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Get Full Access to Tulane - ECON 3100 - Study Guide - Midterm
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TULANE / Economics / ECON 3100 / What is the yield of maturity?

# What is the yield of maturity? Description

##### Description: Focus on Price of Bonds, Money, Interest Rates, Long run and short run
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## What is the yield of maturity?

a

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

## What is the rate of return?

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

## What are the factors that affect demand?

*news positive, PT; negative, Pd * risk riskt, Pt

PR = C, + C2 + ... + (CF)

2-9

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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?

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this only applies to bonds because YTM can't be estimated for

stocks

MOHIGUL PUIUS

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Real v. Nominal Interest Rates

Fisher Equation

i = nominal interest rate iar tipe or r=i-re r=real interest rate

or rai-la

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?

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* 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)

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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.

4 Liquidity,

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)

Summary

positive correlation w/ Denad - Dio Lî, WT, RT negative correlation af demand - D1; riskt

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Fluctuations in

Interest Rates

tudy sou

Market for Bonds / Loonable Funds

I

Do il

SLF

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(i =1763650 +

X

17.60

17.66

.

17.6%- -

.

.

.

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...

.....

DLF

QEF

300 Qs Market for Bands

300 Preferred Version of

Qa Market

Market for Locrable Fonds

(a) StudySoup

for

Bonds

237222nnnnnnnnnnn.

* 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

WT, DT

-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

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Do Not use this market for

- what will happen with i if there is a boonfrecession

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M6 MOUERIALS

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Market

for Money

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?

Friedman

Controversy: Milton

Income Effect il SM

Price

level Effect

Expected

Inflation Effect

SMD

www

M

www.

Qu

Q0

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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)

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MIK MIQUEL JULES

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Fluctuations in Interest Rates (Conted) 3 Possible outcomes for Interest Rates

it.

it

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Soup

d

SR

time

do

time

time

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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MG MERUS

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Struchre of the US Financial Systen.

30% bonds

*

Summary of the external bene sources of funding for a business

2% - stocks

62%

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V

loans

*note stocks are extrendly small

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60% other

Money

.

.

.

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

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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

Inot

e paid in mi/

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