# Study sets matching "money banking chapter 4"

Study sets

Diagrams

Classes

Users

Present Value

Why is a dollar you receive today more…

Interest Rates & Bond Prices

Suppose that you want to have $500 two…

Today's value of a payment to be received in the future when t…

Because the dollar you receive today can be invested and start…

Pv=CF/(1+i)n... 453.51=$500.00/(1+.05)^2

Present Value

Today's value of a payment to be received in the future when t…

Why is a dollar you receive today more…

Because the dollar you receive today can be invested and start…

Cash flows

Present value (or present discounted va…

Simple loan

Fixed-payment loan (fully amortized loa…

cash payments to the holder of a security

today's value of a payment to be received in the future, when…

a credit market instrument that provides the borrower with an…

a credit market instrument that provides the borrower with an…

Cash flows

cash payments to the holder of a security

Present value (or present discounted va…

today's value of a payment to be received in the future, when…

Cash Flows

Present Value

Simple Loan

Fixed-Payment Loan

When different debt instruments have very different streams of…

The common sense notion that a dollar paid to you one year fro…

A loan in which the lender provides the borrower with an amoun…

A loan in which the lender provides the borrower with an amoun…

Cash Flows

When different debt instruments have very different streams of…

Present Value

The common sense notion that a dollar paid to you one year fro…

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Loanable Funds Theory

Capital Inflows

Capital Outflows

Net Capital Inflows

Real interest rates are determined by the supply and demand fo…

Funds provided to a country's investors by foreigners

Funds provided to foreign investors by a country's savers

Capital inflows minus capital outflows

Loanable Funds Theory

Real interest rates are determined by the supply and demand fo…

Capital Inflows

Funds provided to a country's investors by foreigners

present value

principal

compounding

discounting

amount of money needed to invest today to yield the future amo…

amount of money invested in a financial security or deposited…

earning interest on interest that was earned in prior years

the process of dividing a future value by the discount factor…

present value

amount of money needed to invest today to yield the future amo…

principal

amount of money invested in a financial security or deposited…

Cash Flows

Consol (Perpetuity)

Coupon Bond

Coupon Rate

Streams of cash payments

A bond with no maturity date and no repayment of principle tha…

Pays the owner of the bond a fixed interest payment every year…

The dollar amount of the yearly coupon payment expressed as a…

Cash Flows

Streams of cash payments

Consol (Perpetuity)

A bond with no maturity date and no repayment of principle tha…

Wealth impact on asset demand

Expected return on asset impact on asse…

Risk impact on asset demand

Liquidity impact on asset demand

Ceteris paribus, increase in wealth means increase in asset qu…

Ceteris paribus, increase relative to other assets means incre…

Ceteris paribus, increase relative to other assets means decre…

Ceteris paribus, increase relative to other assets means incre…

Wealth impact on asset demand

Ceteris paribus, increase in wealth means increase in asset qu…

Expected return on asset impact on asse…

Ceteris paribus, increase relative to other assets means incre…

amortization

compounding

coupon bond

discount bond

a process in which the principal amount of a security is repai…

earning interest on interest that was earned in prior years

a security that pays a regular interest payment until the matu…

a debt security with just one payment

amortization

a process in which the principal amount of a security is repai…

compounding

earning interest on interest that was earned in prior years

Will a dollar be worth more tomorrow or…

Is $1 dollar worth more now or later?

Do bondholders fare better when the YTM…

Why would a government want to issue a…

Worth more when the interest rate is 10% bc you youre paying l…

Now because you put that $1 dollar in the bank and accumlate i…

Decreases because when the YTM decreases, the price goes up

Because they would recieve steady payments forever. Perpetuity…

Will a dollar be worth more tomorrow or…

Worth more when the interest rate is 10% bc you youre paying l…

Is $1 dollar worth more now or later?

