Liano Test 1 | FIN 3113 - Financial Systems, Quizzes of Finance

Download Liano Test 1 | FIN 3113 - Financial Systems and more Quizzes Finance in PDF only on Docsity! TERM 1 National Debt DEFINITION 1 Total amount government borrowed: $19.4 TrillionThis year: $500 BillionLast year: $400 billionGovernment is sustainable unlike households TERM 2 Interest Rate DEFINITION 2 Income to the lender TERM 3 DSU DEFINITION 3 Deficit Surplus UnitIncome < ExpenditureExpenditure> IncomeBorrower, Issuer TERM 4 Nominal Interest Rate DEFINITION 4 The observable rate that has ignored the effect of expected inflationAny interest rate: general termEx: 30 year fixed mortgage 3.5%2016: 30 yr fixed rate: 3.5%1980: 30 yr fixed rate: 13% ---> interest rate illusion TERM 5 Real Interest Rate DEFINITION 5 The rate measured in terms of increase in the purchasing powerReal rate= nominal rate - inflation premium TERM 6 Money Market DEFINITION 6 Market for short term securities (less than a year)Ex: US T- Bills, CDs, commercial paper, repurchase agreement TERM 7 Realized Real Interest Rate DEFINITION 7 May differ from real rate expected at the beginning of the loan period because inflation premium may differ from actual inflation TERM 8 Rate Comparison DEFINITION 8 Nominal and real rate will equal when you expect no inflationNominal and realized rate will equal when you correctly predict inflationReal and realized real rate will be equal if you correctly predict inflation TERM 9 Function of Financial Systems DEFINITION 9 To channel funds or financial resources from SSU to DSUA financial claim, instrument, security, such as an IOU, stock or bonds is issued by DSU for financial resources provided by SSU TERM 10 Unanticipated Increase or Decrease in Inflation DEFINITION 10 Unexpected increase: makes the borrower better off (redistribution of income from lender to borrower)Unexpected decrease: makes the lender better off TERM 21 Bond Pricing DEFINITION 21 A bond is a long term promissory note or debt of issuer (DSU) TERM 22 Par/Face value or Principle DEFINITION 22 The amount of money the borrower promise's to pay at the maturity date$1000 unless otherwise specified TERM 23 Coupon Payment DEFINITION 23 the dollar amount that is to be paid to the lender for the use of $1000. This is a fixed payment and is obtained by multiplying the coupon rate with the par value TERM 24 Yield to Maturity DEFINITION 24 Return on your investment TERM 25 2 Types of Bond Cash Flows DEFINITION 25 Coupon and par value TERM 26 Most important concept DEFINITION 26 If interest rate increases, price of the bond decreasesIf interest rates decrease, price of the bond increasesPrice of a bond is the present value of future cash flows TERM 27 Capital Market DEFINITION 27 Market for long term (longer than a year) securities.EX: mortgages, US T-Note, US- T-Bond TERM 28 Spot/Cash Market DEFINITION 28 Transaction calling for immediate delivery of assets TERM 29 Discount vs. Premium DEFINITION 29 Discount: PB selling below par value (Coupon rate< market rate)Premium: selling above par value (coupon rate >market rate)No real difference between the two, you get what you pay for TERM 30 Consol (Perpetuity) Bonds DEFINITION 30 Bonds that only have coupon payments. Consol bonds do not pay back the par value and hence have no maturity date TERM 31 Forward/Future Market DEFINITION 31 Calling for the delivery for a specific at a specific future date and priceTo make money in futures market, spot market must go up TERM 32 2 Channels of Funds DEFINITION 32 Direct financing: SSU deals directly with DSU via financial marketIndirect Financing: Financial interpretations like banks bring DSU and SSU together by issuing financial security to the SSu in the form of deposits and use the funds to purchase securities issued by DSU TERM 33 3 Economic Units DEFINITION 33 HouseholdsGovernmentBusiness Firms TERM 34 Zero Coupon Bonds DEFINITION 34 bonds that do not pay interest/coupon payments. It always sells at a discountEX: US savings bonds TERM 35 Private Placement DEFINITION 35 DSU sells the entire issue of financial security to one or a few investorsTime consumingRisk of DefaultSSU has risk