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Chapter 1 Notes and Things to Note:Financial institutionsChanneling funds from those with surplus funds to those with a shortage of fundsTypes of fin institutionsCommercial banksAssets = loans, liabilities = depositsCommercial, consumer, real estateAlso subordinate notes and debenturesEx. BOA, Wells FargoInsurance companiesProtect policy holders from adverse eventsLife = death, illness, retirementProperty = accident, theft, fireEx. Northwestern mutual, Aflac, allstateSecurities firms and investment banksHelp issue securities and engage in related activities – securities brokerage and securities tradingEx. Charles Schwab, Goldman Sachs, ScottstradeInvestment Funds/CompaniesPool financial resources and invest in diversified portfolios of assetsMutual funds, hedge funds, etc.Ex. Vanguard, Blackrock, FidelityThriftsSimilar to commercial loans but in one segmentFinance companies*Do not accept depositsRely on short and long term debt for fundingPension fundsExempt from taxesLife without FI’sNeed for monitoringPrice riskSales price will be less than purchase priceNeed for liquidityQuickly convert from asset to cash at fair market valueServices FI performReduce monitoring costReduce price risk and liquidity riskMaturity intermediation (bridge the gap)Transaction cost services (economics of scale)Denomination intermediation (access to high priced services)Services for whole economyMoney supply transmissionCredit allocationIntergenerational wealth transferPayment services (Direct deposit, etc.)Changes in financial institutesCommercial banks to investment companiesTop BanksTop 5 = None from USFactorsIncrease pool of savingsGrowth pacific basinInformationLow-cost productsDiversify portfolioDeregulationPrimary marketsInvestor to companies (funds flow investor to companies)Secondary marketsInvestor to investorNYSESecondary bond MKTSBenefits of SecondaryLiquidityVarying risk returnsCorporations Current market valuePrice of future securitiesEvaluate performanceCompensate employeesUse stock as currencyMoney vs. capital marketsMoney = less than a yearCapital = more than a yearChapter 2 Notes and Things to Note:Supplier of funds HouseholdsDemander of fundsRetailersEquilibrium rateResult of supply and demand for loanable fundsDeterminants of interest ratesInflationReal risk free rateDefault risk/credit riskLiquidity riskTerm to maturitySpecial provisions/covenantsTaxabilityConvertibilityCallabilityChapter 4 Notes and Things to Note:Transaction flowsThings that impact money supplyMaking loansBuying/selling T-bills/securities/etc.Functions of the FedConduct monetary policyDual mandateMaximize employmentStable prices (keep inflation low)Supervise/regulate depository institutesMaintain stability of the financial systemProvide paymentStructure of the Fed12 federal reserve banks (across the country)12 member banksNon profitBOD appoints president to run the bank9 member BOD at each3 professional bankers3 business ppl3 people appointed by Fed Board of FovernorsFunctionsAssist conduct of monetary policySupervise and regulateConsumer protection/community affairsGovernment servicesNew currency issueCheck clearingWire transfer servicesResearch services7 member board of governors7 membersAppointed by president, confirmed by the senateServe 14 year non renewable termCurrent chair = Janet YellenPrevios, Bernecky, Greenspan, VolckerResponsibilitiesFormulate/conduct monetary policyDiscount rateReserve requirementsSupervise and regulate banks12 member federal open market committee12 members – y from fed board, 1 president of FRB NY, 4 rotating8 scheduled meetings per yearBOG is chairResponsibilityFull employementEconomic growthPrice stabilitySustainable pattern of international tradeMain tool = open market operations = 3rd toolChapter 4 Part 2: Notes and Things to Note:Fed can target and influence federal fund rate (by buying/selling securities) but cannot directly set the rateThe rate is the rate on short-term funds transferred between financial institutions, usually for a period of one dayOpen market operationsBuy/sell US securities to change the money supplyRun through*Discount rateRate of interest Fed Reserve Banks charge on loans to fin institutes in their districtBOG set discount rateFRB’s operate discount windowsProblemsDifficult to predict what banks will doLarge effect on financial marketsSend strong message to fin. MktsReserve requirementsLowering the reserve ratio to increase availability of funds bank can lendRatio = increase in reserves/reserve ratio (multiplier effect)ProblemsRarely used because unpredictable changes in money supplyHow willing make new loansHow willing to hold cash than redepositBlunt instrumentQuantitative easingBuys T-bills in open market ops to lower fed funds rateBuyying long term t-bills, then buying mortgage backed securitiesBenefits to wall streetUnload securitiesProfit from tradingBenefits to main streetIncrease access to finance/loansBenefits never materializedBanks have sat on excess reservesApproachesTarget interest rate (supply fluctuates) (1)Target quantity of reserves (rate fluctuates) (2)HistoricVolckerFought inflation w/ high volatile rates (2)GreenspanTarget rates (1)Bernanke Target rates (1) – lowered rates in recession, kept same for 7 yearsYellenTarget rates (1) – slowly raising rates ................
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