Financial Markets And Decisions at University Of Exeter | Flashcards & Summaries

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Lernmaterialien für Financial Markets and Decisions an der University of Exeter

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What is the role of banks in the financial markets?

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  • They facilitate trades between people with different levels of impatience 
  • Patient people (savers) lend funds to impatient people (borrowers) in exchange for a rate-of-return on the loaned funds. 
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How do we decide whether to accept a project in terms of NPV?

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If NPV is positive --> accept the project 

If NPV is negative --> reject the project 

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When should an asset be sold?

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When rate of return = interest rate

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What happens to the price of bonds when the interest rate paid by banks rises?

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Price of bonds falls

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What is a growing annuity?

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A growing annuity pays a cashflow A with a constant growth rate g for T periods 

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What is a growing perpetuity?

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A growing perpetuity pays a cashflow A with a constant growth rate g forever 

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What si the definition of an asset?

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A commodity that provides a flow of services over time 

Example: house

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Intertemporal choice problem: If a consumer does not save or borrow what is their consumption?

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c1 = m1

c2 = m2

Consuming at endowment point

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What does present-valued mean?

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All terms in period 1 values

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What is the equilibrium condition in terms of arbitrage?

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In Equilibrium there should be no opportunities for arbitrage


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What is the effect of inflation on the slope of the budget constraint?

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If the inflation rate increases --> slope of the budget constraint is less steep

If the inflation rate decreases --> slope fo the budget constraint more steep 

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What is a state-contingent contract?

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One which is implemented when a particular state of nature occurs

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Q:

What is the role of banks in the financial markets?

A:
  • They facilitate trades between people with different levels of impatience 
  • Patient people (savers) lend funds to impatient people (borrowers) in exchange for a rate-of-return on the loaned funds. 
Q:

How do we decide whether to accept a project in terms of NPV?

A:

If NPV is positive --> accept the project 

If NPV is negative --> reject the project 

Q:

When should an asset be sold?

A:

When rate of return = interest rate

Q:

What happens to the price of bonds when the interest rate paid by banks rises?

A:

Price of bonds falls

Q:

What is a growing annuity?

A:

A growing annuity pays a cashflow A with a constant growth rate g for T periods 

Mehr Karteikarten anzeigen
Q:

What is a growing perpetuity?

A:

A growing perpetuity pays a cashflow A with a constant growth rate g forever 

Q:

What si the definition of an asset?

A:

A commodity that provides a flow of services over time 

Example: house

Q:

Intertemporal choice problem: If a consumer does not save or borrow what is their consumption?

A:

c1 = m1

c2 = m2

Consuming at endowment point

Q:

What does present-valued mean?

A:

All terms in period 1 values

Q:

What is the equilibrium condition in terms of arbitrage?

A:

In Equilibrium there should be no opportunities for arbitrage


Q:

What is the effect of inflation on the slope of the budget constraint?

A:

If the inflation rate increases --> slope of the budget constraint is less steep

If the inflation rate decreases --> slope fo the budget constraint more steep 

Q:

What is a state-contingent contract?

A:

One which is implemented when a particular state of nature occurs

Financial Markets and Decisions

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