Studied by 12 peopleHow many members in the Board of Governors of the Fed, how long are they in office for, and who appoints them
7 members, 14 years, the president
How many members in the Federal Open Market Committee
12... 7 of which come from the Board of Governors
most important players in the financial markets
central banks
Central banks actions affect (3 things)
interest rates, amount of credit, and the money supply
what act created the federal reserve system
federal reserve act of 1913
how many directors in each district bank?
9 directors Three A directors- bankers elected by member banks Three B directors - non bankers appointed by member banks Three C directors - non bankers appointed by Board of Govenors
What are the functions of the federal reserve bank (5 things)
Clear checks and administer the payment system Issue new currency and withdraw damaged currency Evaluate mergers and banking activities Examine banks in their district Collect data on local business conditions and research topics on conduct of monetary policy
FOMC directs ________
open market conditions
_____________ establish the discount rate and ___________ review and determine the discount rate
12 federal reserve banks; Board of Governors
All _______________ are required to be members of the Fed
national banks (Banks chartered by states are not required to be members. About 1/3rd of all commercial banks in US are members)
Reserve requirements are _____________ and are set by the ______________
moneys deposited with the Federal Reserve banks that earn little interest; board of governors
Board of Governors chairman serves how long of a term? and how long is the term of the 7 members of the board of governors?
4 years; 14 years
All 7 directors of the Board of Governors are also members of the _______
FOMC (along with 5 regional members.... the New York District President plus 4 other Fed District bank presidents)
Chairman of Board of Governors presides as chairman of _________
FOMC
_____________ help to control the money supply and is the most important tool in the Fed arsenal.
Open market conditions
FOMC is focal point of ___________
monetary policy
What act granted FOMC authority to determine open market operations
Banking Act of 1933
which act gave the board authority over reserve requirements
Banking Act of 1935
What 2 factors make the Fed independent
Members of Board have long terms Fed is financially independent—this is most important
What 2 factors make the Fed dependent
Congress can amend Fed legislation President appoints Chairmen and Board members and can influence legislation
Monetary policy is important because it affects ______ (3 things)
The money supply Interest rates Economic activity
Monetary liabilities of the Fed (2 things)
Currency in circulation (currency outside of banks)... EX: Fed notes, money
Reserves (currency held at banks plus deposits held at the federal reserve)... Reserves assets for banks, liabilities for the Fed. Two categories—required and excess reserves
Assets of the Fed are _______ and _______
Government securities and discount loans
Why are Fed assets important
Changes in assets change reserves and the money supply. Fed assets earn interest, its liabilities do not
What is the most important monetary policy tool
Open market operations
Open market purchase ________ reserves, deposits, MB and money supply
expand
Open market sale ________ reserves, deposits, MB and money supply
shrink
The bonds used in open market operations are those issued by the ________ and _________
US treasury and government agencies
A discount loan ________ reserves, deposits, MB and money supply
expands
The percentage of all deposits that banks are required to hold in reserve is called the ___________
required reserve ratio.... NOTE: required reserves = required reserve ratio times the amount of deposits
When discount lending increases, the quantity of reserves supplied ___________
increases
As rates drop, reserves demanded __________
increases
Open Market Operations: Purchase of Gvts. causes Funds Rate to _______ Sale of Gvts. Causes Funds Rate to _______
fall; rise
Discount Lending: Fed lowers discount rate, Funds rate _______ Fed raises discount rate, Funds rate ______
falls; rises
Reserve Requirement: When raised, Funds rate _____ When lowered, Funds rate _____
rises; falls
Dynamic Market Operations are ____________
Meant to change level of Reserves
Defensive Market Operations are _________
Meant to offset other factors affecting Reserves, typically uses repurchase agreements and reverse repos
What is the funtion of the lender of last resort
to prevent banking panics and prevent nonbank financial panics
What are the three types of discount loans
Adjustment Credit Seasonal Credit Extended Credit
Advantages (1) and Disadvantages (4) of the reserve requirement
Advantages: Powerful effect
Disadvantages: Small changes have very large effect on Money supply Raising causes liquidity problems for banks Frequent changes cause uncertainty for banks Tax on banks
Advantages of Open Market Operations (4)
Fed has complete control of size and timing
Open market operations-flexible and precise
Open market operations easily reversed
Open market operations done quickly
The feds three tools to conduct monetary policy and affect the Fed funds rate
open market operations discount policy change the reserve requirements
Goals of monetary policy (6)
High employment Economic growth Price stability Interest rate stability Financial market stability Foreign exchange market stability
What are the three criteria for choosing targets
Measurability Controllability Ability to predictably affect goals
Lessons from Monetary targeting
Success requires correcting overshoots Operating procedures not critical Breakdown of relationship between M and goals made M-targeting untenable; led to inflation targeting
Lessons from inflation targeting
Decline in π still led to output loss Worked to keep π low Kept π in public eye—reduced political pressures for inflationary policy
the term money markets is used to refer to markets where
large denomination, low risk, short term financial securities are traded
money market transactions are done through
OTC markets (electronic communication)
Purpose of money markets
Investors in Money Market: Provides a place for warehousing surplus funds for short periods of time
Money market acts as a buffer for temporary use of cash inflows and outflows
Borrowers from money market provide low-cost source of temporary funds
six primary money market participants
US Treasury Federal Reserve system Commercial banks Businesses Investment and security firms Individuals
7 money market instruments
Treasury Bills Federal Funds Repurchase Agreements Negotiable Certificates of Deposit Commercial Paper Banker's Acceptance Eurodollars
Treasury Bills are used to finance ______
the national debt
Treasury bills are ST or LT borrowings of the federal government?
