Unit 4 March 22

Bond vs. Stocks

• Bonds are loans or IOU's that represent debt that the government or a corporation must repay back to an investor 
• if a corporation issues and then sells a bond, its a liability, for the buyer its an asset
• if nominal interest rate decreases the value of a bond will increase 
• if the nominal interest rate increases, value of a bond decreases 
• stock owners can earn a profit in two ways 
• dividends, which are portions of a corporation's profit, are paid out to stockholders
• a capital gain is earned when a stockholder sells stock for more than he/she paid for it 
• a stockholder that sells stock at a lower price than the purchase price suffers a capital loss
• Money Market
• Demand for money has an inverse relationship between nominal interest rates and the quantity of money demand 
• when quantity demand decrease when interest rates increase 
• quantity demand increases when interest rate decrease
• money demand sifters
• change in price level 
• change in income 
• change in taxation that affects investment 
• How do banks make money 
• Fractional reserve 
• demand deposits are created through the fractional reserve system
• the process in which banks hold a small portion of their deposits in their reserve and they loan out excess 
• banks keep cash on hand ( Required Reserve ) to meet depositors needs
• banks must keep reserve deposit in the vault or at their district fed
• total reserve is equal to 
• required reserves plus excess reserves 
• banks can only lend out their excess reserves