Microeconomics Final: Chapter 13

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Efficient Markets

A market that instantaneously incorporates all available information relevant to a stock's price

Bonds

A promise to pay back borrowed funds, issued by a corporation or government agency

Financial Assets

A promise to pay future income in some form, such as future profits or future interest payments

Share of Stock

A share of ownership in a corporation

Lower interest rates increase firms'...

investment in new capital, causing capital stock to be larger, and our overall standard of living to be higher

Bonds with a lower risk have...

lower yields, while the same is true for high risk, high yield bonds

Ceteris paribus, the present value...

of a future payment is lower when the interest rate is higher

When capital is rented, rather than purchased, the marginal approach to profit tells us...

the firm should rent another unit of capital whenever the additional (net) revenue per period is greater than the additional rental cost per period

There is an inverse relationship between bond prices and bond yields...

the higher the price of any given bond, the lower the yield on that bond

When there is uncertainty about future benefits, the principle asset evaluation is just the starting point. It tells us...

the maximum an asset would be worth

The greater the uncertainty or greater one's aversion to risk...

the more the value of a risky asset will far short of its maximum

According to the efficient markets theory, any information that helps one predict the future price of a specific stock or the market in general is only useful to...

the people who have the stocks before this information became available

As the interest rate rises, each business firm in the economy - using the principle of asset evaluation...

will place a lower value on additional capital, and decide to purchase less of it

Ceteris paribus, a payment received later...

has a lower present value than a payment received earlier

Investment

Firms' purchases of new capital over some period of time

The present value of $Y to be received in n years is equal to ...

PV=Y/(1+r)^n

Dividends

Part of a firm's current profit that is distributed to shareholders

Discounting

The act of converting a future value into its present-day equivalent

Yield

The annual rate of return a bond earns for its owner

Principle of Asset Evaluation

The idea that the value of an asset is equal to the total present value of all the future benefits it generates

Discount Rate

The interest rate used in computing present values

Primary Market

The market in which newly issued financial assets are sold for the first time

Secondary Market

The market in which previously issued financial assets are sold

Capital Gains

The return someone gets by selling a financial asset at a price higher than they paid for it

Present Value

The value, in today's dollars, of a sum of money to be received or paid at a specific date in the future with certainty

The principle of asset valuation applies to financial assets as well as...

physical assets

Because of interest, it is always preferable to...

receive a given sum of money earlier rather than later

Firms that issue financial assets in the primary market are affected by what happens in the...

secondary market


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