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
- staff
- Macroeconomics