Banking and Monetary Policy_Abrams_Date_031310

Banking and Monetary Policy_Abrams_Date_031310 - End of...

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End of chapter 4 – next test Liquidity preference theory of interest o Supply and demand for money (as an asset) determines the nominal interest rate Assume there are only two financial assets: bonds and money (graph) o According to Keynes if the fed makes excess money supply, nominal interest rates go down Term structure of interest rates: refer to graph Yield curves: o Usually slope upwards o When slope downwards, called an inverted yield curves 3 consecutive 1 yr bond, or one 3 yr bonds o buying a 3 yr bond, you know the interest and how much you will get o but if you buy 3 one yr bond, you don’t know what the interest rate will be after the second and 3 rd year Premium: a modification to the expectation theory o Premium given to the longer-term bonds. Longer term bonds, interest rate price fluctuates, there is a larger risk on longer termed bonds Risk Structure Interest Rate (the next three things affect yield to maturity) o Default risk Your not going to pay for an asset with high default risk Lower demand, lower price Municipal bonds: state and local gov bonds Are affected by default risk Exempt from federal taxation Net Present value is higher, but interest are lower The lower the default, the higher the interest rates o Taxation risk: different task treatments of financial assets
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This note was uploaded on 08/29/2010 for the course ECON 302 taught by Professor Abrams during the Spring '08 term at University of Delaware.

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Banking and Monetary Policy_Abrams_Date_031310 - End of...

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