Term
| When given a price range, and the seller knows just as much as you, what should you pay? |
|
Definition
|
|
Term
| When given a price range, and the seller knows more than you, what should you pay? |
|
Definition
|
|
Term
| When trying to motivate a worker, how do you determine what % of profits to offer them? |
|
Definition
| Offer them more than the amount that makes it worth the same to them to be lazy or be hard-working. Work with their utility loss as a fixed cost. |
|
|
Term
| How do you determine insurance premium (payment)? |
|
Definition
| (Likelihood of event occuring*cost of payout)/years of policy. The event must only be able to occur once over the period. |
|
|
Term
| Are lemons more likely in the NYSE or over-the-counter? |
|
Definition
| NYSE has more info, so less adverse selection/lemons |
|
|
Term
| Would lending to a friend with or without a business be better? |
|
Definition
| With a business, because the friend has a personal stake in making sure the business makes a profit. Shareholder! |
|
|
Term
| Simple present value formula of a lump sum |
|
Definition
|
|
Term
| Annuity formula in words and in formula |
|
Definition
|
|
Term
| Bond PV formula is a combination of |
|
Definition
| annuity formula and simple present value formula |
|
|
Term
| What is the rate of return on a 1-year investment? |
|
Definition
| (Coupon + Price tomorrow - price today)/price today |
|
|
Term
|
Definition
|
|
Term
|
Definition
|
|
Term
| To find expected present values, given required yield and probability, you must (in words) |
|
Definition
| find the present values in each scenario and weight them by their probability, then sum |
|
|
Term
| To find the standard deviation of a bond price, given required yield and probability, you must (in words) |
|
Definition
| find the present values in each scenario and weight them by their probability, then sum, which will give you the expected PV of the bond price. You must then use probability weighted VARIATIONS, sum, then take the square root. |
|
|
Term
| To find holding period return, one must do what calculation? |
|
Definition
| (Total FV - originalPV)/originalPV |
|
|
Term
| Equity is dubbed what type of claim? |
|
Definition
|
|
Term
| Debt is a claim to what type of payment? |
|
Definition
|
|
Term
| Demand deposits are what type of service? |
|
Definition
|
|
Term
| Money generally includes what? Two types of defitions: |
|
Definition
| The monetary base, set by the Fed, which is the currency, or could include deposits, savings, and highly liquid stuff |
|
|
Term
|
Definition
|
|
Term
| The secondary market is where |
|
Definition
| most transactions occur, mostly in stocks |
|
|
Term
| An example of a centralized market is the |
|
Definition
|
|
Term
|
Definition
|
|
Term
| Capital market assets are |
|
Definition
|
|
Term
| Some things that determine asset value are |
|
Definition
| moneyness, divisibiilty, reversibility, cash flow, term to maturity, liquidity, complexity |
|
|
Term
| What are financial markets for? |
|
Definition
| matching savers/investors, smoothing consumption, insuring against risk |
|
|
Term
| Financial intermediaries are able to... |
|
Definition
| lower transaction costs, share risk with depositors without them taking it, and make sure your money is well informed |
|
|
Term
| Equity being not the most important kind of finance is odd because |
|
Definition
| it allowed direct investment by savers, and doesn't risk bankruptcy |
|
|
Term
| The most important form of external financing is |
|
Definition
|
|
Term
|
Definition
| before the sale, when one party doesn't know as much as the other |
|
|
Term
|
Definition
| after the sale, when the loaner can control what the borrower does |
|
|
Term
| NO TRADE THEOREM occurs because |
|
Definition
| in a perfect market, there are no gains to trade, so no trade occurs |
|
|
Term
| Some ways to solve adverse selection are |
|
Definition
| ratings agencies, issuer pays model, gov regulation, obsessive bank scrutiny, collateral |
|
|
Term
| Free rider problem occurs when |
|
Definition
| many lenders, and biggest lender foots all the cost of scrutinizing borrower |
|
|
Term
| Issuing debt is better than equity for who, and why? |
|
Definition
| For shareholders, so they can maintain claim to profits |
|
|
Term
| Managers prefer using equity because |
|
Definition
| equity send a bad signal to the market that the stock is overvalued |
|
|
Term
| Tools to solve moral hazard |
|
Definition
| financial intermediation, gov regulation, costly-state-verification, debt contracts/covenants |
|
|
Term
|
Definition
| requiring behavior, prohibiting other behavior, requiring information, requiring collateral maintenance |
|
|
Term
| The Volcker rule focuses on |
|
Definition
| prohibiting trading on your own account |
|
|
Term
| Economies of scope refers to the ability of financial firms to |
|
Definition
| lower average cost by letting the same division use information for multiple purposes |
|
|
Term
| Underwriting and research can be conflicts of interest because... |
|
Definition
| firms may "buy" positive coverage simply by selecting a particular underwriter. Also, IPOs may be underpriced to entice underwriter to give better coverage |
