Finance 101: Money and Financial System

Anything generally accepted as payment for goods and services or repayment of debts.

1. Medium of exchange, 2. Unit of account, 3. Store of value.

Government issued currency not backed by metal or tangible assets.

The total amount of money in an economy, including various forms.

M1 is the sum of currency and demand deposits.

The market value of a bond at a specific time, reflecting the present value of future cash flows.

The risk of a bond's return decreasing due to rising interest rates, affecting prices inversely.

The weighted average time until cash flows from a bond are received, indicating sensitivity to interest rate changes.

The risk that future cash flows from a bond may have to be reinvested at lower interest rates.

The relationship where a higher coupon rate reduces a bond's duration, leading to less price sensitivity.

Financial institutions that accept deposits from the public and provide loans.

Cost savings achieved by producing multiple related goods/services together.

Banking services for deposit-taking and lending to individuals and businesses.

Part of commercial banking focused on small deposits and personal loans.

YTM equals coupon rate when bond price is at face value.

Investment funds pooling money from small investors, highly regulated.

Price of a coupon bond and YTM are inversely related.

Occurs when bond price is greater than face value.

Less regulated investment funds targeting wealthy individuals and large investors.

Total return anticipated on a bond if held until it matures.

Real interest rate = nominal rate - inflation rate.

Concept that money available now is worth more than the same amount in the future due to earning potential.

Treasury securities with face value adjusted for inflation.

The difference between nominal treasury yield and TIPS yield.

Rate of return = current yield + capital gain.

Current yield = coupon payment / price of bond.

Raising funds directly from savers in financial markets.

Raising funds via financial intermediaries from savers.

Borrowing money, typically through bonds with fixed payments.

Ownership shares in a business, giving claims on net income.

Problem of asymmetric information before transactions, leading to bad borrower choices.

Problem of asymmetric information after transactions, making it hard to detect risky behaviors.

Market where new security issues are sold directly to initial buyers.

Market where previously issued securities are traded and exchanged.

Today's valuation of future cash flows.

One repayment of the entire principal plus interest at maturity.

Regular fixed payments covering interest and principal until maturity.

A bond that pays fixed interest periodically until maturity, with face value paid back later.