货币银行学复习材料.doc

An Introduction to Money and the Financial SystemThis morning, a typical American college student bought coffee at the local caf, paying for it with an ATM card. Then she jumped into her car, on which she carries accident insurance, and drove to the university, which she can afford to attend thanks to her student loan. She may have left her parents home, which is mortgaged, a few minutes early to avoid construction work on a new dormitory, paid for by bonds issued by the university. Or perhaps she needed to stop at the bookstore to purchase this book, using her credit card, before her first money and banking class began. Beneath the surface, each financial transaction mentioned in this storyeven the seemingly simple onesis quite complicated. If the caf owner and the student use different banks, paying for the coffee will require an interbank funds transfer. The company that insures the students car has to invest the premiums she pays until they are needed to pay off claims. The students parents almost surely obtained their home mortgage through a mortgage broker, whose job was to find the mortgage that offered the best interest rate. And the bonds the university issued to finance construction of the new dormitory were created with the aid of an investment bank. This brief example hints at the complex web of interdependent institutions and markets that underlies the financial transactions we engage in every day. The system is so large, so efficient, and generally speaking so well run that most of us rarely take note of it. But a financial system is like air to an economy: If it disappeared suddenly, everything would grind to a halt. Lets take a closer look at this system. GlossaryCentral bankThe financial institution that manages the governments finances, controls the availability of money and credit in the economy, and serves as the bank to commercial banks.European Central Bank (ECB)The central authority, located in Frankfurt, Germany, which oversees monetary policy in the common currency area.Federal Reserve SystemThe central bank responsible for monetary policy in the United States.Financial institutionsFirms, such as banks and insurance companies, that provide access to the financial markets, both to savers who wish to purchase financial instruments directly and to borrowers who want to issue them; also known as financial intermediaries.Financial instrumentThe written legal obligation of one party to transfer something of value (usually money) to another party at some future date, under certain conditions.Financial marketThe part of the financial system that allows people to buy and sell financial instruments quickly and cheaply.Financial systemThe system that allows people to engage in economic transactions. It is composed of five parts: money, financial instruments, financial markets, financial institutions, and central banks.InformationA collection of facts. The basis for the third core principle of money and banking: Information is the basis for decisions.MarketsA virtual or physical place where goods, services, and financial instruments are purchased and sold. The basis for the fourth core principle of money and banking: Markets set prices and allocate resources.MoneyAn asset that is generally accepted as payment for goods and services or repayment of debt, acts as a unit of account, and serves as a store of value.RiskA measure of uncertainty about the future payoff to an investment, measured over some time horizon and relative to a benchmark. The basis for the second core principle of money and banking: Risk requires compensation.StabilitySteady and lacking in variation. The basis for the fifth core principle of money and banking: Stability improves welfare.TimeA measurable period during which something can happen. The basis for the first core principle of money and banking: Time has value.Money and the Payments SystemThe makers of the board game Monopoly print about 50 billion dollars worth of Monopoly money every yearcoincidentally about the same as the amount of new U.S. currency issued in 2002. Every game has bills totaling 15,140 Monopoly dollars. At a cost of about 13 U.S. dollars per set, this money would be a good deal if you could buy things other than Boardwalk and Park Place with it. Unfortunately, attempts to pay for groceries, books, or rent with this particular form of money have been unsuccessful. And thats probably a good thing. Since the mid-1930s, Parker Brothers has sold over 200 million Monopoly games, containing more than 3 trillion Monopoly dollars.1When we pay for our purchases in the real world, we have lots of choices: crisp new $20 bills, credit cards, debit cards, checks, or more complicated electronic methods. Regardless of the choice we make, we are using money to buy our food and clothes and pay our bills. To make sure we can do it, thousands of people work through every night, for the payments system really never sleeps. The middle of the night is the busiest time for check-clearing operations. Trucks make pickups and deliveries, and a fleet of leased airplanes flies sacks of paper checks around the country. And the volumes are astounding. The Federal Reserve reports that in 2000 there were 103 billion non-cash payments made in the U.S., 65 percent of which were paper checks. That means something like 250 million paper checks and 150 million electronic payments were processed on an average business day. From the time you put a signed check into an envelope until it returns to you with your bank statement, that small piece of paper travels a long way. If you choose another way to pay, the path of that payment is just as complicated.To understand why money is so important to the smooth functioning of the economy and how it improves