B200.F09.W11.Tools of Finance.R1

B200.F09.W11.Tools of Finance.R1 - BUAD 200 Week 11:...

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BUAD 200 Week 11: Finance Chapter 19 (Revised) November 2-4, 2009
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Interest Rate: Price of earlier availability Expressed as a % of present value Expressed as an annual %, even for transactions of less than a year or for multiple years. (allows easy comparisons) 6 month Bank CD: 1.50% 2 Year Treasury Bond: .89% Bank Prime Rate: 3.25% 30 year fixed mortgage: 5.18%
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Nominal Rate (what we observe) Nominal interest i% = Real interest r% + anticipated inflation P* [i% = r% + P*] Real interest: Why Positive? Positive Time Preference (Future is uncertain) Productive Opportunities Nature is productive Capital is productive
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Determination of Interest Rates Demand & Supply of Loanable Funds Demand: People wanting to borrow money Firms: Expand physical Capital Government: Finance deficit spending
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DEMAND DEMAND FOR LOANABLE FUNDS FOR LOANABLE FUNDS i% 20% 15% 10% 5% Qe Qty b /T
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Determination of Interest Rates Supply: Sources of Funds Household Savings Firms with desire for funds later (Insurance) Foreign Investors
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SUPPLY SUPPLY OF LOANABLE FUNDS OF LOANABLE FUNDS i% 20% 15% 10% 5% Qe Qty b /T Supply
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MARKET for LOANABLE FUNDS MARKET for LOANABLE FUNDS i% 20% 15% 10% 5% Qe Qty b /T Supply 12%
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Bond Prices and Interest Rates $ Bond   Price Qty B/T $952 909 870 833 i% 5% 10% 15% 20% Demand Supply
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This note was uploaded on 11/07/2009 for the course BUAD 200x at USC.

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B200.F09.W11.Tools of Finance.R1 - BUAD 200 Week 11:...

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