COMMERCE 2FA3 Chapter Notes - Chapter 1: Risk Premium, Fixed Income, Capital Market
13 Dec 2017
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Why do we need financial markets: people with excess funds are called surplus units those with insufficient can be termed deficit units financial markets allow households to redistribute consumption opportunities over time. Outflow = money you put in: example: you are considering an investment. You would have to put out of your own money to finance this investment. You (cid:271)elie(cid:448)e (cid:271)(cid:455) the e(cid:374)d of the (cid:455)ear (cid:455)ou"ll ha(cid:448)e . Is this a good investment: solution: the return is 20% (=30/25 -1). This is a good investment if interest rate is less than. Where do interest rates come from: is a price; price of resources today in terms of resources that must be repaid at some future date, supply of loanable funds. Logically positively related to the rate of interest: the greater the reward for supplying capital, the greater the amount supplied, demand for loanable funds.
