Financial Derivatives and Loanable Funds Quiz

Financial instruments that derive their value from another underlying asset, such as stocks, bonds, or currencies.

A financial market where derivative securities are traded.

A regulation restricting proprietary trading by banks.

An agency that regulates financial instruments.

Full and fair disclosure of information on securities issues to investors.

The decline in home prices that began in late 2006 and early 2007.

Mortgages issued to borrowers with poor credit histories and lower credit scores.

Securities backed by mortgage loans.

The total amount of money circulating in an economy, deposits being a key component.

Financial institutions offer financial claims to savers with better liquidity and lower price risk than holding assets directly.

Financial institutions are a crucial source of funding for specific industries.

Similar to economies of scale in information production, financial institutions benefit from reduced transaction costs due to their size.

Financial institutions manage the risk of asset and liability maturity mismatches.

Financial institutions provide payment services like transfers, benefiting the economy.

The use of technology to offer financial solutions that compete with traditional methods.

The risk that fintech firms could disrupt traditional financial services firms, leading to customer and revenue loss.

As the risk of financial security increases, the supply of loanable funds decreases.

As near-term spending needs increase, the supply of loanable funds decreases.

As economic conditions improve in a domestic country, the supply of funds increases.

As economic conditions improve in a foreign country, the supply of funds decreases.

Monetary expansion leads to an increase in the supply of loanable funds.

When financial market participants have few near-term spending needs, the absolute dollar value of funds available to invest increases.

A direct impact on equilibrium interest rates means that an increase in a factor leads to an increase in equilibrium interest rates (and vice versa).

An inverse impact on equilibrium interest rates means that an increase in a factor leads to a decrease in equilibrium interest rates (and vice versa).

Higher utility from an asset purchased with borrowed funds leads to a higher demand for loanable funds. The higher demand will increase the price of loanable funds (interest rates) and thus makes borrowing more expensive. Lower utility from an asset leads to a lower demand for loanable funds, lowering the interest rates.

More restrictive non-price conditions (like fees, collateral, or requirements) will decrease the demand for borrowed funds. This is because potential borrowers will be less interested in borrowing with more stringent conditions. Less restrictive non-price conditions will increase the demand for borrowed funds, as it is more appealing for borrowers.

As interest rates increase, the cost of borrowing increases, making borrowing less attractive. This leads to a lower demand for loanable funds. Conversely, as interest rates decrease, the cost of borrowing decreases, resulting in a higher demand for loanable funds. This is known as the movement along the demand curve.

Changes in factors like economic conditions, utility derived from assets purchased with borrowed funds, or changes in non-price conditions (fees, collateral) shift the demand curve for loanable funds.

Factors affecting the supply of loanable funds are those that affect the willingness of lenders to provide funds. These can include factors such as interest rates, government policies, and inflation, among others.

The general upward or downward movement of prices in an economy over time. It's a key factor influencing interest rates.

The risk that a borrower will not be able to repay their debt obligations, including interest and principal payments.                                                                         

A measure of the overall price level of consumer goods and services in an economy.

A measure of the overall price level of goods and services produced by domestic companies.

The risk that an investor will not be able to easily sell an asset at a fair market price. This risk is higher for assets that are less liquid.

Special provisions or covenants included in a debt contract that affect the risk of the investment. These can influence the interest rate.

When domestic economic conditions are strong, the demand for funds for investments increases. This drives interest rates higher.

When domestic economic conditions weaken, the demand for funds decreases, leading to lower interest rates.

Markets where corporations raise funds by issuing new financial instruments like stocks and bonds.

Markets where existing financial instruments, like stocks and bonds, are traded after their initial issuance.

Markets where short-term debt securities (less than 1 year maturity) are traded. These securities have lower risk and less price fluctuation.

Markets where long-term debt securities (bonds) and shares of equity (stocks ) are traded.

The financial crisis of 2008 had a significant impact on the issuance of new securities by corporations in primary markets.

Full and fair disclosure of information about securities issues to investors.

Financial institutions that make loans to individuals and businesses, but do not accept deposits. They rely on short- and long-term debt for funding.

Depository institutions, like savings associations, banks, and credit unions, offer services like commercial banks but focus on specific areas like real estate or consumer loans.

Financial institutions that protect individuals and corporations against adverse events like death, illness, retirement, accidents, theft, fire, etc.

Financial institutions that pool the financial resources of individuals and companies and invest them in diversified portfolios of assets.

Financial institutions that collect funds during an individual's working years to be withdrawn upon retirement, often with tax-exempt investments.

How money flows between different entities in an economy, involving financial institutions.

The importance of financial institutions in facilitating the flow of funds between lenders and borrowers.

Bonds that are considered to have high credit quality and a low probability of default. These bonds are typically rated AAA or Aaa by major credit rating agencies.

Bonds that are considered speculative, meaning they have a higher risk of default. These bonds are typically rated below Baa by Moody's and BBB by S&P and Fitch.

A rating assigned to bonds by credit rating agencies that reflects the perceived risk of the bond issuer defaulting on their debt obligations.

A bond's ranking based on creditworthiness and default risk, with higher ratings indicating lower risk and vice versa.

A type of bond considered speculative or high-yield, often offered by companies with lower credit ratings.

A bond typically issued by well-established companies with strong financial performance and a lower risk of default.

A bond issued by a company with a lower credit rating, indicating a higher likelihood of default and higher potential for loss.

The loanable funds theory proposes that interest rates in financial markets are determined by the equilibrium of the supply and demand for loanable funds.

The supply of loanable funds refers to the amount of money available for investments in financial markets. It's influenced by factors like interest rates, economic conditions, and government policies.

Generally, as interest rates rise, the supply of loanable funds increases. This is because higher interest rates incentivize lenders to provide more funds.

The demand for loanable funds represents the amount of money individuals, businesses, and governments want to borrow for investments.

As interest rates rise, the demand for loanable funds typically decreases. This is because higher interest rates make borrowing more expensive, discouraging borrowers.

Equilibrium interest rates are reached when the supply and demand for loanable funds balance. At this point, the amount of funds lenders are willing to provide equals the amount borrowers want to borrow.

Factors affecting demand for loanable funds include economic conditions, expected returns on investments, and non-price conditions (fees, collateral requirements).

Factors affecting the supply of loanable funds include interest rates, economic conditions (both domestic and foreign), and government policies.

Bonds with the lowest credit rating, indicating high risk of default and poor prospects for recovering investments.

Bonds with a speculative rating, indicating a higher risk of default than investment-grade bonds.

A financial instrument that derives its value from another underlying asset, such as stocks, bonds, or currencies.

Financial instruments that represent ownership in a company (stocks) or debt obligations (bonds).

A broad measure of the overall value of a specific segment of the bond market, reflecting changes in bond prices and interest income.

Common stock represents the fundamental ownership claim in a corporation, giving holders voting rights and a residual claim on assets after debt payments.

Dividends are payments made to shareholders from a company's profits, determined and distributed by the board of directors.

The residual claim means common stockholders have the right to receive any remaining assets after all debts and preferred stockholders are paid.

Limited liability protects stockholders from personal liability for the corporation's debts. They can only lose their investment.

Voting rights allow common stockholders to elect the board of directors and participate in company decisions.

Preferred stock offers specific rights and privileges, typically including fixed dividend payments and priority in asset distribution.

Stock markets play a crucial role in facilitating the buying and selling of corporate securities, impacting economic activity and performance.

Stock market movements, especially in the secondary market, are closely watched as indicators of economic activity and business sentiment.