everyones well-being, we need to understand exactly what money is. Just why is a $20 bill issued by the U.S. government much more useful than $20 in Monopoly money? Furthermore, to quantify the impact of money on the economy, we need to be able to measure it. Those are the goals of this chapter: to understand what money is, how we use it, and how we measure itFinancial Instruments, Financial Markets, and Financial InstitutionsLong before formal financial institutions and instruments became common, there were times when people lacked the resources to meet their immediate needs. In the terminology of introductory economics, peoples incomes were exceeded by their necessary consumption. When a harvest was poor, they would dip into the reserves stored from previous years or exchange assets like land and livestock for food. But often those measures were insufficient, so communities developed informal financial arrangements that allowed people to borrow or lend among themselves. After a poor harvest, those people with relatively good yields would help those with relatively poor ones. When the tables were turned, help would flow the other way. In some societies, families spread out geographically to facilitate these arrangements. For example, in rural Indian communities, households deliberately married off their daughters to families in different regions to increase the chance that their in-laws would be able to respond in a time of crisis.1 These informal insurance arrangements ensured that everyone had enough to eat. While family members and friends still make loans among themselves, the informal arrangements that were the mainstay of the financial system centuries ago have given way to the formal financial instruments of the modern world. Today, the international financial system exists to facilitate the design, sale, and exchange of a broad set of contracts with a very specific set of characteristics. We obtain the financial resources we need from this system in two ways: directly from lenders and indirectly through institutions. In indirect finance, an institution like a bank stands between the lender and the borrower, borrowing from the lender and then providing the funds to the borrower. Most of us do our borrowing and lending indirectly. If we need a loan to buy a car, we get it from a bank or finance companythats indirect finance. Once we get the loan, the car becomes one of our assets, and the loan becomes our liability. We all have assets and liabilities. Your assets probably include things of value like a bank account and a computer. If you have a student loan or credit card debt, those are your liabilities. In direct finance, borrowers sell securities directly to lenders in the financial markets. Governments and corporations finance their activities in this way. These securities become assets for the lenders who buy them and liabilities to the government or corporation that initially sells them. In the next section, well look at these financial instruments in more detail so that we can understand exactly how they work. Financial development is inextricably linked to economic growth. A countrys financial system has to grow as its level of economic activity rises, or the country will stagnate. Figure 3.1 (23.0K) plots a commonly used measure of financial activitythe ratio of a broad monetary aggregate to gross domestic productagainst real GDP per capita. The resulting correlation should not come as a surprise. There arent any rich countries that have very low levels of financial development. In fact, the ultimate role of the financial system is to facilitate production, employment, and consumption. In a prosperous economy, people have the means to pay for things, and resources flow to their most efficient uses. Savings are funneled through the system so that they can finance investment and allow the economy to grow. The decisions made by the people who do the saving direct the investment. In this chapter, we will survey the financial system in three steps. First, well study financial instruments, or securities, as they are often called. Stocks, bonds, and loans of all types are financial instruments, as are more exotic agreements like options and insurance. Exactly what are these financial instruments, and what is their role in our economy? Second, well look at financial markets, such as the New York Stock Exchange and the Nasdaq (National Association of Securities Dealers Automatic Quotations), where investors can buy and sell stocks, bonds, and various other instruments. And finally, well look at financial institutionswhat they are and what they do. GlossaryAssetSomething of value that can be owned; a financial claim or property that serves as a store of value.Asset-backed securitiesShares in the returns or payments arising from a specific asset or pool of assets, such as home mortgages or student loans.Bond marketA financial market in which debt instruments with a maturity of more than one year are traded.Centralized exchangeA financial market in which financial instruments are traded in a single physical location.CollateralAssets pledged to pay for a loan in the event that the borrower doesnt make the required payments.CounterpartyThe person or institution that is on the other side of a financial contract.Debt marketA financial market where bonds, loans, and mortgages are traded.Derivative instrumentA financial instrument, such as a futures contract or an option, whose value and payoff are derived from the behavior of underlying instruments.Direct financeFinancing in which borrowers sell securities directly to lenders in the financial markets.Equity marketA financial market where stocks are bought and sold.Financial institutionsFirms, such as banks and insurance companies, that provide