Bond and stocks

3-22-17

Bonds and Stocks

• bonds are loans, or IOUs, that represent debt that the govt or corporation must repay to investor
• bond holder has no ownership of company

Bonds

• First if a corporation issues and then sells a bond
• liability or asset is corporation
• assets  or liability are buyers
• If that corporation issues a lok bond with a 10 yr. term and a 5% interest
• nominal interest rate = 5%
• nominal interest falls 3% = value of bond increases
• nominal interest rate rises 8 = value of bond decreases

Stock owners

• earn profit in two ways:
• Dividends, portions of corporations profit are paid out to stock holders
• higher corporate profit, the higher the divided
• Capital gain: earned when stockholders sell stock at lower price than purchase price suffers a capital loss

The money market

• Demand fir $ has inverse relationship between nominal interest rates and quantity of $ demanded
• What happen when demand of $ when in. rates increases?
• Quantity demand falls because of individuals would prefer to have interest earning assets instead of borrowed liabilities
• What happens when quantity demanded when in. rates decreases
• quantity demand increases no incentive to convert cash

Money Demand Shifters

1. Changes in price lvl
2. changes in income
3. changes in taxation that affect investment

• Money demand curve slopes decreases and to the shifts because all else being equal higher interest rates increase the opportunity cost of holding $, thus leading public to reduce quantity of $ it demands

Fractional Reserve system

• Demand deposits/checks
• process by which banks hold a small portion of their deposits in reserves and loan out the excess
• banks keep cash on hand which is (RR) to meet depositor's needs 
• MS only moves by bond or loans