SOCIOL 182 Lecture Notes - Lecture 5: Excess Reserves, Risk Premium, Adverse Selection
Document Summary
Us treasury bonds have been considered to have no default risk because the federal government can always increase taxes or print money to off its obligations. Bonds like these with no default risk are called default-free bonds. The spread between interest rates on bonds with default risk and interest rates on default-free bonds, both of the same maturity is called risk premium. A bond with default risk will always have a positive risk premium, and an increase in its default risk will raise the risk premium. Chapter 7: common stock is the principal medium through which corporation raise equity capital. Stockholders: those who hold stock in a corporation, own an interest in the corporation equal to the percentage of outstanding shares they own. Dividends are payments made periodically, usually every quarter to stockholders. One period valuation model: you buy the stock, hold it for one period to get a dividend, then sell the stock.
