March 22, 2017

Bonds vs Stocks

• “Bonds are loans, stocks you own”

Bonds

• How are the value of bonds determined? If a corporation issues and then sells a bond
• Is it a liability
• First: if a corporation issues and then sells a bond

Liability for corporation

Asset for the buyer

• If that corporation issues a 10k bond with a 10 yr term and a 5% interest
• Nominal interest is 5%
• If nominal interest rate falls to 3% the value of the bond increases
• If interest rises to 8% then value decreases
• Dividends- which are portions of a corporation's profits, are paid out to stockholders
• Higher the corporate profit, the higher the dividend
• Capital gain- is earned when a stockholder sells stock for more than he or she paid for it
• Capital loss- stockholder sells stock at lower price then bought
• Federal reserve bank= Fed, central bank
• Two goals
• Stabilize economy
• Full employment

The money market

• (Supply and demand for money)
• Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded
• What happens to the quantity demanded of money when interest rates increase?
• Quantity demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities
• What happens to the quantity demanded when interest rates decrease?
• Quantity demanded increases. There is no incentive to convert cash into interest earning assets
• The demand for money
• Money demand is downward slope
• Monday demand shifters
• Changes in price level
• Change in income
• Changes in taxation that affects investment
• Increasing the money supply
• If the FED increase the money supply, a temporary surplus of money will occur at 5% interest.
• The surplus will cause the interest rate to fall to 2%
• How does this affect ad?