Economics Unit 2 Test Review Test Questions – Flashcards
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assets
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anything tangible or intangible of economic value owned by a business or individual
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asset allocation
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an investment strategy in which an investor divides his/her assets among different broad categories of investments (such as bonds) to reduce risk in an investment portfolio while maximizing return
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average annual yield
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the average yearly income on an investment, such as a bond, expressed in percentage terms
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bond
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a certificate of ownership of a specified portion of a debt due to be paid by a government or corporation to an individual holder and usually bearing a fixed rate of interest
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broker
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A firm or person who acts as an intermediary by buying and selling securities to dealers on an agency basis rather than for its own account
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capital markets
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the electronic and physical markets in which bonds and other financial instruments such as stocks and commodities are sold to investors
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commodity
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any unprocessed or partially processed good, such as grain, fruits, and vegetables, or precious metals
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compound interest
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interest that is calculated on the initial principal and previously paid interest
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diversification
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a strategy by which an investor distributes investments among different asset classes and within each asset class among different types of instruments in order to protect the value of the overall portfolio
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economic indicators
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statistical measures of current conditions in an economy
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mutual funds
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investment companies that invest pooled cash of many investors to meet the fund's stated investment objective
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index
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A statistical measure of change in an economy or a securities market. An imaginary portfolio of securities representing a particular market or a portion of it.
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price
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the dollar amount to be paid for a security, which may also be stated as a percentage of its face value or par in the case of debt securities
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risk
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a measure of the degree of uncertainty and/or of financial loss inherent in an investment or decision
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short
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borrowing and then selling securities that one does not own, in anticipation of a price decline
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stock
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A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.
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security
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A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. It is a fundable, negotiable financial instrument that represents some type of financial value.
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collateralized debt obligations
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An investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds. Similar in structure to a collateralized mortgage obligation (CMO) or collateralized bond obligation (CBO), CDOs are unique in that they represent different types of debt and credit risk. In the case of CDOs, these different types of debt are often referred to as 'tranches' or 'slices'. Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays.
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credit default swap
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A swap designed to transfer the credit exposure of fixed income products between parties. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. For example, the buyer of a credit swap will be entitled to the par value of the bond by the seller of the swap, should the bond default in its coupon payments.
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deregulation
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The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry.
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derivative
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A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
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leverage
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1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. 2. The amount of debt used to finance a firm's assets. A firm with significantly more debt than equity is considered to be highly leveraged.
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futures
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A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.
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investment ratings
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A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".
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securitization food chain
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individuals take out loans (like a mortgage on a house), banks loan the money to the borrower, then sell the loan to investment banks; investment banks package the loan with other loans into CDOs and sell those to investors. Securitization turns a bank's illiquid assets (mortgages) into liquid assets (money), so they can maintain solvency and better ratings; it also allows investment banks to lower their risk and raise their ratings by burying bad risks in a pile with good risks. Investors can invest in CDOs at low interest rates, making it appealing to them.
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SEC (securities and exchange commission)
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A government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities
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subprime
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A classification of borrowers with a tarnished or limited credit history. Lenders will use a credit scoring system to determine which loans a borrower may qualify for. Subprime loans carry more credit risk, and as such, will carry higher interest rates as well.
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microeconomics
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area of economics that deals with behavior and decision making of small units
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demand curve
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a graph showing the quantity demanded at each and every price at a given time (always downward sloping)
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demand
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the desire, ability, and willingness to buy a product
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marginal utility
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the extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product
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diminishing marginal utility
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the decrease in satisfaction or usefulness received from each additional unit of a product
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the Law of Demand
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more will be purchased at lower prices than at high ones
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income effect
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change in quantity demanded due to a change in price that alters a consumer's real income
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substitution effect
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a change in quantity demanded due to a change in the relative price of a product (i.e. buying more dvds because movie ticket prices went up while dvd prices went down)
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substitutes
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products that can be used in place of other products (i.e. different brands)
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complements
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products that tend to be used together (i.e. hot dogs and buns)
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elasticity
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a measure of responsiveness that shows how a dependent variable such as quantity responds to an independent variable such as price
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demand elasticity
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the extent to which a change in price causes a change in the quantity demanded
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elastic
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describes demand when a given change in price causes a relatively larger change in the quantity demanded
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unit elastic
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describes demand when a given change in price causes a proportional change in the quantity demanded
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inelastic
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describes demand when a given change in price causes a relatively smaller change in the quantity demanded
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supply
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the amount of a product that would be offered for sale at all possible prices that could prevail in the market
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supply curve
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a graph showing the various quantities supplied at each and every price that might prevail in the market (always upward sloping)
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supply elasticity
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measure of the way in which quantity supplied responds to a change in price
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subsidy
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a government payment to an individual, business, or other group to encourage or protect a certain type of economic activity
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Law of Supply
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the quantity supplied varies directly with its price
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Law of Variable Proportions
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states that in the short run, output will change as one input is varied while the others are held constant
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marginal product
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the extra output or change in total product caused by the addition of one or more unit of variable input
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the three stages of production
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increasing returns, diminishing returns, negative returns
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short run
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the period of production that allows producers to change only the amount of the variable input called labor
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fixed cost
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cost that a business incurs even if the plant is idle and output is zero
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variable cost
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cost that changes when the business rate of operation or output changes
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marginal cost
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extra cost incurred when a business produces one additional unit of product
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total revenue
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the number of units sold multiplied by the average price per unit
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profit maximization
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marginal cost is equal to marginal revenue
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price
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the monetary value of a product as established by supply and demand
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economic model
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a set of assumptions that can be used to help analyze behavior and predict outcomes
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market equilibrium
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a situation in which prices are relatively stable and the quantity supplied is equal to the quantity demanded
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surplus
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a situation in which the quantity supplied is greater than the quantity demanded at a given price
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equilibrium price
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the price at which neither a surplus nor a shortage of a product exists
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shortage
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a situation in which the quantity demanded is greater than the quantity supplied
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price ceiling
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a maximum legal price that can be charged for a product
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price floor
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the lowest legal price that can be paid to most workers (i.e. minimum wage)
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long run
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a production period long enough to change the amount of variable and fixed inputs used in production
