Checking account, car loan, bonds, student loan, mortgage, stocks Assets: Own ex : Checking account, bonds, stocks Liability: Owe ex: car loan, student loan, mortgage Security: Financial asset that can be sold by the public ex: Stocks and bonds Mutual funds: Funds pooled with other investors to buy securities Federal funds rate: the return on a particular investment or how much one pays to borrow A financial market "rally": is when prices of a particular asset are rising In a bond market rally interest rates are falling Financial Markets and Assets: Stocks or Bonds They’re securities that are essential for a rich economy. Firms uses them to fund K purchases (and stocks) and governments borrow for deficits. They allow households to save for the future. In general, stocks offer higher average returns than bonds, but with more risk (stock prices vary more)
Financial Markets and Assets: Stock (Equity) Stock: A “share” in ownership in a corporation anyone can buy or sell owners receive profits as “dividends” hopefully selling price > purchase price very difficult to predict stock prices Financial Markets & Assets: Bonds Bond: A security sold by large business or governments (issuer) that offer fixed future payments to buyers. The borrower (bond issuer) promises a fixed nominal payment to the investor (lender or bond buyer) at a set date. Face Value: The set amount The bond price varies: existing bonds are bought & sold in very active markets – prices change by the second Borrowers (bond issuers) want low rates and lenders (bond buyers) want high rates If there was unexpected inflation, bond owners would be upset and firms and governments that issued bonds would be happy. Real interest rate = Nominal interest rate – inflation If the Fed purchased bonds the amount of money in the economy would grow (AD shifts right) - Reserves increase, bond price increases, interest rate decreases, more consumption and investment Most bonds: > 1 year maturity with twice annual payments (coupons) + face value U.S. Treasury bonds: 20-30 years U.S. Treasury notes: 2-10 years U.S. Treasury bill: ≤ 1 year & no coupon * The borrower (bond issuers), such as large businesses, the government, and the U.S. Treasury, offers (sell) fixed future payments or bonds to buyers (lenders or bond owners). If inflation goes up, the borrower benefits from this (and viceversa). Financial Markets & Assets: Bond Prices Interest rate = (Face value – PT-BILL) / PT-BILL “Iron Law of Bonds:” their price rises -> their interest rate falls (& vice-versa) Market prices of issued bonds vary as interest rates go up and down. Financial Markets & Assets: Bond Owning Why buy a T-Bill (up to 1 year maturity)? Interest rates similar to bank deposits If you wanted to earn the most possible on this investment, you'd want to pay the least possible T-Bills come with a variety of face values; these are set when the U.S. Treasury auctions them off and potential buyers know them as well. Why buy a T-Note or T-Bond (10-30 years)? Higher rates than banks ex : 2.3% (10-year bond) vs.1.0% at PNC
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- Fall '10