Interest Rates and Money Flashcards
List the credit market instruments
1) Simple loan
2) Fixed payment loan
3) Coupon bond
4) Discount bond
Yield to maturity
The “interest rate” that equates the present value of cash flow payments received from a debt instrument with its value today
What is the relationship between YTM and coupon bond price?
YTM = coupon rate THEN P = FV
YTM > coupon rate THEN P < FV
YTM < coupon rate THEN P > FV
What is the YTM of a bond with a long-term maturity?
Similar to coupon rate.
Types of interest rates
EX-ANTE: adjusted to expected change.
EX-POST: adjusted to actual change.
Rate of return
The amount of each payment to the owner plus the change in the security’s value.
What type of bonds have zero risk?
Coupon bonds because they pay their face value at maturity.
What are the functions of money?
1) Medium of exchange
2) Unit of account
3) Store of value
What is the most liquid asset?
Cash
What is the least liquid asset?
Real estate
What are monetary aggregates?
The measures of the money supply (M1 and M2) used by the Federal Reserve System.
Define M1
A measure of money that includes currency, traveler’s checks and checkable deposits.
Define M2
A measure of money that includes M1 plus assets that are less liquid (e.g. deposits).
M1 equation
Currency + deposits + traveler’s checks.
M2 equation
M1 + small deposits (<100K) + saving and money market deposits + money market mutual funds share