|
|
Term
|
Definition
| Allocating "hot" IPOs to favored clients because of the tendency for these IPOs to rise in price immediately, effecting a kickback |
|
|
Term
| Auditing and consulting may be conflicts of interest because... |
|
Definition
| incentive for auditing arm to make initiatives by consulting arm look good. this is now illegal |
|
|
Term
| What is "ratings shopping"? |
|
Definition
| A firm can pay to find out what the rating will be, before getting rated. |
|
|
Term
|
Definition
| the issuer of the equity/debt pays to get info on it, therefore making them more likely to seek favorable info |
|
|
Term
| The Glass-Steagall Act said... |
|
Definition
| No more Universal banking b/c it caused GP (didn't actually). Repealed in 1999. Caused investment banks to become real banks. |
|
|
Term
| Real banks, as opposed to investment banks, have access to... |
|
Definition
| assistance from Fed Reserve |
|
|
Term
| Universal banking can be a conflict interest because... |
|
Definition
| could sell securities to bank clients, may sell bonds to cover bad loans, may make loans at favorable rates to encourage using the bank for underwriting etc, coercion to purchase insurance products, TRADING ON OWN ACCOUNT |
|
|
Term
| Conflicts of interest, in general, causes... |
|
Definition
|
|
Term
| Markets might work better than gov to fix conflicts of interest because... |
|
Definition
| investment banks/ratings agencies are afraid of getting a bad REPUTATION |
|
|
Term
| Even before Glass-Steagall, population knew conflicts of interest existed because... |
|
Definition
| IPOs traded at a discount. Banks solved this by creating separate affiliates to do investment banking. |
|
|
Term
| Conflicts of interest for regulators? |
|
Definition
| small lobbyists from the industry effect regulation that is supposed to better society as a whole, interests not always aligned |
|
|
Term
| Regulation capture is caused by |
|
Definition
| regulation transparency (costly), supervisory oversight (costly), separation of functions (costly). Leads to barriers to entry, hurts investors |
|
|
Term
| After tax real interest rate is |
|
Definition
| nominal*(1-tax) - inflation(expected) |
|
|
Term
| Three things that aren't taxable? |
|
Definition
| municipal bonds, interest payments, mortgage interest |
|
|
Term
| If interest rates go up, it is better to hold.. |
|
Definition
| short term instruments that can change with the interest rate |
|
|
Term
| If interest rates fall, it is better to have... |
|
Definition
|
|
Term
| What determines asset demand? |
|
Definition
| wealth, expected return, risk, liquidity |
|
|
Term
| What determines asset supply? |
|
Definition
| expected profitability (more), expected inflation (more), government deficit (more) |
|
|
Term
| Efficient market hypothesis states... |
|
Definition
| The expected future price (in the expected return formula) is given by the optimal forecast OF the price |
|
|
Term
| Market efficiency ranges from.. |
|
Definition
| weak to strong, with semistrong in the middle....measure of how much info in the price..strong means insider trading |
|
|
Term
| 5 evidences agaisnt market efficiency? |
|
Definition
| small firm effect (more returns if small), january effect (rise), market overreaction to news, excessive volaility, mean reversion |
|
|
Term
| Coval and Stafford said what about mutual funds? |
|
Definition
| in general, mutual funds allow investors to add/withdraw capital at will. Subject to extreme flows. But past performance is not indicator of future return. |
|
|
Term
| Coval and Stafford meant to show that... |
|
Definition
| bad mutual funds more likely to eliminate holdings, need to liquidate is costly when other firms need to liquidate as well, transactions far from fundamental value. Large inflows also costly, drive up security prices. Which stocks are traded seems predictable. |
|
|
Term
| Coval and Stafford show that traders can make an abnormal return of 10% by |
|
Definition
| buying or shorting ahead of distressed purchases by mutual funds |
|
|
Term
| Tulipmania refers to the Netherlands early 1600s incident where |
|
Definition
| tuplis were overpriced and dropped in value by almost half in a month |
|
|
Term
| Tulipmania may be logical because... |
|
Definition
| they wanted a rare tulip type that became more common via a special type of breeding over time |
|
|
Term
| In Tulipmania, was it a bubble? |
|
Definition
| only that one month in 1637 (Jan to Feb) looks like a bubble, because nonspecialists startded to trade with no margin requirements on futures contracts. Most not fulfilled. No evidence of real tulips in the trades, at most, wealth transfers. |
|
|
Term
|
Definition
| more paper currency means more economic expansion by employing wasted resources |
|
|
Term
| The Mississippi Bubble involved France adopting.. |
|
Definition
| high taxes/John Law's ideas, new company to take over Candian beaver skin, tobacco, and African trade. Shares paid in gov. debt. |
|
|
Term
| The South Sea Bubble involved |
|
Definition
