05 01 2014 Chapter 1 CHAPTER ONE INTEREST RATES ON DIFFERENT TYPSE OF BONDS DIFFER Financial intermediaries Money Money Supply Rate of money growth and recessions Aggregate Price Level price level Inflation Monetary Policy vs Fiscal Policy Money growth rate M2 and interest rates of long term us treasury bonds CHAPTER Two interest rate on 3 month treasury bill fluctuates more than other interest rates and is lower interest rate of baa corporate bonds is higher than other interest rates is higher on average than others spread between it changes but not as much as treasury bill Institutions that borrows funds from people who have saved and make loans to others banks are largest financial intermediary anything that is accepted in payment for goods or services or in the repayment of debts rate of money growth of money supply has declined before almost every recession changes in money might be driving force behind business cycle fluctuations average price of goods and services in an economy Continual increase in price level growth rate money supply and inflation generally rise together Monetary Policy money supply and interest rate vs fiscal policy government spending and taxation as money growth rate rises the long term bond rose as 60 70s but less clear since 80s Lender savers vs borrower spenders Direct vs indirect finance Disadvantage of owning equity Underwriting security Brokers vs dealers Exchange vs OTC market Money market vs capital market Money Market Instruments short term to maturity least price fluctatuions less risky bank CD s are the most outstanding as of 2010 US TREASURY BILLS Treasury Bill vs notes and bonds Primary lender saves householders and primary borrower spenders businesses and government fed gov Direct IPO of stock GE issues commercial paper to public bowie bonds asset backed securities which uses current and future revenue from albums recordered by david bowie as collateral Indirect asset transformation banks pension funds insurance companies residual claimant corporation must pay all debt holders before it pays equity holders investment bank guarantees a price for a corporations securities and then sells them to the public broker agents of investors who match buyers with sellers of securities dealers link buyers and sellers by buying and selling securities at stated prices Exchange buyers and sellers of securities or their agents and brokers meet in one central location to conduct trades ex NYSE or CBOT OTC market dealers at different locations can sell to anyone who comes to them and is willing to accept their prices contact via computers many common stocks traded this way ex Us gov bond market Money market short term securities more liquid smaller fluctuations in prices vs capital market longer term debt and equity instruments traded 1 US treasury billds 2 negotiable bank certificates of deposit 3 commercial paper 4 repo agreements 5 fed funds short term debt instruments 1 3 or 6 months finance fed government pay a set amount at maturity no interest payments sell at a discount most liquid of all MMinstruments most actively traded almost no risk of default because fed government can raise taxes or issue currency held by banks mainly bill no interest sold at discount notes bonds interest payments notes are Currency vs money Money is anything that is accepted in Wealth Total collection of pieces of property that CHAPTER 3 What is money Money Money supply Income Purpose of money Barter vs with money Money is a store of value Money and inflation anything that is generally accepted in payment for goods or services or in the repayment of goods money is a stock concept certain amount at given time payment but CURENCY is paper money and coins serve to store value MONEY bonds stock land art house Flow of earnings per unit of time 1 medium of exchange 2 unit of account 3 Store of value medium of exchange is what differs it from other assets like stocks and bonds barter is without money in which goods and services are exchanged directly for other goods and services for economic exchanges to occur using barter coincidence of wants must occur be divisible be easy to carry not deteriorate quickly repository of purchasing power over time why do people hold money if other assets offer interest price appreciation bcause of liquidity money is the most liquid During inflation when the price level increases and things are more expensive then the value of money decreases A medium of exchange must Be easily standardized be widely accepted M1 Money M2 Money not as liquid households M1 1 Currency paper money and coins in the HANDS of nonbank public 2 Travelers checks travelers checks not issued by the bank a check for a fixed amount that can be cashed or used in payment after endorsement with the holder s signature 3 demand deposits type of checking account business checking accounts that don t pay interest and travelers checks issued by banks 4 other checkable deposits interest bearing checking accounts held by 1 small denomination time deposits certificated of deposit with denominations of less than 100 000 that can be redeemed only at a fixed maturity date without a penalty A savings account or certificate of deposit CD held for a fixed term with the understanding that the depositor can make a withdrawal only by giving notice 2 savings deposits nontransaction deposits that can be added to or taken out at any time 3 money market deposit accounts savings account that offers competitive interest rate in exchange for larger than normal deposits 3 money market mutual fund share retail retail accounts on which households can write checks WHEN introduced made m2 more liquid M1 M2 movements CHAPTER 4 Interest rate Yield to Maturity PV formula Basis point PV or Present discounted value dollar paid to you one year from now is less valuable Present value is higher when FV higher shorter time period until payment n and 4 types of credit market instruments 1 simple loan borrower pays lender at maturity movements in money growth of M1 and M2 is roughly similar but there are periods like 92 94 and 04 07 that they move in opposite directions M2 is more stable so ppl look at money supply and m2 relationship than a dollar paid to you today because you can deposit a dollar in a savings account that earns interest rate and have more than a dollar in a year FV PV 1 i n n and I must be in the same time unit ex Future value of 100 in 18 months at 5 annual interest rate 100 1 0 5 1 5 Fraction of a