Glossary conflict of interest A manifestation of the moral hazard in which one party in a financial contract has incentive to act in its own interest, rather than in the interests of the other party 187 consol (perpetuity) A perpetual bond with no maturity date and no repayment of principal that periodically makes fixed coupon payments 67 constant-money-growth-rate rule A policy rule advocated by monetarists whereby the central bank keeps the money supply growing at a constant rate 688 consumer durable expenditure Spending by consumers on durable items such as automobiles and household appliances 651 consumer expenditure The total demand for (spending on) consumer goods and services 573, 619 consumption Spending by consumers on nondurable goods and services (including services related to the ownership of homes and consumer durables) 655 consumption function The relationship between disposable income and consumer expenditure 574 costly state verification Monitoring a firm s activities, an expensive process in both time and money 178 cost-push inflation Inflation that occurs because of the push by workers to obtain higher wages 673 coupon bond A credit market instrument that pays a fixed interest payment every year until the maturity date, when a specified final amount is repaid 62 coupon rate The dollar amount of the yearly coupon payment expressed as a percentage of the face value of a coupon bond 62 credit boom A lending spree when financial institutions expand their lending at a rapid pace 200 credit default swap (CDS) A traded derivative to which the seller is required to make a payment to the holder of the CDS if there is a credit event for that instrument such as a bankruptcy or downgrading of the firm s credit rating 291 credit derivatives Derivatives that have payoffs to previously issued securities, but ones that bear credit risk 374 credit-linked note A type of credit derivative that combines a bond and a credit option 375 credit options Options in which, for a fee, the purchaser has the right to get profits that are tied either to the price of an underlying risky security or to an interest rate 374 credit-rating agencies Investment advisory firms that rate the quality of corporate and government bonds in terms of the probability of default 115 credit rationing A lender s refusing to make loans even though borrowers are willing to pay the stated interest rate or even a higher rate, or restricting the size of loans made to less than the full amount sought 333 credit risk The risk arising from the possibility that the borrower will default 322 715 credit swap A transaction in which risky payments on loans are swapped for each other 375 credit view Monetary transmission mechanisms operating through asymmetric information effects on credit markets 652 currency The name applied collectively to the coins and notes issued by the central bank 43 currency board A monetary regime in which the domestic currency is backed 100% by a foreign currency (say dollars) and in which the note-issuing authority, whether the central bank or the government, establishes a fixed exchange rate to this foreign currency and stands ready to exchange domestic currency at this rate whenever the public requests it 544 currency swap The exchange of a set of payments in one currency for a set of payments in another currency 370 current account An account that shows international transactions involving currently produced goods and services 522 current yield An approximation of the yield to maturity that equals the yearly coupon payment divided by the price of a coupon bond 68 dealers People who link buyers with sellers by buying and selling securities at stated prices 20 debt-currency swap The form of debt conversion where the debt denominated in foreign currency is converted into domestic currency 280 debt-debt swap The form of debt conversion where banks holding the debt of one less developed country (LDC) exchange it for the debt of another LDC 280 debt deflation A situation in which a substantial decline in the price level sets in, leading to a further deterioration in firms net worth because of the increased burden of indebtedness 203 debt-equity swap The form of debt conversion where the debt is converted into the equity of public and private domestic enterprises 280 deductible The fixed amount by which the insured party s loss is reduced when a claim is paid off 295 default A situation in which the party issuing a debt instrument is unable to make interest payments or pay off the amount owed when the instrument matures 114 default-free bonds Bonds with no default risk, such as Canada bonds 114 defined-benefit plan A pension plan in which benefits are set in advance 296 defined-contribution plan A pension plan in which benefits are determined by the contributions into the plan and their earnings 296 deleveraging When financial institutions cut back on their lending because they have less capital 200 demand curve A curve depicting the relationship between quantity demanded and price when all other economic variables are held constant 85