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Class 2 Jan 9th Completed

O to provide price information to help coordinate

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O To provide price information to help coordinate decentralized decision making in various sectors of the economy.
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Financial Intermediaries O Chartered Banks O Trust Companies O Credit Unions O Insurance Companies O Investment Funds Money Market Funds Bond and Mortgage Funds Equity Funds (Mutual Funds) Real Estate Investment Trusts O Finance Companies O Central Bank
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Why do people buy or sell financial assets? O To alter consumption patterns over time. To save for retirement, to save for a down payment on a house, to save at the beginning of the month to be able to buy groceries at the end. O To alter consumption patterns across future “states of nature”. This is the notion of insurance or risk allocation , e.g. homeowner’s insurance, life insurance.
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Why do firms borrow money? O They need funds to produce goods and/or services to make money. O They use stocks, bonds, and loans to finance the acquisition of the buildings machines, and other inputs they need in the production process. O They have to make sure that they have enough working capital for everyday operations.
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The Time Value of Money 9
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The Time Value of Money O Financial decisions involve cash outflows and inflows that are spread out over time. O Financial decision-makers therefore have to compare the values of sums of money at different dates. O The time value of money refers to the fact that a dollar you have today is worth more than the expectation of that dollar to be received at a future date. 10
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Why? O A bird in the hand is worth two in the bush O There are three main reasons why a dollar today is worth more than the expectation of one dollar in the future Inflation changes the purchasing power of one dollar over time O One dollar 100 years ago bought you more goods than one dollar today O In 1912, you could buy with 4 cents what you can buy with $1 now. Said differently, with $1, you could buy the equivalent of $25 today.
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