# Study sets matching "money banking chapter 4"

Study sets

Classes

Users

Yield to Maturity

Future Value Equation

Present Value

What makes the FV rise today?

The most accurate measure of interest rates... Commonly used as…

FV = PV (1 + i)^n

Based on the concept that $1 paid to you one year from now is…

The amount today is higher... The interest rate is higher... n is…

Yield to Maturity

The most accurate measure of interest rates... Commonly used as…

Future Value Equation

FV = PV (1 + i)^n

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…

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

An average investor must weigh the bene…

If there is an excess demand for bonds…

If the expected gains on the stocks ris…

In the bond market, the seller is consi…

the lower returns on liquid assets

the interest rate will fall

the equilibrium interest rate will rise

the borrower

An average investor must weigh the bene…

the lower returns on liquid assets

If there is an excess demand for bonds…

the interest rate will fall

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…

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

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…

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…

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

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…

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.

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…

Time Value of Money

Simple loan

Discounting the future

Fixed payment loan (amortized loan)

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

A loan where the lender provides the borrower with an amount o…

The process of calculating today's value of dollars received i…

The lender provides the borrower with an amount of funds that…

Time Value of Money

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

Simple loan

A loan where the lender provides the borrower with an amount o…

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

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

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

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

Yield to maturity

Present Value (or present discounted va…

What a bond earns (its rate of return)…

Coupon Bond

The most accurate measure of interest rates; ... the present valu…

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

interest rate

pays the owner of the bond a fixed interest payment (coupon pa…

Yield to maturity

The most accurate measure of interest rates; ... the present valu…

Present Value (or present discounted va…

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

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

What is the primary service provided by…

Interest Rate

What are the current interest rates?

What is the main factor that controls i…

Purchasing Power

Cost of Borrowing

-30 year mortgage... -1 year CD: 1.42%... -5 year CD: 2.3%... -Federal…

Monetary Rate

What is the primary service provided by…

Purchasing Power

Interest Rate

Cost of Borrowing

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

Compound interest is the idea:... A) That…

Which of the following best expresses t…

Suppose Paul borrows $4000 for one year…

A saver knows that she will receive $10…

That you get interest on interest.

PV(1+i)^2

$4,280

5.26%

Compound interest is the idea:... A) That…

That you get interest on interest.

Which of the following best expresses t…

PV(1+i)^2

Learning Objectives

Cash Flows

Consol (Perpetuity)

Coupon Bond

-Calculate the present value of future cash flows and the yiel…

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…

Learning Objectives

-Calculate the present value of future cash flows and the yiel…

Cash Flows

Cash payments to the holder of a security.

Determinants of Asset Demand

An increase in wealth, expected return…

Risk Averse

Diversification

1. Wealth ... 2. Expected Returns ... 3. Liquidity ... 4. Risk ... 5. Info…

increase demand

choose asset with lower risk when 2 assets have the same expec…

dividing wealth among different assets to reduce risk

Determinants of Asset Demand

1. Wealth ... 2. Expected Returns ... 3. Liquidity ... 4. Risk ... 5. Info…

An increase in wealth, expected return…

increase demand

present value

simple loan eq

4 types of credit market instrument

fixed payment loan

is based on a dollar paid to you one year from now is less val…

Present Value= Future Cash Flow/ (1+i)^n

1. simple loan 2. fixed payments 3. coupon bond 4. discount bo…

the lender provides the borrower with an amount of funds which…

present value

is based on a dollar paid to you one year from now is less val…

simple loan eq

Present Value= Future Cash Flow/ (1+i)^n