Microeconomics Final: Chapter 13
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
