Unit 4 - Bonds

March 4, 2015

Bonds: Loans or IOU's that represent debt that the government or corporation must repay to a investor (Are low risk investment)

3 components

• Coupon Rate: The interest rate that a bond issuer will pay to a bond holder.
• Maturity: The time at with payment to a bond holder is due.
• Par value: The amount that an investor pays to purchase a bond and that will be paid back to the investor at maturity.

Time value of money

• Is a dollar today worth more than a dollar tomorrow?
• Yes, because opportunity cost & inflation
• This is the reason for charging & paying interest
• Interest Formula (Simple Formula  v=((1+r)^n )P) (Compound Formula  v=((1+r)^nk )P) 
• P= Present value of $
• r= real interest rate
• n= years
• k= number of times interest is credited per year

7 Functions of Fed

• Issue paper currency
• Sets reserver requirements and hold reservers of banks
• Lends money to banks and chargers them interest
• They are check clearing service for banks
• It acts a personal bank for the government
• Supervises member banks
• Controls the money supply in the economy

Types of multiple deposit expansion

• Type 1: Calculate the initial change in excess reserves
• Type 2: Calculate the change in loans in the banking system
• Type 3: Calculate the change in the money supply
• Type 4: Calculate the change in demand deposits