ECN 481 (2), Bonds and Interest Rates

ECN 481 (2), Bonds and Interest Rates - Financial Markets...

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Financial Markets Facilitate transactions between borrowers and lenders Lenders -- earn return on funds Borrowers -- permits increased flexibility for expenditure
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Motivations for Borrowing Consumers -- allows for non- synchronous patterns of desired consumption and income Business -- financing short-term needs (e.g. inventories) and long-term investment projects Government (Federal as well as State and Local)-- financing existing debt and new deficits
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Types of “Borrowing” Debt -- A contract to pay specified amounts over a predetermined time interval (e.g. bonds, bank loans) Equity -- Purchases of shares of ownership (e.g. stock)
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Direct Vs Indirect Finance Direct Finance -- Borrower borrows directly from lender. Examples -- Personal transactions, Bonds Indirect Finance -- Lender loans to Financial Intermediary , who then loans to borrowers. Examples -- Banks, Mutual Funds
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Exchanges Versus “Over the Counter” Markets Exchange -- Buyers and sellers meet in one central location Over the Counter -- Trades made from home or office, via computers.
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Primary Versus Secondary Markets Primary Markets -- Markets for new issues. Secondary Markets -- Markets for issues sold before maturity
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Money Vs Capital Markets Money Market -- Market for bonds with maturity one year or less high denominations excellent secondary markets Capital Market -- Market for long- term bonds and equity lower denominations lower volume -- relatively narrow secondary markets
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Interest: Compensation for Inconvenience Inconvenience Interest Rate Sources of Inconvenience Liquidity -- ability to convert instrument into a medium of exchange Default Risk -- likelihood that borrower will not meet promised payments
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Applications to Money Supply Components Savings Deposits versus Time Deposits Relative liquidity
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This note was uploaded on 08/09/2009 for the course ECN 481 taught by Professor Dutkowsky,d during the Summer '08 term at Syracuse.

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ECN 481 (2), Bonds and Interest Rates - Financial Markets...

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