Micro-Economics Chapter 18
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.