Icon of Money and Banking: Test #1 Study Guide
10/2/16 Valuing Financial Assets PV = FV PV - X. + x2 +...+
PV=Z PV=Z, (1+i)n (1+i) (1+i (it ist i (i-g) ments and *payments change *payments are
when payment grows are fixed
in different years
fixed & forever @ a constant rate Pricing a Bond
Pricing a Stock
Ps = D. (1+2) Citija T iit Affected by: If you want to learn more check out What is the definition of homicidality?
We also discuss several other topics like What is the diffuse away from synaptic cleft?
Affected by: *interes trates it, Pt.
* interest rates in Pl & risk → riskł, Pt
*news positive, PT; negative, Pd * risk riskt, Pt
PR = C, + C2 + ... + (CF)
Yield to Maturity Conly bonds)
the interest rate that makes the present value of all payments equal to its market value today
Pg=C. + C2 +...+ (C+FV) i that solves this equation is the YTM Don't forget about the age old question of When will an attitude predict behavior and, conversely, when will an action cause an attitude?
(1+i) (i) (tit * If P Vo is sold @ less than Fr, then i'c studs &C is expreseed as a * If PVB is sold@ greater than FV, then ice
% af F
Annnnnnnnnnn Don't forget about the age old question of Define karma.
Rate of Return (bonds and stocks) - return on your investment
c=capon payments collected return=(P. - Po) + C Pa = purchase price (original)
P = price sold @
(P.-Po) = copital gain/loss
When do we use each one?
7- If you don't hold an asset to maturity le rate of return STI - If you do hold an asset to maturity → YTM If you want to learn more check out What are the three types of reactions of autonomic?
this only applies to bonds because YTM can't be estimated for
Real v. Nominal Interest Rates
i = nominal interest rate iar tipe or r=i-re r=real interest rate
Me = expected inflation
Ta = actual inflation. Difference blw na and the
Me - ex-ante (from before ) interest rate use to see if you should invest pa -ex-post (from after) interest rate use to see if your investment was good We also discuss several other topics like What is the torah? what made it special?
* negative real interest rates always favor the buyer/borrower.
higher inflation always favors borrower (especially hyperinflation) * higher real interest rates always favor the lender &
Theory of Asset Demand (or Portfolis Choice Theory) @ Wealth - an individuals collection of assets
orule wt, D 7 (shift right)
wealth elasticity of demand to A in Q of assets dluxury assets: los 1
% in wealth "necessity assets: % ALI O @ Expecteda Returns
orule: ret, DP (shift right) & for same asset
if expected returns of stocks decreases, then expected returns for bands decreases *always talking about relative expected returns (only 2 things compared)
2 Risk Uncertainty
o rule: as riskt, Di (shift left) for the same asset
if risk of another asset increases, then demand for other increases.
orule it liquidity of an asset increases, the dmand for it will increase
if liquidity of stocks increases the demand for bonds decreases audio liquidity a good Lt, Di (shift right)
positive correlation w/ Denad - Dio Lî, WT, RT negative correlation af demand - D1; riskt
Market for Bonds / Loonable Funds
(i =1763650 +
/ Study Soup
300 Qs Market for Bands
300 Preferred Version of
Market for Locrable Fonds
* Demanding bonds = supplying locnable finds & iT, PBL * Supplying bands = demanding loonable funds.
Factors that Affect Demond Factors that Affect Supply (Theory of Asset Denad Factors) 1) expected profitability 1) wealth
-boom ep1, SBT 2) expected returns ern, DT
- recession ept, sot 3) risk/ uncertainty rt, Dt 2) Inflation TT, Sot 4) liquidity LT, DT. - (S = DLE e I always favors borrower) 5) Inflation that factor Ter, at 3) Government Activities
s explain w/ Fisher equation. - budget deficit ↑ Sot
Use these markets when:
- what will happen whi with rising inflation (77)
shift both curves! (Dot, SoT) so, if - what will happen whi when there is a gournment budget/ suplus?
only shift SA (BOT, SBT) so, i f
3) Study Soup
Do Not use this market for
- what will happen with i if there is a boonfrecession
Factors that Shift Du 1) A level of Income
- IT, Duh (right) 2) A in Price Level
- PLT, Du ↑ (right)
factors that shift Su 1) Ain Fed policy
– expansionary Smit (right) - contractionary Sud(left) this is called the liquidity effect
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Use this market when
- what happens to i in times of economic boon/ recession? - what happes to i when Fed pursues and expansionary / contractionay policy?
Income Effect il SM
owhen a country is in an expansion (boom), MST, but
Income alor, (But, iT)
Qu when people realize there o when SMT, T T is more money in circulation, 4 SB î and pot they increase their prices (Out, it)
MIK MIQUEL JULES
Fluctuations in Interest Rates (Conted) 3 Possible outcomes for Interest Rates
A) On day D, the SM increases (due to the Fed pursuing an expansionary policy)
- immediate effect: liquidity effect (it) - then, Friedman's effect take place - result liquidity effect is more powerful: &, is lower than in
B) On Day D, the SM increases due to the Fed pursuing an expensionay policy
immediate effect: liquidity effect (it)
then, Friedman's effects take place result: F's effects overpower liquidity effect ui, is higher than in
c) On day , the SM increases due to the fed pursuing an expansionary policy
immediate effect: Friedman's effects. -case of hyperinflation
people are sensitive to a change in Su because they remember
they immediately raise i
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Struchre of the US Financial Systen.
Summary of the external bene sources of funding for a business
2% - stocks
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*note stocks are extrendly small
3 Functions of Money
1) medium of exchange - can use it to purchase things 2) unit of account - can be a uniform anant, like USD; consistant 3) store of value - an asset, the most liquid
2 Types of Money
1) commodity money - has alternative uses to being money; ex sold silver sproblem opportunity cost is the value of the altenative, like price of gold
people used to melt gold, which is why some coins have holes in the middle 2) Fiat Money-currency that isn't backed by anything; why is it valuable?
-backed by the government and laws - governmnt holds a monopoly on it
difficult to copy ristricts supply prevents inflation by making it scarce
4 stiff penalties for counterfeit
• Argument for government is not restricted by how much commodity it has
• Argument against a commodity money keeps a government disciplined Alternatives to a National Currency Soup New kinds of Money (counted) Dollarization - a country adopting o stored-valued cards - pre-paida
another cantry's currency (usually USD) card for a certain store Currency Board - a country's currency
o electronic money-put money in pappal) is backed by a stable foreign currency an account to pay for things are
• Currency Unions- several countries o digital currencies - very decontralized; chase to have a common currency
intraceable, not regulated ex bitcoins
e paid in mi/