FIL 240 1st Edition Lecture 3 Outline of Last Lecture I Areas of Finance A Definition of REIT II Interest Rates A Equation for risk free rate and interest rate III Markets A Definition of money market B Definition of capital market C Definition of capital paper IV Liquidity Outline of Current Lecture I Interest Rates A Risk free rate equation II Money A Definition of money B 3 types of money C Definition of liquidity III Debt A 3 types of debt B Face value C Definition of inverted yield curve Current Lecture I Interest Rates A Kf Kreal e B An example of a risk free rate is a short term Treasury bill C Once people expect The Fed To keep printing money and they stop the markets will go into shock D K Kf risk premium risk premium default premium maturity premium eliquidity premium E Low premiums student loans mortgages F High premiums credit cards cash advance These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute II III G The longer the loan is for the worse the maturity premium because there s a higher chance for an adverse effect on the rate environment inflation for the lender H Lenders are much more likely to lend to an responsible professional employed person Money A Money something generally accepted in exchange for something else It does not have to be paper money bitcoin etc B 3 types of money Barter trading goods for goods Metal commodity gold silver the material must be in fashion not as useful as barter Fiat by decree only no intrinsic value paper money C Liquidity ease with which you can convert an asset into cash useable items High liquidity cash short term Treasury bills money short term capital long term D Loans borrowers are issuers lenders are purchasers of the securities Debt A 3 types of debt Bill less than or equal to 1 year cash advance Treasury bill Note between 1 year and 7 years car loan Treasury note Bond more than 7 years mortgage Treasury bond B When you receive a bill from the utility company you really created the bill you borrowed the electricity they just remind you of what you owe C Cash is a bill from the Treasury they pay it off in 7 years by destroying the old bill and printing a new one D The face value of every corp govt bill note or bond is 1 000 Price Face Value Interest Yield 975 1 000 25 25 975 2 56 950 1 000 50 50 950 5 26 E When price goes down yield goes up fundamental principle of finance F Inverted yield curve a dip occurs in the upwards sloping yield curve
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