ECON1102 Lecture Notes - Lecture 6: Corporate Bond, Nominal Interest Rate, Commodity Money
4 May 2018
School
Department
Course
Professor
Thursday, 26 April 2018
Financial Assets, Money and Private Banks
Key Issues!
-Asset returns and prices!
-What is money? !
-Demand for money!
-Private banks and deposits!
-Why are banks regulated?!
-Money, prices and inflation !
Financial System!
-What happens to private saving?!
-S = Y - T - C
-Currency!
-Bank deposits!
-Stocks/shares/equities!
-Bonds!
-Other assets !
-Lenders (Saver) —> Financial System (Intermediation) —> Borrowers
(Investor)!
Asset Prices and Yields!
-General relationship: The yield or return on a financial asset is inversely related to
the asset’s price. !
-Return = price(tomorrow) + payoff / price(today)!
-Other things equal, an increase in price today implies a decrease in returns !
Bonds!
-Legally enforceable promise to repay a debt (Govt + Corporate bonds) !
1
Thursday, 26 April 2018
-4 Elements of a Bond!
-Term of a bond = length of time before bond has to be repaid (maturity)!
-Principal = amount that needs to be repaid at maturity!
-Coupon payment = regular dollar payment of interest on the bond!
-Coupon rate = coupon payment/principal!
-Bond Prices and Interest Rates !
-Bonds do not have to be held until maturity, but can be traded on the bond
market. !
-The price of a bond is determined by the interest rate. (inverse relationship)!
Money!
-Medium of exchange!
-Good or asset whose primary purpose is to purchase other goods.!
-goods —> money —> goods !
-Medium of exchange increases efficiency of trade.!
-Why not directly trade goods? inefficient!
-Double coincidence of wants: medium of exchange makes this easy to fulfil. !
-Two forms for money:!
-Commodity money: money has some intrinsic value (e.g. silver or gold coin).!
-Fiat money: Money has no intrinsic value (e.g. currency or bank deposit) and
is declared legal tender by the government. !
-Unit of account !
-Good that is used to compare the value of all other goods and services. !
-Standard to use medium of exchange as the unit of account. !
-Store of value!
-Good or asset that serves as a means of holding (or transferring) wealth over
time. !
-Transfer purchasing power from today into some future value. !
2
Thursday, 26 April 2018
-Many goods and assets can serve as a store of value but do not possess the
medium of exchange or unit of account functions of money. !
-Disadvantage to using money as a store of value: !
-Low nominal return compared to other assets.!
-Advantages to using money as a store of value:!
-Money as a medium of exchange is perfectly liquid. !
-Nominal price of money is fixed, so no possibility of capital loss. !
Measuring Money
-In modern economies money is provided by:!
-Government (currency - notes and coin)!
-Currency = notes and coin on issues (less what is held by RBA and banks)!
-M1 = Currency + Current deposits at banks!
-M3 = M1 + all other bank deposits of non-bank private sector!
-Broad Money = M3 + borrowings from private sector by non-bank depository
corporations!
-Banking system (deposits - accounting) !
Demand for Money!
-Focus on transitions demand for money (M).!
-Demand to hold a particular level or stock of money. !
-What factors are likely to influence the quantity of money demanded for making
transactions?!
-Value of transactions!
-2 components:!
-Real GDP (Y) as a proxy for volume of transactions.!
-Other things equal, an increase in Y will increase demand for money (M)!
-Aggregate price level ( P)!
-Other things equal, an increase in P will increase the demand for M!
3
Document Summary
S = y - t - c. Lenders (saver) > financial system (intermediation) > borrowers (investor) General relationship: the yield or return on a nancial asset is inversely related to the asset"s price. Return = price(tomorrow) + payo / price(today) Other things equal, an increase in price today implies a decrease in returns. Legally enforceable promise to repay a debt (govt + corporate bonds) Term of a bond = length of time before bond has to be repaid (maturity) Principal = amount that needs to be repaid at maturity. Coupon payment = regular dollar payment of interest on the bond. Bonds do not have to be held until maturity, but can be traded on the bond market. The price of a bond is determined by the interest rate. (inverse relationship) Good or asset whose primary purpose is to purchase other goods. Medium of exchange increases e ciency of trade.
