Econ 303

From BluWiki

[edit] Class Notes

[edit] 1/28/2005

Zero coupon bond

Why would you buy:

• Speculative - if you think they're going to go down, you would buy 0 coupon bonds
• Reduce reinvestment risk (if interest rates fall, you don't have to worry about reinvesting payments at a lower interest rates)

Why would you sell:

• To match irregular revenue streams

Overview of text:

• Most basic condition for a monetary system:
  • A need to trade with each other. Specialization of roles.
  • Diffusion of information, people need to know what's available, how much it is , etc.
  • Enforced property rights
  • Enforced contract law - or an "infrastructure of trust" - you have to trust that when parties agree to something, they will follow through on it.

• Roles of financial intermediaries
  • They take the small amounts of excess capital and "aggregate it" for large capital expenditures
  • Reduce the information costs of investing capital, spreading across
  • Reduce risks by pooling them (e.g. mortgages)
  • "Market making" - they introduce liquidity into investments
  • Help companies to go public, and find capital (IPOs)

Difference between bill, note, bond:

Bill is less than 1 year, note has a maturity of less than 5 years, bond has a maturity over 5 years (or 10 yrs for US Treasury)