide who uses the funds the nancial market ows from saver to nancial intermediaries and then to borrowers MUTUAL FUNDS buying a share of fund that portfolio holds this is an example of indirect nance CATEGORIES OF FINANCE MARKET DEBT borrow funds and pay back at regular intervals until the nal payment is due Maturity number of periods until debt is to be paid nally Treasury bills or quotT bills are shortterm bonds that mature within one year or less T bills are sold with maturities of one three six and 12 months Treasury notes are issued with maturities of 2 3 or 7 years Treasury bonds aka long term bonds offer maturities of 1530 years Note there s no maturity date on stock EQUITY dividends aren t guaranteed a company has to make pro t rst Dividends are your share of pro t in a stock PRIMARY MARKET First time stocks and bonds are issued here What nancial institution assists in the initial sale of securities Answer investment banks SECONDARY MARKET for example NEW YORK STOCK EXCHANGE Secondary and primary markets are equally important Secondary market make stocks and bonds easy to resell liquid Liquid means easy to convert to cash Organization of Secondary Market 0 Exchange 0 Over the counter Both exchange and over the counter bring buyers and sellers together Money market this is referring to short term debt it has nothing to do with actual money Note Market for money actual money CD CERTIFICATE OF DEPOSIT COMMERCIAL PAPER issued by large corporations REPURCHASE AGREEMENT used by banks FEDERAL FUNDS loan from a bank to a bank Capital market long term Mortgages and mortgage backed securities 0 Corporate stock no maturity date 0 Corporate bonds 30yr bonds 0 State and local government bonds AKA municipal bonds 30yrs Consumer loans FOREIGN BOND it s priced in terms of the legal tender in the country EUROBOND buying a bond priced in a currency other than your country s legal tender Note GM is a US company Toyota is a Japanese company EURODOLLAR dollars deposited in a bank in another country FINANCIAL INTERMEDIARIES they are important to the economy or else there will be nancial crisis They reduce transactions cost by using economies of scale and they partake in risk sharing FDIC FEDERAL DEPOSIT INSURANCE CORPORATION Examples of direct and indirect nance 0 You purchase a united states govt bond at treasury directgov ANSWER DIRECT You deposit 10000 into your savings account at frost bank and your friend borrows 10000 from frost bank to buy a car ANSWER INDIRECT ASSYMETRIC INFROMATION not the same on both sides Problems a Adverse selection those who are likely to borrow money are also likely to not pay back this is already known before any transaction takes place b Moral hazard one changes the way they act after you have lent the money to them this happens after a transaction ECONOMIES OF SCOPE one resource many tasks DEPOSITORY INSTITUTIONS examples of these are Commercial banks eg wells Fargo chase etc Savings and loan association similar to commercial banks Mutual savings banks anyone can join no dividends Credit unions there s a commonality Interest rate may be lower than commercial banks CONTRACTUAL SAVINGS INSTITUTIONS examples are Life insurance companies they invest in longer term assets Fire and casualty insurance companies they have shorter term assets because they are less likely to predict future casualties unlike life insurance companies Pension funds and government retirement funds you decide where this goes INVESTMENT INTERMEDIARIES examples are I Mutual funds II Finance companies make just loans and do not accept deposits III Money market mutual funds short term debt IV Hedge funds EUROBOND is not always denominated in terms of the quotEUROquot currency Financial intermediaries have risks CHAPTER 3 An example of a sentence using the term INCOME correctly is Janet earns 200 in two months the value of her income tells a different story about her job Which one uses the term MONEY correctly see chapter 3 slides on blackboard for the questionsstatements ANSWERS ARE 0 Number 1 is referring to INCOME 0 Number 2 is implying WEALTH Number 3 indicates MONEY as a medium of exchange x As a medium of exchange money makes trade easier and less time consuming unlike barter As a unit of account money is used to make decisions on what to buy if an item is weighed with price As a store of value money is received on the note that it can be kept and used for later purchases CHARACTERISTICS OF MONEY A Easily standardized that means it should be easy to gure out the value B Widely accepted stores and other places should be able to take accept it Divisible could be broken down into lesser values change Portable easy to carry around Not deteriorate quickly it should last long without needing mp0 replacement F Hard to counterfeit in order to maintain security and inability to illegally duplicate bonds aren t liquid unlike money for barter to work there has to be double coincidence of wants commodity money eg gold silver cigarettes etc have more than one use fiat money cant be used for any other thing other than as a medium of exchange It is worthless alone checks can be cancelled if lost its safer unlike paper currency which when lost may or may not be retrieveable because there is no proof of ownership electronic payments are faced with security problems but it is becoming more acceptable Epayments have risen due to our current generation FOOD FOR THOUGHT Are we becoming a cashless society there are no right or wrong answers In my opinion we are because everything is now happening online with all our new devices and soon no one would be able to see actual currency because all transfers payments and other transactions would be based over the internet M1 directly spendable money narrow money transactions money Eg demand depositchecking account credit card isn t part of m1 because it s a loan and not a nal transaction debit card is in m1 savings and checking account m1 and m2 respectively M2 this may or may not be directly spendable some are more liquid than otherssee components in ch3 notes on blackboard All items in m1 are also in m2 COMPONENTS OF M1 COMPONENTS OF M2 currency currency Check deposit Check deposit Other check deposit Other check deposit Travelers checks Travelers check Small denomination time deposit Savings deposit Money market mutual funds Money market deposit accounts Use the table above as a guide to answer the questions belowWhat happens to M1 and M2 when you Transfer funds from checking account to your money market mutual funds account Redeem your time deposit and put the funds into your checking account Use funds from your savings account to purchase a time deposit Use funds from your checking account to purchase a treasury bill Deposit the currency in your pocket into your checking account ANSWERS RESPECTIVELY M1 decreases and m2 stays the same M1 increases and m2 stays the same M1 and m2 stay the same M1 and m2 decrease M1 and m2 stay the same
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