access to the financial markets, both to savers who wish to purchase financial instruments directly and to borrowers who want to issue them; also known as financial intermediaries.Financial instrumentThe written legal obligation of one party to transfer something of value (usually money) to another party at some future date, under certain conditions.Financial marketThe part of the financial system that allows people to buy and sell financial instruments quickly and cheaply.Indirect financeAn institution like a bank stands between the lender and the borrower, borrowing from the lender and providing the funds to the borrower.LiabilitySomething you owe.Money marketA market in which debt instruments with a maturity of less than one year are traded.Over-the-counter (OTC) marketA financial market in which trades occur through networks of dealers connected together electronically.PortfolioA collection or group of investments held by a person or company.Primary financial marketA financial market in which a borrower obtains funds from a lender by selling newly issued securities.Secondary financial marketA financial market in which previously issued securities are bought and sold.SpecialistsIndividuals who oversee the trading of individual stocks in a centralized exchange.Underlying instrumentA financial instrument used by savers/lenders to transfer resources directly to investors/borrowers; also known as a primitive security.Future Value, Present Value, and Interest RatesLenders have been despised for most of history. They make borrowers pay for loans, while just sitting around doing nothing. No wonder people have been vilified for charging interest. No wonder that for centuries, clerics pointed to biblical passages damning interest.1 Even philosophers like Aristotle weighed in against the practice, calling the breeding of money from money unnatural. After scorning lenders for millennia, today we recognize their service as a fundamental building block of civilization. Credit is one of the critical mechanisms we have for allocating resources. Without it, our market-based economy would grind to a halt. Even the simplest financial transaction, like saving some of your paycheck each month to buy a car, would be impossible. And corporations, most of which survive from day to day by borrowing to finance their activities, would not be able to function. Credit is so basic that we can find records of people lending grain and metal from 5,000 years ago. Credit probably existed before common measures of value, and it predates coinage by 2,000 years.2Despite its early existence and its central role in economic transactions, credit was hard to come by until the Protestant Reformation. By the 16th century views had changed, and interest payments were tolerated if not encouraged, so long as the rate charged was thought to be reasonable. Some historians even point to this shift as a key to the development of capitalism and its institutions. Protestant European countries did develop faster than Catholic ones, at least at first.3 Since then, credit has exploded, facilitating extraordinary increases in general economic well-being. Yet even so, most people still take a dim view of the fact that lenders charge interest. Why? The main reason for the enduring unpopularity of interest comes from the failure to appreciate the fact that lending has an opportunity cost. Think of it from the point of view of the lender. People who offer credit dont need to make loans. They have alternatives, and extending a loan means giving them up. While lenders can eventually recoup the sum they lend, neither the time that the loan was outstanding nor the opportunities missed during that time can be gotten back. So interest isnt really the breeding of money from money, as Aristotle put it; its more like a rental fee that borrowers must pay lenders to compensate them for lost opportunities. Its no surprise that in todays world, interest rates are of enormous importance to virtually everyoneindividuals, businesses, and governments. They link the present to the future, allowing us to compare payments made on different dates. Interest rates also tell us the future reward for lending today, as well as the cost of borrowing now and repaying later. To make sound financial decisions, we must learn how to calculate and compare different rates on various financial instruments. In this chapter, well explore interest rates using the concepts of future value and present value and then apply those concepts to the valuation of bonds. Finally, well look at the relationship between inflation and interest rates. Basis pointOne one-hundredth of a percentage point.BondA financial instrument that promises a series of future payments on specific dates. Also known as a fixedincome security.Compound interestThe interest you get on interest as it accumulates over time.Coupon bondA bond offering annual coupon payments at regular intervals until the maturity date, at which time the principal is repaid.Fixed-payment loanA type of loan that requires a fixed number of equal payments at regular intervals; home mortgages and car loans are examples.Future valueThe value on some future date of an investment made today.Internal rate of returnThe interest rate that equates the present value of an investment with its cost.maturity dateThe time to the expiration of a debt instrument; the time until a bonds last promised payment is made.par valueThe final payment made to the holder of a bond; also known as the par value and the face value.present discounted valueThe value today (in the present) of a payment that is promised to be made in the future.present valueThe value today (in the present) of a payment that is promised to be made in the future.Real interest rateThe interest