| the South Sea Company competing with the Bank of England to refund British Gov. debt in lieu of not being able to trade with South America. |
|
|
Term
| The South Sea Company issues shares in exchange for... |
|
Definition
| gov debt on their balance sheet from current bondholders, growth via interest from gov (reduced borrowing cost for gov) |
|
|
Term
| Why did the South Sea Company issue shares for debt? |
|
Definition
| bribed Parliament/King's associates, gave them 17% of new shares, believed that more paper money leads to real expansion |
|
|
Term
| What popped the South Sea Bubble? |
|
Definition
| The value was lowered by legislation designed to excluded competitors of South Sea, creating a liquidity crisis, making people want to sell their stock. Original value was favor of parliament/gov debt steady inflow. |
|
|
Term
| The discount window involves... |
|
Definition
|
|
Term
| The Fed funds market involves... |
|
Definition
| borrowing from other banks |
|
|
Term
| What is the discount window criteria? |
|
Definition
| now, the FEd will take a lot of different assets as collateral, but always had collateral (t-bills, etc) |
|
|
Term
| Banks don't like borrowing from... |
|
Definition
| the discount window, because of stigma |
|
|
Term
|
Definition
| Borrowing at 3, lend at 6, golf at 3pm |
|
|
Term
|
Definition
| GM's financing arm is now a bank that can lend at low interest to entice people to buy their cars |
|
|
Term
| If a bank faces a lot of withdrawals, what can it do? |
|
Definition
| discount window, fed funds market, sell securities, call debt, use excess reserves (best) |
|
|
Term
| Excess reserves are good because |
|
Definition
| no interest, no stigma, insurance against withdrawals, option value vs others |
|
|
Term
| Reserves are recently a lot higher because |
|
Definition
| the Fed put money into banks to try increase their willingness to lend |
|
|
Term
|
Definition
| a UK bank run in 2007, with limited deposit insurance up to 2000 pounds, partial up to 35000 pounds, with insurance by banking industry |
|
|
Term
| After the BBC announced aid to Northern Rock... |
|
Definition
| depositors ran on the bank |
|
|
Term
| Before the BBC announced aid to Northern Rock... |
|
Definition
| damage to bank already done, since bank was funded by short-term borrowing and securitized notes who's market were frozen the MONTH prior |
|
|
Term
| Two problems with Northern Rock were... |
|
Definition
| maturity mismatch (LT loans financed with short-term debt) and rollover risk (no loans short term means risk for long term) |
|
|
Term
| The LIBOR going down in 2009 meant... |
|
Definition
|
|
Term
| What triggered Northern Rock and the preceding freeze in S-T loans? |
|
Definition
| US subprime mortgages causes French investment vehicles to close, freezes this market |
|
|
Term
| In month prior to North Rock, what did regulators do? |
|
Definition
| hide the problem, thought depositors were subject to irrational panics, allowed sophisticated investors to run on the bank before depositors |
|
|
Term
|
Definition
| mutually owned savings bank, massive growth over decade, expanded mortgages, needed more funds, turned to S-T loans - common for UK banks |
|
|
Term
| The Northern Rock run only occured on what part of their balance sheet? |
|
Definition
| wholesale funding, mix of short to medium term notes - but retail deposits only dropped from 5.6 to 3 billion |
|
|
Term
| What caused the Northern Rock run? |
|
Definition
| providers of info needed to do better, should have hit all institutions not just Northern Rock, high leverage, massive margin call |
|
|
Term
|
Definition
| except from Gov regulation/transparency rules, blindsides some investors |
|
|
Term
|
Definition
| defeated by agr/state banks |
|
|
Term
|
Definition
| response to abusive state banks, destroyed by populism |
|
|
Term
| Federal Reserve System (current)... |
|
Definition
| balance of bank between banks and power of people, board of governors |
|
|
Term
| Bank failures very common in |
|
Definition
|
|
Term
| Dual banking system means |
|
Definition
| state and Fed banking at same time |
|
|
Term
| Interest rate volatility involves |
|
Definition
| maturity mismatch, increase opportunity cost w/interest rates up, stream of fixed payments desirable |
|
|
Term
| To meet interest rate volatility needs... |
|
Definition
| adjustable rate mortgages, financial derivatives, interest rate swaps, hedging |
|
|
Term
| McFadden Act of 1927 meant |
|
Definition
| no branching of banks, ATMs, bank holding companies, across state lines |
|
|
Term
| McFadden Act relaxed by... |
|
Definition
| Riegle-Neal Interstate Banking Act of 1994, permits interstate competition and consolidation |
|
|
Term
| S&Ls/credit unions/mutual savings banks were created to... |
|
Definition
| increase availability of banking services to consumers, increase home ownership |
|
|
Term
| Difference between owning and renting? |
|
Definition
| Moral hazard in ownership if based on loan, diversification lack in S&Ls (mortgages) & credit unions (correlated risk) |
|
|
Term
| S&Ls and credit unions were favored by gov regulation by |
|
Definition
| S&Ls could pay higher interest, credit unions were nonprofit so not taxed |
|
|
