FIL 240 1st Edition Lecture 3 Outline of Last Lecture I. Areas of FinanceA. Definition of REITII. Interest RatesA. Equation for risk-free rate and interest rateIII. MarketsA. Definition of money marketB. Definition of capital marketC. Definition of capital paperIV. LiquidityOutline of Current Lecture I. Interest RatesA. Risk-free rate equation II. MoneyA. Definition of moneyB. 3 types of moneyC. Definition of liquidityIII. DebtA. 3 types of debtB. Face valueC. Definition of inverted yield curve Current LectureI. Interest RatesA. Kf = Kreal + ᴨeB. An example of a risk-free rate is a short-term Treasury billC. 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, mortgagesF. High premiums – credit cards, cash advanceThese 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.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. II. MoneyA. 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-termD. Loans: borrowers are issuers; lenders are purchasers of the securities.III. DebtA. 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
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