The separation of the money market from the capital market is based on the ______ of the instruments traded there.
length of term
A stock index tells you
the average price of a collection of stocks.
Preferred stockholders
are paid a fixed dividend before common stock holders have been paid a dividend.
Who regulates all the publicly listed companies?
The Securities and Exchange Commission (SEC)
Which of the following is true?
Previously issued shares of stock are traded either on organized exchanges or over-the-counter.
Secondary stock offering is in the
primary market.
An Initial Public Offering (IPO) is an offering of
stocks to the public by a company that has not previously sold securities to the public.
In general, as current and expected future earnings of a corporation rise
the stock's price also rises.
The S&P 500 stock index is an index of
500 major companies whose shares trade in U.S. markets.
An investment company that pools the funds of many small investors and buys a large number of different stocks or other securities is called
a mutual fund.
An investor buys stock for $10,000 and earns dividends of $250 during the course of the year. At the end of the year, the stock is worth $9,300. The dividend yield for the year is
2.5 percent. ($250 is 2.5% of $10000. div yield is what was earned)
The idea that stock prices fully reflect all available information is called
the efficient markets hypothesis.
The Wilshire 5000 stock index is
an index of all the companies with U.S. headquarters whose shares trade in the U.S.
A theory that investors use all the information available to them in determining their decisions is called ________ expectations.
rational
In the CAPM, the risk to a stock's return that is associated to the fluctuations in the overall stock market
is known as systematic risk.
_________________ is where the repayment of the principal on a mortgage is generally spread out over the life of the loan.
Amortization
Asymmetric information exists when
one party to a transaction knows more than another.
Moral hazard occurs when
the existence of a contract changes the behavior of a party to the contract.
The possibility that a bank's loan customers might not repay their loans is known as
default risk.
Adverse selection occurs when
people or firms that are worse-than-average risks are most likely to enter a contract that is offered to everyone.
When a bank's assets and loans are mainly long term but deposits are short term, the bank faces
interest rate risk. (borrow short, lend long)
Securitization is mainly used by the banks to manage_________ risk.
interest rate (when banks sell mortgages to other banks to protect themselves)
____________ caused the mortgage related losses in the US housing market to spread across and affect not only the entire US economy but also the international investors.
Securitization
Credit crunch results in
higher interest rates and tight credit requirements
When there is a run on a bank, this bank is facing ____________ risk
liquidity
Which of the following are considered liabilities for a bank?
deposits
Accounting rules require that a bank's ______ equals its ______.
assets; liabilities plus equity capital.
A bank's reserves equal its
vault cash plus deposits at the Federal Reserve.
The market in which banks with excess reserves lend them to banks that desire additional reserves is known as the ________ market.
federal funds
A bank's excess reserves equal its
total reserves minus required reserves.
A bank's spread equals
the average interest rate on the bank's assets minus the average interest rate on its liabilities.
The funds used to pay for FDIC insurance coverage come from
insurance premiums paid by banks.
The law that created the Financial Stability Oversight Council is the
Dodd-Frank Act
In the CAMELS rating system, the letter C stands for
capital adequacy.
The law that created national banks chartered by the federal government was the
National Bank Act 1864
Which of the following is NOT a reason that the government regulates banks?
To keep the number of banks constant
The law that prohibited banks from engaging in investment banking was the
Glass-Steagall Act 1933.
Contagion occurs when
a bank run spreads from one bank to another.
In its role as a lender of last resort, the government lends to banks that are
solvent and illiquid.
A system in which a bank may choose whether to be chartered by federal government authorities or by a state government is called a ________ banking system.
dual
FDIC insurance covers a depositor up to
$250,000
Systematic risk
the risk to a stock's return that is attributable to the fluctuations in the market; also called market risk
rational expectations
the notion that people use all available information in making their economic decisions
unsystematic risk
the risk to a stock's return that is not explained by movements in the market; also called idiosyncratic risk
irrational expecations
a theory that investors do not have rational expectations, so the stock market goes through periods in which stock prices rise higher than their fundamental value and other periods in which stock prices fall below their fundamental value
adverse selection
the problem that people or firms that are worse than average risks are more likely to seek out loans than borrowers that are better than average risks
hidden characteristics before the contract
asymmetric information
situation in which one party in a transaction knows more than another (adverse selection and moral hazard)
moral hazard
situation in which the existence of a contract changes the behavior of a party to the contract.