Now because you put that $1 dollar in the bank and accumlate i…

cash flows

present value

simple loan

fixed payment loan

cash payments to the holder of the security

today's value of a payment to be received in the future when t…

a credit market instrument providing the borrower with an amou…

a credit market instrument that provides a borrower with an ac…

cash flows

cash payments to the holder of the security

present value

today's value of a payment to be received in the future when t…

A dollar in the future is less than a d…

Type of loan where in which the lender…

A bond that pays the owner a fixed inte…

A coupon bond's yearly dollar amount ex…

Present value

fixed-payment loan

coupon bond

coupon rate

A dollar in the future is less than a d…

Present value

Type of loan where in which the lender…

fixed-payment loan

Determinants of Portfolio Choice

1) Wealth (determinant of portfolio cho…

Difference between Income and Wealth

2) Expected Rate of Return (Determinant…

1) wealth ... 2) expected rate of return ... 3) risk ... 4) liquidity…

we can assume that an increase in wealth will increase the qua…

Income is a person's earnings during a particular period, such…

expected return = [(Prob of event 1 occurring) x (value of eve…

Determinants of Portfolio Choice

1) wealth ... 2) expected rate of return ... 3) risk ... 4) liquidity…

1) Wealth (determinant of portfolio cho…

we can assume that an increase in wealth will increase the qua…

wealth, rate of return, risk, liquidity…

expected return

risk

diversification

the determinants of portfolio choice

the rate of return expected on an asset during a future period

the degree of uncertainty in the return on an asset

the division of wealth among many different assets to reduce r…

wealth, rate of return, risk, liquidity…

the determinants of portfolio choice

expected return

the rate of return expected on an asset during a future period

expected return

diversification

mkt/ systematic risk

idiosyncratic/unsystematic risk

rate of return expected on asset during future period

division of wealth among many different assets to reduce risk

common to al assets of certain types such as increase & decrea…

risk to particular asset rather than mkt as whole (price of pa…

expected return

rate of return expected on asset during future period

diversification

division of wealth among many different assets to reduce risk

Cash flows

consol or perpetuity

coupon bond

coupon rate

Cash payments to the holder of a security

a perpetual bond with no maturity date and no repayment of pri…

a credit market instrument that pays the owner a fixed interes…

the dollar amount of the yearly coupon payment expressed as a…

Cash flows

Cash payments to the holder of a security

consol or perpetuity

a perpetual bond with no maturity date and no repayment of pri…

Cash Flows

Present Value

Simple Loan

Fixed-Payment Loan

Cash payments to the holder of a security.

AKA Present Discounted Value... Today's value of a payment to be…

A credit market instrument that provides the borrower with an…

AKA Fully Amortized Loan... A credit market instrument that provi…

Cash Flows

Cash payments to the holder of a security.

Present Value

AKA Present Discounted Value... Today's value of a payment to be…

Simple Interest and Present Value

Compound interest (annual) and present…

Categories of credit market instruments

Simple Loan

1 year case/1 year loan... Formula: CF=PV(1+i)... PV=CF/1+i

2 year case... Formula CF=PV(1+i)^n... PV=CF/(1+i)^n

1. Simple Loan... 2. Fixed Payment Loans... 3. Coupon Bonds... 4. Disco…

Borrower borrows lump(principle) and repays lump at maturity.…

Simple Interest and Present Value

1 year case/1 year loan... Formula: CF=PV(1+i)... PV=CF/1+i

Compound interest (annual) and present…

2 year case... Formula CF=PV(1+i)^n... PV=CF/(1+i)^n

How to Build an investment portfolio?

Expected return

The expected return on an investment is:

investors are risk averse

1. The saver's wealth ... 2. The expected rates of return from d…

is the return expected on an asset during a future period.

Expected return = [(Probability of event 1 occurring) X (Value…

choose the asset with the lower risk when two assets have the…

How to Build an investment portfolio?

1. The saver's wealth ... 2. The expected rates of return from d…

Expected return

is the return expected on an asset during a future period.

Expected return

Risk

Diversification

Market Risk

The rate of return expected of an asset during a future period

the degree of uncertainty in the return of an asset

The division of wealth among assets to reduce risk

Risk that is common to all assets of a certain type, such as t…

Expected return

The rate of return expected of an asset during a future period

Risk

the degree of uncertainty in the return of an asset

cash flows

consol

perpetuity

coupon bond

cash payments to the holder of a security

a perpetual bond with no maturity date and no repayment of pri…

a bond with no maturity date and no repayment of principal and…

a credit market instrument that pays the owner a fixed interes…

cash flows

cash payments to the holder of a security

consol

a perpetual bond with no maturity date and no repayment of pri…

medium of exchange

unit of account

store of value

monetary aggregates

function of money; used to pay for goods and services

function of money; money is used to measure value in an economy

function of money; a repository of purchasing power available…

measures of the money supply

medium of exchange

function of money; used to pay for goods and services

unit of account

function of money; money is used to measure value in an economy

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Determinants of a Portfolio Choice

Wealth

Expected Rate of Return

Risk

1. Savers Wealth ... 2. Expected Rate of Return ... 3. Degree of Ris…

total value of assets a person owns minus liabilities

The rate of return expected on an asset during a future period

Degree of uncertainty in the return on an asset

Determinants of a Portfolio Choice

1. Savers Wealth ... 2. Expected Rate of Return ... 3. Degree of Ris…

Wealth

total value of assets a person owns minus liabilities

medium of exchange

unit of account

store of value

monetary aggregates

function of money; used to pay for goods and services

function of money; money is used to measure value in an economy

function of money; a repository of purchasing power available…

measures of the money supply

medium of exchange

function of money; used to pay for goods and services

unit of account

function of money; money is used to measure value in an economy

Loanable funds theory

Capital inflows

Capital outflows

Net capital inflows

Real interest rates are determined by the supply and demand fo…

Funds provided to a country's investors by foreigners

Funds provided to foreign investors by a country's savers

Capital inflows minus capital outflows

Loanable funds theory

Real interest rates are determined by the supply and demand fo…

Capital inflows

Funds provided to a country's investors by foreigners

present value

yield to maturity

fixed payment loan

interest rate risk

a dollar paid to you one year from now is less valuable than a…

the interest rate that equates the present value of cash flow…

the same cash flow payment every period throughout the life of…

prices and returns on long term bonds are more volatile than t…

present value

a dollar paid to you one year from now is less valuable than a…

yield to maturity

the interest rate that equates the present value of cash flow…