workshop 2 Flashcards
Financial markets have the basic function to…
Get people with funds to lend to people who want to borrow.
There’s a fall in the level of prices. What affect does this have on the value of money
Increases
If wealth increases, what happens to the demand for stocks and long term bonds?
Demand increases for both
Default risk
Risk that payments will not be made, or that the face value isn’t paid when the bond matures.
What happens when the price of a bond is above the equilibrium price.
There is an excess supply and prices will fall.
What defines the return of a bond. Equation
(C+Pt+1-Pt)/Pt
If the interest rate on all bonds rise from 5 to 6 percent over this year, which bond would you rather hold?
Shortest term one (one year) because there is less interest rate risk.
Where would a corporation acquire new funds when it’s securities are sold?
In the primary market from an investment bank.
If bonds becomes more widely traded what happens to the demand curve, price and IR
Demand curve shifts right, price goes up and the interest rate falls
If expected inflation increases, what happens to the supply of bonds and supply curve.
Causes the supply of bonds to increase and shift right
When the government’s budget deficit decreases, what happens to the supply or demand curve
Supply curve shifts left
After a textbook recession, what happens to demand and supply for bonds and the interest rate.
Demand decreases, the supply of bonds decreases and the interest rate falls.
What does deflation do to the supply, demand and bond price
Demand to increase, supply to decrease and bond prices to increase
What is a discount bond
pays the bondholder the face value at maturity.
What is yield to maturity
The interest rate that equates the present value of payments received from a debt instrument with its value today.