ST (28 days to one year)
Treasury bills are issued at a _________ and can be redeemed at their ____________
discount; par or face value
Market for T-Bills is extremely _______ and _______
deep (many buyers and sellers) and liquid (they can be easily bought and sold)
T-Bill discounting formula on pg 150 of study guide
T-Bill discounting formula on pg 150 of study guide
Federal Funds are
Short-term funds transferred (loaned or borrowed) between financial institutions, usually for a period of one day.... in easier wording it is the overnight borrowing and lending among commercial banks for the purpose of meeting the Feds reserve requirement
What sets the Fed fund rate
Forces of supply and demand set Feds fund rate
Main purpose for Fed funds is to
is to provide banks with reserves to meet their reserve requirements at Fed.
difference between fed funds and repurchase agreements
Non banks can participate in repurchase agreements
Repurchase agreements (repos)
When a firm sells Treasury securities in a repo and the firm agrees to repurchase the securities at a specified time and price.
maturity of repos
3-14 days... very ST
Negotiable certificates of deposit are
Bank issued term securities which have a specified maturity date and are issued by banks.... In other words it is a bank-issued security that documents a deposit and specifies the interest rate and the maturity date
Are negotiable certificates of deposit a bearer instrument
yes
What does a bearer instrument mean?
whoever holds it at maturity can redeem it
Denominations for a CD range from __________ and mature in
range from $100,000 to $10 million and mature in 1 to 4 months
Commercial Paper are ____________
Unsecured promissory notes, issued by corporations
Commercial paper matures in less than ___________
270 days
Commercial paper are issued on a discounted basis? T or F
True
Bankers acceptance is ___________________
An order to pay a specified amount to the bearer on a given date if specified conditions have been met, usually delivery of promised goods. Crucial to Intl. trade
Banker's acceptance are traded on a _______ basis in the _______ market
discount; secondary
Advantages of Banker's acceptance (4)
Exporter paid immediately Exporter shielded from foreign exchange risk Exporter does not have to assess the financial security of the importer Importer's bank guarantees payment
Eurodollars
Dollar denominated deposits held in foreign banks
SLIDE 23 on Lecture 11-12
SLIDE 23 on Lecture 11-12
The correlation of interest rates among money market securities is because they are all ST and of low risk. Two significant differences that distinguish one security from another is _________ and _______
default risk and liquidity
Money market mutual funds are
Open-end investment funds that invest only in short-term securities
Money market mutual funds are popular among
small investors
Purpose of the Capital Markets is for
Original maturity is greater than one year, typically for long-term financing or investments
Best known capital market securities are
stocks and bonds
Primary issuers of securities in capital markets are
Federal and local governments: debt issuers Corporations: equity and debt issuers
Largest purchaser of securities in capital markets are
you and me (households are the main buyers)
Primary market transactions include
initial public offerings (IPOs)
Secondary markets are where previously issued securities trade. Where do these occur?
OTC markets or organized exchanges (NYSE)
Bonds represent
a debt owed by the issuer to the investor
The coupon rate of a bond is the
rate of interest the issuer must pay annually
The par, face, or maturity value of a bond is the
amount that the issuer must pay at maturity
If repayment terms are not met with a bond, the owner of the bond has
a claim on the assets of the issuer
Treasury bills have maturities __________ while Treasury notes have maturities _________ while treasury bonds have maturities _________
less than 1 year (money market security); between 1-10 years; greater than 10 years
Treasury notes and bonds have _______ but are free of
interest rate risk; default risk
Treasury notes and bonds have very _______ interest rates because _________
low; because of their low risk of default
Municipal bonds are issued by ____________ and are used to ______________
local, county, and state government; finance public interest projects
Tax-free municipal interest rate =
taxable interest rate (1 marginal tax rate)
What are the two types of municipal bonds
General obligation bonds (full faith and credit) and Revenue bonds (Bond repaid from project)
General obligation bonds
are backed by the full faith and credit of the issuer
Revenue bonds
are backed by the cash flows of a particular project
Municipal bonds have default risk? T or F
yes but still less risky than corporate bonds
Corporate bonds have a face value of _______ and pay interest
$1000; semiannually
Restrictive covenants
restrictions on management designed to protect bondholders. EX: a limit on dividends a firm can pay
With corporate bonds the degree of risk and interest rate do not vary with each bond no matter the level of risk. T or F?
F Degree of risk varies with each bond Interest rate varies with level of risk
Call provisions
state the price and time at which the issuer can force the holder to sell the bond back before maturity. In other words it allows the issuer to call (redeem) the bond before matiry
Note
Flashcard