Midterm Exam Notes
First Exam Notes
1. The two reasons why you (or anyone) should study financial markets and financial institutions). Answers:
* Personal needs, your career, your life, less surprise in the future. You could not avoid financial markets and institutions anywhere * Assume us work for business, government; non-profit program is affected by financial institution and market. 2. Define security.
* A security also called a financial instrument is a claim on the issuer’s future income or assets (any financial claim or piece of property that is subject to ownership) 3. What is basis point and why do financial professionals use the term basis point rather than percentage? Answers:
* 1/100th of a percentage point. Used as verbal shorthand by financial professionals. For example, rather than say “fees are 75 one-hundredths of a percentage point, investment professionals say “fees are 75 basis points” * There are several advantages to referring to changes in basis points, rather than percentages. The first is that basis points are absolute and clear. For example, one could say equally correctly that interest rates rose 20%, from 5% to 6%, or that interest rates rose 1% from 5% to 6%. This can get a bit confusing, but it's much more simple when basis points are used, because one can say that interest rates rose by 100 basis points, providing instant clarity. Basis points can also be used to discuss very small increments of change without having to throw around challenging numbers. A rise in interest of 0.38%, for example, is perhaps better understood as 38 basis points. 4. The FX market is:
* Not highly regulated, very large worldwide in terms of amount of transactions, volatile at times, and important to the U. S. economy (and most other nations) since it facilitates international trade (exports and imports). It is the place where foreign exchange rate is decided. 5. In the financial system three general events occur.
* Securities are traded;
* Interest rates are established;
* Financial services are produced, delivered and consumed 6. Name two or more functions of the Fed other than monetary policy. Answers:
* The Fed (and most central banks around the world) has many responsibilities other than monetary policy. For example, the Fed oversees/regulates bank holding companies, monitors the payments system of the U. S., and distributes currency and coin.
7. Name the source of the Fed’s authority
* US congress/ and law
8. Name the source of the Fed’s funding of its operation. Answers:
* The process of buying and selling securities to execute(实行) monetary policy generates导致 income in the form of interest and gains on trades. 17 billions dollars; treasury The Federal Reserve's income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions (the rate on which is the so-called discount rate). After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. 9. Read numbers 1., 2., 3., and 4. In the Summary section of chapter one (page 14) Answers:
* Activities in financial markets have direct effects on individuals’ wealth, the behavior of businesses, and the efficiency of our economy. Three financial markets deserve particular attention: the bond market (where interest rates are determined), the stock market (which has a major effect on people’s wealth and on firms’ investment decisions), and the foreign exchange market (because fluctuation in the foreign exchange rate...
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