ECON-3076EL Lecture Notes - Lecture 10: Dividend Discount Model, Excess Reserves, Adverse Selection
28 Feb 2017
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Document Summary
Financial system / primary functions of financial systems. Financial system = financial markets + financial institutions. Financial system main objectives: transfer funds from savers to investors, diversify portfolios, sets prices of financial instruments. Financial instruments (assets) money, t-bills, bonds, stocks, etc. Real investment real estate, infrastructure, machines, etc. Internal financing = retained earnings + cash flows. External financial = financial markets (direct) + financial institutions (indirect) Financial markets = money markets + bond market + equity market. Bonds of the same default risk pay different interest rates because of differences in their term to maturity. The yield curve typically shifts up or down without changing slope (or twisting) long and short- term rates generally move together. When short-term rates are low, the long-term rates are likely to be higher than short-term rates; and when the short-term rates are high, the long-term rates are likely to lower.
