Micro-Economics Chapter 18

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Expected Value =

(1-Risk Factor) X Present Discounted Value (PDV)

What (3) would push ALL stock prices up or down at same time?

*Congressional budget & deficit decisions *Monetary Policy *Consumer Confidence

The present discounted Value of a future payment declines with ___________ and ____________ (Lottery Winnings)

*Higher interest rates *Longer delays in future payment.

Financial Intermediaries benefit society through (3)

*Improving the efficiency of resource allocation *Facilitating Transfer of savings to investors *Reducing search and information costs.

Businesses borrow loanable funds primarily to increase __________ goods.

Capitol

Dividends

Corporate Profits - Retained Earnings

a __________ is a Limited Liability Form of Business.

Corporation

Bonds

Debt contracts that are issued frequently by corporations.

Equilibrium Rate of Interest

Demand for loanable funds + Supply of loanable funds determines this.

Risk Premium

Difference in rates of return on uncertain and certain investments.

Coporate Profits-Retained Earnings

Dividends

Intersection of the SLF and DLF (Supply of Loanable Funds and the Demand for Loanable Funds)

Equilibrium Rate of Interest

PDV =

Future Payment / *1 + Interest Rate)N

Higher interest rates raise the _________ __________ of money

Future value

financial intermediary:

Institution (e.g., a bank or the stock market) that makes savings available to dissavers (e.g., investors)

loanable funds increase

Interest Rate Increases

loanable funds decrease

Interest rate decreases

Corporate profits not paid out in dividends

Retained Earnings

Changes in expectations about future corporate profits imply ______________________

Shifts in the supply and demand for a company's stock.

The ________________ the expected return, or the ____________ the cost of funds, the GREATER will be the amount of loan able funds demanded..

higher, lower

The amount of loanable funds demanded varies __________ with the rate of interest

inversely

Current yield on a bond is equal to what?

Annual Interest Payment / Market (resale) price of Bond

Capitol Gains

Any increase in the value of a stock

Lower interest rates

Lower the future value of current dollars Raises the current value of future payments

Discount future dollars by the __________________ _____ of money

Opportunity Cost

Interest rate rises

PDV of a future payment declines

Interest rate falls

PDV of future payment rises

PDV

Present Discounted Value of future payment

Higher Interest rates

Raise the future value of current dollars Reduce the present value of future payments

The Higher

The -________ the interest rate paid, the smaller is the present discounted value of a specific amount of money today.

Price/Earnings Ratio

The price of a stock share divided by profit per share

Present Discounted Valute : (PDV)

The value today of future payments adjusted for interest accrual.

WHy would a firm demand loanable funds?

To Expand their busniess To increase physical capital NOT to increase the supply of labor

risk premium: Def: The difference in rates of return on risky (uncertain) and safe (certain) investments.

risk premium

Time Value of Money

the idea that a specific amount of money is more valuable to a person the sooner it can be obtained.


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