hidden action, after the contract
credit crunch
situation in which banks do not lend money as they ordinarily would but rather have much higher requirements for borrowers to qualify for loans than normal
discount rate
interest rate bank pays on a loan from the fed's discount window
discount window
place where banks can request loans from the federal reserve
federal funds rate
interest rate charged on bank-to-bank overnight loans
federal funds market
the market in which banks with excess reserves lend them to banks that desire additional reserves
interest-rate-risk
the risk of a change in the price of a security in the secondary market because of a change in the market interest rate
spread
the difference between the average interest rate on a bank's assets and the average interest rate on its liabilities
CAMELS rating system
C: capital adequacy
A: asset quality
M: management
E: earnings
L: liquidity
S: sensitivity to risk
system used by banking supervisors in which banks are rates
Dual banking system
system in which a bank may choose whether to be chartered by federal government authorities or by a state government
lender of last resort
the service provided by the government that lends funds to a bank when needed
too-big-to-fail policy
a policy under which bank regulators will not close a bank that is deemed to be so large that its closure would affect the financial system and cause other banks to fail; instead, the government will make loans to the bank to keep it afloat
primary stock
guaranteed dividends, no voting rights
common stock
dividends not guaranteed, can change, voting rights
IPO (initial public offering)
first time a stock is on the market, not available to general public just investors
primary market
where IPO's are sold
secondary market
where investors from primary market purchases can sell stock of other companies; no benefit to the the company-just the buyer/seller
secondary stock offering
new stocks in a company already on the market; still sold in the primary market
DOW Jones
30 largest companies
An average of the daily closing prices
S&P 500
500 top companies in the US
Better measurement of the nation's economy
NASDAQ
Electronic/new companies
Stock listed either here or NYC Stock Exchange
Wilshire 5000
Every company publicly traded in the US headquartered in the US
Broadest measure of US stock market
When stock prices RISE,
company is growing, economy expanding. bond prices go down, interest rates go up
When stock prices go DOWN,
company is no longer growing, economy is contracting. bond prices go up, interest rates go down.
Fundamental value of a stock
present value of expected earnings of a company
overvalued stock
higher cost than yield
undervalued stock
higher yield than cost
bank balance sheet: assets
Reserves
Loans
Securities
Other assets
bank balance sheet: liabilibites
-Deposits: transactional: checking deposits / non-transactional: cd/savings deposits
-Borrowings: Federal chartered bank @ discount rate
bank balance sheet: equity
assets must equal liabilities plus equity
Glass-Stegall Act 1933
-Established FDIC
-Prohibits commercial banks from investment banking activities
-Prohibits banks from owning commercial firms and vice versa
-Prohibits interest payments on demand deposits
-Repealed by Gramm-Leach-Bliley Act 1999
Gramm-Leach-Bliley Act 1999
Repealed Glass-Stegall act
Dodd Frank Act 2010
-Established Bureau of Consumer Financial Protection
-Financial Stability Oversight Council
-Stricter rules for capital requirement etc, stress tests and living wills
-Expanded federal supervisory responsibility to non-bank financial institutions
-Created
Dow Jones Industrial average is the stock index of
30 major us companies whose shares trade in markets
An index fund is
A mutual fund that invests all the stocks in a particular stock index
An investor buys a stock for $10,000 and earns dividends of $150 during the course of the year. At the end of the year, the stock is worth $9,500. The
capital gains yield
on this stock for the year is...
-5%
The model that proposes that 'stock prices move randomly and fully reflect all available information' is the _____________
Efficient market hypothesis
A preferred stock pays a _________ dividend ______________ voting rights.
fixed, without
A common stock pays a ____________ dividend ___________ voting rights.
variable, with
Financial assets with an original maturity of year year or less are traded in the ______________________.
money market
Who regulates all the publicly traded companies?
The Securities and Exchange Commission (SEC)
Fundamental value of a stock is the __________ value of expected earnings of the company.
present
Banks check credit history and credit score of their customers to reduce ________________
default risk
In the CAPM, the risk to a stock's return that is associated to the fluctuations in the overall stock market is known as
systematic risk
The first electronic stock exchange in the world is
NASDAQ
When the Federal Reserve conducts open market sales, what changes on the bank balance sheet?
Securities increase, borrowings increase
Are deposits to the Federal Reserve a liability or an asset on their balance sheet?
Liability
Are deposits to the Federal reserve a liability or an asset on the BANK balance sheet?
Asset
If a bank has $1 million in transaction deposits, how much is their reserve requirement?
$100,000
If a bank has $1 million in transaction deposits and $150,000 in reserve, how much is the bank holding in excess reserves?
$50,000
Banks hold excess reserves to reduce
liquidity risk
The average interest rate on a bank's assets minus the average interest rate on it's liabilities is known as the bank's
spread
Rapid increases in home prices from 2000 to 2006 was problematic because
disposable personal income was not increasing rapidly
Losses in subprime mortgage market magnified and extended to the entire economy because of
rapid increase in securitization earlier
When people or firms that are worse-than-average are most likely to enter a contract that is offered to everyone, the problem is called
adverse selection
If Apple Inc., an already listed company, wants to sell new equity shares, it is considered a ______________ stock offering in _____________ market.
secondary, primary
If Askor Inc., a newly listed company, wants to sell new equity shares, it is considered an ________________ in the _______________ market
initial public offering, primary
If Misty is selling her shares in Apple Inc., it is sold in the ___________________ market
secondary
Which of the following is an asset for depository institutions?
Reserve deposits at the federal reserve (part of reserve requirements)
If Bank Spread increases for a bank, it will
increase its profits
Contagion occurs when
a bank run spreads from one bank to another
The law that allowed banks to form financial holding companies and enter securities and insurance industries is the
Gramm-Leach-Bliley Act 1999
The law that separated commercial and investment banking was the
Glass-Stegall Act 1933
The law that brought mortgage lenders, credit card companies, investment banks, and other non-bank financial institutions under the supervision of the Federal Reserve is the
Dodd-Frank Act 2010
A bank is exposed to interest rate risk if
it has short term liabilities and long term assets (borrow short, lend long)