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20 download_doc-5.php - BUS-G 345 I Determinants of Asset...

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BUS-G 345 Chapter 5 I. Determinants of Asset Demand a. Intro i. When deciding to buy and hold an asset or buy one asset over another, one must consider several factors 1. Wealth a. The total resources owned by the individual, including all assets 2. Expected return a. The return expect over the next period on one asset relative to alternative assets 3. Risk a. The degree of uncertainty associated with the return 4. Liquidity a. The ease and speed with which an asset can be turned into cash b. Wealth i. ↑ wealth → ↑ quantity demanded of an asset c. Expected returns i. The return on an asset measures how much we gain from holding the asset ii. ↑ expected returns (relative to other assets) → ↑ quantity demanded of an asset d. Risk i. ↑ risk (relative to other assets) → ↓ quantity demanded of an asset e. Liquidity i. The more liquid an asset relative to others, the more desirable it is ii. ↑ liquidity (relative to other assets) → ↓ quantity demanded of an asset f. Theory of asset demand i. The quantity demanded of an asset is
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BUS-G 345 Chapter 5 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 4. Positively related to its liquidity relative to alternative assets ii. Chart Variable Change in Variable Change in Q Demanded Wealth Expected Return Risk Liquidity II. Supply and demand in the bond market a. Intro i. Each bond price is associated with a particular level of the interest rate ii. The negative relationship between bond prices and interest rates means that when a bond price rises, its interest rates falls b. Demand curve i. Shows the relationship between the quantity demanded and the price 1. i = R e = (F-P)/P a. shows that a particular value of the interest rate corresponds to each bond price ii. increase expected return , increase the quantity demand iii. downward slop 1. indicates that at lower prices of a bond, the quantity demanded is higher c. Supply curve i.
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