Econ 311: Test 1
35 Cards in this Set
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Financial system
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links savers and investors (produce new physical capital), provides productive uses for nation's savings, leading to economic growth
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Financial System Drawing
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Breaks down Financial System into Financial Markets and Financial Intermediaries
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Financial Market
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I am an investor how do i buy 5 million buildings- sell off 5 million of my company which is called equity and is called stock market. I could also issue 5 million of bonds (bond market). Foreign excange markets are also FM. Direct Finance can take Place of FM
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Financial Intermediary
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Bank, savings & loans, credit union, insurance companies, mutual funds, etc. They are a middle man (pull funds from others). Indirect Finance can take place of FI
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Monetary Theory
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examines the effects of money on the overall economy. The effect money has on a...
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Business Cycle
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up and down activity of economy such as recession, etc.
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Monetary Policy
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use of money supply and interest rates to effect the level of economic activity
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Goal of the Federal Reserve?
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is to prevent inflation
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if Interest Rates go up?
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Bond prices go down (negative relationship)
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Interest
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the amount lenders receie for extending credit, or the amount borrowers pay for obtaining credit
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Interest Rate
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reflects the amount of interest paid in relation to the amount lent or borrowed
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Interest Rates reflect the ??
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"Price" of the capital
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Calculating Interest Rates (2 concepts?)
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1) Present value
2) Yield to maturity
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Yield to maturity (YTM)
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the IR that equates the price of an asset today with the PV of all future payments associated with that asset (the best method)
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(4) Credit Market Instruments
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Simple Loan, Discount Bond, Coupon Bond,
Fixed Payment Loan
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Simple Loan
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Borrower receives principal and repays principal plus interest at maturity (ex. commercial bank loan)
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Discount Bond
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Borrower repays face value of the bond at maturity, but initially receives less than face value (doesnt make any payments until maturity, like simple loan)
(EX-US Treasury Bill)
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Coupon Bonds
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Borrower initially receives the FV of the bond, then makes payments of interest at regular intervals and repays the FV at maturity
(Ex- US Treasury Bond (Long term treassury dept), Corporate Bond)
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Fixed Payment Loan
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Borrower makes regualr period payments of equal size. Each payment includes both principal and interest.
(Ex-Car Loan)
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Theory of Asset Demand
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Other things equal, how will a change in any of the following affect one's decision to buy a particular asset
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A Model
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the market for bonds (were gonna learn what makes the bond price go up and down, which will tell us what makes IR's go up and down)
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Bond Demand
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There is a negative relationship between bond prices and the quantity of bonds demanded
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Bond Supply
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There is a positive relationship between bond prices and the quantity of bonds supplied
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Equilibrium
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Quantity of bonds supplied= Quantity of bonds demanded at the going bond price.
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An Increase in Wealth causes Interest Rates to?
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Increase in Wealth causes IR to fall
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Statements about "Total Rate of Return" on bonds
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1) the total rate of return may be greater or less than the rate of capital gain.
2) Larger the coupon payment, the greater the return, holding everything else constant
3) Total rate of return may be greater or less than the current yield
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Exchange
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When secondary market buyers and sellers of securities meet in one central location to conduct trades.
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Example of a debt instrument
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a bond issued by General Motors
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Example of a Financial Market Transactions
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1) you purchase a US Government bond
2) you purchasse a bond issued by a large corporation
3) you purchase shares of stock in General Motors
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The longer the time until a bond matures, the greater?
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the greater will be the change in its price
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If expected returns on stocks rise, while the expected returns on bonds do not change, then?
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the equilibrium interest rate will rise.
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When borrowers posses information about their opportunities or activities that they dont disclose to lenders or creditors, a problem of?
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asymmetric information rises
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The ______ interest rate is adjusted for expected inflation
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Ex ante real
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Ex Post Real Interest
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RIR= nominal int. rate (-) actual inflation rate
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Ex Ante Real Interest
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RIR= nominal (-) expected inflation rate
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Econ 311: Test 1