ECO 181 Lecture Notes - Lecture 8: Autarky, Loanable Funds
Document Summary
Chapter 8 savings, investment and the financial sector. Bonds normally consist of: face coupon rate fixed or variable rate paid to lender, value - value that lender receives at maturity. Rate is determined by: probability of default: likelihood of a company going bankrupt. Higher risk, higher return: maturity of bond:(i. e. how long before you get paid back):long term bonds usually pay higher rates due to greater chance of default, tax status of bonds: people have to pay taxes on most interest income. However bonds issued by municipalities-states, counties or cities are tax exempt and thus are likely to pay lower rates. Summary of bonds/example: advantages, lower risk, guaranteed income flow, disadvantages lower returns-historically. Example: rank the following bonds from lowest to highest return. (3) an internet start-up, (1)the state of new york, (2)mcdonalds. This is true during normal economic times but not during recessions (crashes) or bubbles.
