Lecture_3-1

Lecture_3-1 - Lecture 3 Principles of Macroeconomics Econ 2...

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Lecture 3 Principles of Macroeconomics Econ 2 Winter, 2009
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Every Breath You Take http://www. youtube .com/watch? v=ipJTqCbETog
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Basis Points Interest rate changes are usually described using basis points A basis point is one-hundredth of a percentage point A 50 basis point cut in an interest rate is a ½ percent
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Basis Points Example: FOMC announcement
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Yield Curve
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Yield Curve Dynamic Yield Curve
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Yield Curve Yield curve spread: 10 yr. treasury bond – 3 month t-bill Or, 30 yr. – 3 month Typically the spread is positive If negative: an inverted yield curve
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A Quick Tutorial on Bonds
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Bonds Bond • A legal promise to repay a debt, usually including both the principal amount and regular interest payments
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Bonds Principal Amount • The amount originally lent Maturation Date • The date at which the principal will be repaid
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Bonds Coupon Rate • The interest rate promised when a bond is issued Coupon Payments • Regular interest payments made to the bondholder
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Bonds Bonds -- An Example • Principle amount of a bond = $1,000 • Maturation date = January 1, 2025 • Coupon rate = 5% • Annual coupon payment = (0.05)($1,000) = $50
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Bonds Corporations and governments sell bonds to raise funds. The longer the term of the bond the higher the coupon rate.
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Bonds The greater the risk of default, the higher the coupon rate. Municipal bonds are exempt from federal taxes and have a lower coupon rate. Bondholders may sell their bonds at any time in the bond market at their market price.
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Bonds Example • Bond prices and interest rates • Jan 1, 2006 purchase a 2 year government bond –Principle amount = $1,000 –Coupon rate = 0.05 –Coupon payment = $1,000 x 0.05 = $50 (Jan 1, 2007) –At maturity: $1,000 + $50 = $1,050 (Jan 1, 2008)
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Bonds Example • Bond prices and interest rates • Want to sell the bond on Jan 1, 2007 The prevailing interest rate = 6% Bond price x 1.06 = $1,050 Bond price = $1,050/1.06 = $991 The prevailing interest rate = 4% Bond price = $1,050/1.04 = $1,010 • Observation • Bond prices and interest rates are inversely related
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Creating Economic Aggregates Important to distinguish between real and nominal values How might we think of adding together different goods we purchase?
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Creating Economic Aggregates How might we think of adding together different goods we purchase? We could “weight” each good by some value Use pounds, dollars, etc.
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Creating Economic Aggregates We could “weight” each good by some value Use pounds, dollars, etc. The result is a quantity index The quantities are indexed or weighted by their contribution in pounds or dollars
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