Unit 4: Stocks and Bonds 3/22/17

Bonds or loans, or IOU's, that represent debt that the government or a corporation must repay to an investor. The bond holder has NO OWNERSHIP of the company.

If a corporation issues and then sells a bond. 
- Its is a liability for the corporation
- An asset for the buyer
If that corporation issues a 10k bond with a 10 year term and a 5% interest.
-Nominal interest rate at the time of issue - 5%
If the Nominal Interest Rate falls 3%, the value of the bond increases.

Stock owners can earn a profit in two ways;
1. Dividends: Portions of a corporation's profits, are paid out to stockholders.
-The higher the corporate profit, the higher the dividend
2. Capital Gain: Earned when a stockholder sells stock for more than he or she paid for it.
A stockholder that sells stock at a lower price than the purchase price suffers a capitol loss.

The Money Market:
-Demand for money has an inverse relationship between nominal interest rates & the quantity of money demanded.

The Demand for Money:
What happens if price level increases?
1. Changes in price level
2. Changes in income
3. Changes in taxation that affects investment



The Money Demand Curve slopes down and to the right, because all else being equal, higher interest rates increase the opportunity cost of holding money, thus leading public to reduce quantity or money it demands.

Fractional Reserve System: Process by which banks hold a small portion of their deposits in reserve and loan out the excess.
-Demand Deposits are demanded through the Fractional Reserve System.