CHAPTER%205 - Asset Demand Bond Market Equilibrium Interest...

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Asset Demand Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF Last Lecture: Simple loans, fixed-payment loans, coupon bonds, discount bonds. All differ in timing of cash flow payments. Yield to maturity , which equalizes present value with the value today, is our measure of interest rates. Less accurate measures are the current yield and the discount yield . Bond prices and interest rates are negatively related. Price fluctuations make the rate of return differ from the interest rate. Higher interest rate risk for bonds with longer maturities. Real vs. nominal interest rates.
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Asset Demand Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF CHAPTER 5 The Behavior of Interest Rates
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Asset Demand Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF The Behavior of Interest Rates Interest rates fluctuate considerably. Interest rates are closely related to market asset prices. In equilibrium, market prices equate demand and supply. To understand the behavior of interest rates, we need to look at the demand and supply for assets.
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Asset Demand Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF The Theory of Asset Demand Factors that influence portfolio choice: 1. WEALTH the total resources owned by the individual, including all assets 2. EXPECTED RETURN the return expected over the next period on one asset relative to alternative assets 3. RISK the degree of uncertainty associated with the return on one asset relative to alternative assets 4. LIQUIDITY the ease and speed with which an asset can be turned into cash relative to alternative assets 5. INFORMATION COSTS the cost to overcome informational asymmetries
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Asset Demand Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF Aggregate US Household Portfolio Allocation equities, 33.00% US governement securities, 2.00% corporate bonds, 2.00% tax exempt securities, 1.00% pension funds, 26.00% life insurance reserves, 2.00% checkable deposits and currency, 1.00% savings and time deposits, 10.00% money market funds, 5.00% bond and equity funds, 10.00% mortgages, 1.00% other, 7.00%
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Asset Demand Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF Theory of Asset Demand Holding all other factors constant (ceteris paribus), the quantity demanded of an asset is 1. positively related to wealth 2. positively related to its expected return relative to alternative assets 3. negatively related to the risk of its returns relative to alternative assets (if risk averse) 4. positively related to its liquidity relative to alternative assets 5. negatively related to the information cost s incurred
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Asset Demand Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF The Bond Market: Supply and Demand At lower prices (higher interest rates), ceteris paribus, the
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This note was uploaded on 10/08/2008 for the course ECON 3310 taught by Professor Davis during the Fall '07 term at Cornell University (Engineering School).

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CHAPTER%205 - Asset Demand Bond Market Equilibrium Interest...

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