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ASSET MARKET MONEY AND PRICE

Is a desirable feature for an asset to have the more

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is a desirable feature for an asset to have the more consumption a person can enjoy in the future for the saving done today. However, the return on an asset is not always known in advance. Ex: stock prices may go down or up… decisions is based on expected returns, guesses. Risk: uncertainty about the return = risk. High risk actual return very different from expected returns ex: share in a start-up Internet company worthless if company fails but grows by 10 if it succeeds. Liquidity: ease with which it can be exchanged for goods, services or other assets. Money is highly liquid/automobile is illiquid(requires time and efforts to be exchanged)..stocks and bonds have intermediate liquidity. Also, liquidity provides flexibility liquid asset can be easily be disposed of Time to maturity: amount of time until a financial security matures and the investor is repaid of his principal. Investors com[are returns on bonds with differing times to maturity to see which is expected to give the highest return expectations theory of term structure of interest rates… term-structure explains why bonds that are similar in all except their terms to maturity have different rates of return. On average we observe that the interest rates on long-term bonds exceed the interest rates on short-term bonds…. We need to understand that long-term bonds arte riskier than short term bonds bc the price of long-term bonds are more sensitive than the prices of short term bonds are to changes in interest rate investors are compensated for holding long term bonds term premium
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