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Level 45

Theory of Financial Intermediation

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Direct financing
Funds flow directly through financial markets (Interbank, Stock exchange, Money market, Bond arket, Foreign Exchange..)
indirect financing
financing translation between sources of funds (lenders) and users of funds (borrowers) which is facilitated by an intermediary
arguments for EMH
information disclosure effect; investment analysts and mutual funds' performance; random walk; technical analysis
arguments against EMH
information disclosure effect; january effect; market (over)sensitivity; to information disclosure, consistency with market fundamentals; mean reversion; small firm effect
Role of the US Central Bank
administers the country's monetary policy; maintains financial system stability, and safety, and soundness; supervises and regulates banking institutions, protects consumer credit rights, participates in the country's payment system, provides financial services to DTIs and the government
FRS System
includes a board of governors, federal reserve banks, and federal open market committee (FOMC)
Federal Reserve Banks
participate in the country's payment system; distribute notes and coins; supervise and regulate member banks and bank holding companies (BHCs); act as bankers to members banks and the Treasury
Federal Open Market Committee
Oversees the country's open market operations; primary tool to administer the country's monetary policy and manage its credit environment; primary tool to administer the country's monetary policy and manage its credit environment; purchase and …
Monetary Policy Tools of the Fed
Open Market Operations; reserve requirements, contractual clearing balances, discount window lending
national banks
chartered by the federal government through the Office of the Comptroller of the Currency
state member banks
chartered by the state that are members of the federal reserve
state non member banks
chartered by the state that are not members of the Federal Reserve System
issuing and trading of short-term debt obligations with original maturity of one year or less; participants include corporations and financial institutions that have idle cash but are restricted to a short-term investment horizon; allocates…
money market instruments
banker's acceptances, commercial paper, federal funds, negotiable certificates of deposit, repurchase agreements, treasury bills
bankers acceptances
a time draft payable to a seller of goods with payment guaranteed by a bank; arise from international trade transactions and are used to finance trade in goods that have yet to be shipped …
commercial paper
an unsecured short-term promissory note issued by a corporation to raise short-term cash, often to finance working capital requirements; generally sold with maturities of 1 to 270 days (if maturity is greater than 270 d…
negotiable certificates of deposit
a bank issued time deposit that specifies an interest rate and maturity date and is negotiable in the secondary market
repurchase agreements
an agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price on a specified date; essentially a collateralized fed fund loan with collat…
Treasury Bills
Short-term debt securities issued most commonly by the federal government.