| A | B |
|---|
| loan | a sum of money that a lender gives a borrower, which is expected to be repaid with interest |
| principal | sum of money the lender gives the borrower |
| term | length of the loan |
| future-oriented activities | activities intended to bring in profits over the long term |
| default | failure of a borrower to pay back a loan to the lender on time, or at all |
| time value of money | the opportunity cost of not having one’s money available for use for some period |
| financial intermediary | any institution or business that collects money from suppliers of capital (depositors) and then funnels the funds out to users of capital (the business that borrow from the financial institution). |
| suppliers of capital | the investors who provide the funds. In the banking system, for example, the suppliers of capital are the depositors in the bank |
| users of capital | the eventual recipients, such as borrowers, of funds from a bank or other financial intermediary |
| venture capital firms | financial intermediaries that provide fuds to risky start-ups; most of today's high technology firms are funded through venture capital |
| venture capital | the funds provided to risky start-ups by venture capital firms |
| risk | the possibility that something unexpected, either good or bad, will happen to your investment |
| return | the gain you can expect on your investment over the long run |
| expected return | the average return that you can expect on an investment over the long run |
| risk-return principle | the only way to get consistently higher returns over the long run is to take more risks |
| default risk | also know as credit risk is the possibility that a borrowere won't play back the loan on time, or at all |
| event risk | measures the odds that a major event, such as a terrorist attack or a big earthquake, will reduce the return on the investment |
| inflation risk | the danger that inflation will increase, so the lendeer would be paid back in dollars that are worth less |
| stock | a piece of ownership in a particular business |
| public companies | businesses that have sold shares of stock (also called equity) to the general public |
| equity | shares of stock |
| initial public offering | the first time a company sells shares to the public |
| dividend | a portion of a company’s profits that it pays out to shareholders each quarter |
| stock market | a market where shares of stocks are bought and sold |
| market price | the typical price at which a good or service sells in a market. Also, the current price at which a share of stock can be bought or sold |
| price appreciation | an increase in the price of a stock |
| total return | share of stock is equal to the change in the stock price, plus the dividend, divided by the orignal price |
| investment banks | the financial intermediaries that handle the initial public offerings and secondary offerings of companies |
| stockbrokers | the financial intermediaries that handle the buying and selling of shares between investors |
| stock trades | the purchase or sale of a share of stock by an investor |
| diversification | splitting your money across different investments; it is a central principle of financial economics; helps reduce risk without reducing return; even the best diversification cannot completely eliminate risk from the stock market |
| mortgage market | the market for home loans |
| bond market | one of the main ways corporations and governments borrow |
| bond | a loan that entitles the lender (bondholder) to get regular interest payments over time, and then to get back the principal at the end of the loan period; bonds are sold in the bond market, this is he main way corporations and governments raise money; borrowing by issuing bonds is typically cheaper than borrowing from a bank |
| bondholder | the purchaser of a bond |
| fixed-income securities | bonds that entitle the lender to receive regular interest payments over time |
| treasury bonds | securities the federal government issues each year to fund the budget deficit with terms as long as 10 years and 30 years |
| treasury bills | securities the federal government issues with terms as short as one month |
| bubbles | a situation where the price of an asset, such as housing, rises far above sustainable levels |
| government spending | factor that will not affect the long-term aggregate supply curve |
| wealth effect | explains why the aggregate supply curve is upward sloping |
| cut in fed funds rate | causes a shift in aggregate demand curve; in the short-run output wil risk, but in the long-run output will not change |
| interest rate | price of the loan |
| without borrowing | fewer goods would be sold and less investment would be made by businesses |
| federal government borrowing | borrowing not sensitive to interest rates |
| in general, the willingness to borrow | will fall as the interest rate rises |
| demand curve | downward-sloping |
| risk of default | the possibility of not getting paid back on a loan |
| as the interest rate rises | lenders are willing to supply more loans, all other things being equal |
| supply schedule for lending | upward sloping |
| factors affect interest rates | strength of the economy, risk of default |
| expanding economy | causes demand curves for loans to shift to the right, interest rates will rise |
| interest rates will fall | during periods of economic weakness |
| borrowers at high risk of default | lenders less willing to advance money, quantity of loans is lss than quantity loand to safer borrowers, equivalent to upward shift in supply curve that results in higher interest rates for high-risk borrowers |
| bank credit channel | the whole flow - from suppliers of capital, through the financial intermediary, to the users of capital - is called a bank credit channel |
| venture capital credit channel | venture fund investors - pension fund, universally endowment, rich individual to venture capital firm to new companies such as tech start-up, energy start-up, biotech start-up |
| price of stock | determined by how well the company is doing; companies can raise money by issuing new stocks |
| shareholders | may also receive a dividend from a stock |
| initial public offering (IPO) | the first time a stock is sold to the public and it is handled by the investment banks |
| brokers | handle the buying and selling of shares |
| investment banks and stock brokers | key financial intermediaries in the stock market |
| multiple credit channels | lead to more competition, and make it easier for businesses to raise money |
| government borrowing | the federal government borrows to fund the budget deficit and raise money; to do this, the Treasury Department sellls treasury bonds with terms of 10 and 30 years; treasury bills, which are short-term securities that mature in less than one year |
| financial markets | markets prone to bubbles |
| bubble in internet markets | occurred in the late 1990s |
| financial bubble | occurred in the financial crisis of 2007-2009 in the U.S. housing market; weaknesses in financial regulatin also contributed to the problem |
