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MACROECONOMICS CLASS 1. Keynes developed the theory of liquidity preference in order to explain what factors determine the economy's interest rate. According to the theory, the interest rate adjusts to balance the supply and demand for money. There is one interest rate, called the equilibrium interest rate, at which the quantity of money demanded equals the quantity of money supplied. According to liquidity preference theory, the opportunity cost of holding money is the interest rate on bonds. The money demand curve is downward sloping because people will want to hold more money as the cost of doing so falls.
Equilibrium in the money market is achieved by adjustments in the interest rate (Roubini, II). Liquidity preference theory is most relevant to the short run and supposes that the interest rate adjusts to bring money supply and money demand into balance. It assumes that the nominal supply of money is determined by the Federal Reserve System. As for me, liquidity refers to the ease with which an asset is converted into a medium of exchange 2. The money supply is controlled by the Federal reserve through: Open-market operations Changing the reserve requirements Changing the discount rate With regard to macroeconomic policy, the Fed has three distinct instruments.
The most important is open market operations, but they also control reserve requirements on deposits and the discount rate on borrowing from the Fed. Day-to-day open market operations are carried out with repurchase agreements, or repos, on US government securities with sanctioned US security dealers. Fed purchases government securities and sells them back again a few days later. That means that the customer has repurchased the securities it temporarily sold to the Fed. The difference between the sale and repurchase prices indicates the interest rate on the transaction. The reverse transaction is called a reverse repo by the market, and a matched sale purchase by the Fed.
Both of these instruments allow the Fed to affect the quantity of reserves and the monetary base. The most popular indicator of the Fed's open market operations is the federal funds rate (Roubini, XII). One of the tasks of the Fed is to provide short-term loans to banks. These loans are secured with government securities. In the old days this took the form of banks selling securities to the Fed at a discount, with the result that this arm of the Fed is known as the discount window. The interest rate on such borrowing is called the discount rate.
The discount rates are suggested by the regional banks subject to the Board of Governors and in recent times have been below market rates. The loans are made at the discretion of the Fed, and banks that are seen as abusing their borrowing privileges may lose them. In practice, the discount rate is not viewed as an important aspect of monetary policy, but it is often used to signal the Fed's intentions. A rate cut, for example, may indicate that the Fed foresees lower rates, and possibly looser monetary policy. The final policy instrument of policy is reserve requirements. Banks (and other depository institutions) must hold reserves against deposits in the form of cash or deposits at federal reserve banks.
These reserves do not pay interest. The Board sets these requirements within limits set by the Monetary Control Act of 1980. These requirement are changed much less often than the discount rate. One more final policy instrument is foreign exchange intervention, which in the US is the joint responsibility of the Fed and the Treasury. 3. Economy consists of: a production function, a labor market, and a goods / capital market. In long run, given taxes, productivity, government spending and so on, this model determines output, employment, the real wage, and the real interest rate.
In long-run we assume that prices are flexible and enough time passes to allow prices to adjust to market clearing levels. Thus, the long-run equilibrium price level is defined by the point where the interest rate and real output are at their long-run (full employment levels). This would define a long-run goods market and money market equilibrium. Changes in government policy, as well as other changes in the economic environment change the rate of investment in new capital goods. Over longer time periods this will lead to changes in the amount of capital, which filters through the entire economy. For example, government increases purchasing of goods and services.
Immediate effect is to drive up the interest rate and lower the rate of investment. 4. On the picture shift of money demand curve (from MD 1 to MD 2) increases equilibrium with a fixed money supply. It causes interest rate rise (from r 1 to r 2) INVESTMENT CLASS 1. A commercial company is the union or association of two or more persons by shared agreement, that obligates them to make contributions applied for the achievement of a shared purpose, and to share among them profits and losses. There are four main types of companies: Partnership. (a) General Partnership. All partners respond with unlimited solidarity to their social obligations. (b) Limited Partnership.
A partnership consisting of one or more general partners, jointly and severally responsible as ordinary partners, and one or more limited partners who are not liable for the debts of the partnership beyond the sum contributed as capital to the common stock. Limited Liability Companies. A company in which the liability of each partner is limited to the amount invested. A minimum of two and a maximum of 25 partners make up this type of company.
The common capital is divided into shares, which in no case may represent ownership. Capital shares must be paid up in full at the time of incorporation of the company. Joint Stock Companies. In this type of company, the general partners are liable for obligations as ordinary partners, where as limited partners incur no liability beyond the number of shares subscribed.
Stock Company or Corporation. A company in which, common capital consists of transferable shares. The liability of each stockholder is limited to the number of shares he has taken. The most popular types of corporations are the "C"- Corporation, "S" - Corporation and Non-profit Corporation Stocks can be classified into many different categories. The two most fundamental categories of stock are common stock and preferred stock, which differ in the rights that they confer upon their owners. But stocks can also be classified according to a number of other criteria, including company size and company sector. (Investor Guide).
Common stock represents ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders, and preferred shareholders are paid.
Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. With preferred shares investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation preferred shareholders are paid off before the common shareholder, but still after debt holders. Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (Investopedia). 2. Investors, searching objects for invest one's capital, apply following valuation methods Investment Planning): Bond Rating Services.
Two rating agencies, Standard & Poor's (S&P) Corporation and Moody's Investors Service Inc. , provide investors with bond ratings, that is, current opinions on the relative quality of most large corporate and municipal bonds, as well as commercial paper. Common Stock Valuation Methods. There are no uniform rating services for common stock. The vagaries of the stock market as well as the complexities of this area results in greater variation of opinion as to the true or intrinsic value of a stock, as compared to bonds.
Fundamental and Technical Analysis Technical analysis is based on published market data and focuses on internal factors by analyzing movements in the aggregate market, industry average, or stock. In contrast, fundamental analysis focuses on economic and political factors, which are external to the market itself. 3. Stock valuation is more difficult than bond valuation because stocks do not have a finite maturity and the future cash flows, i. e. , dividends, are not specified.
Therefore, the techniques used for stock valuation must make some assumptions regarding the structure of the dividends (Mathis). There are following Common Stock Valuation Methods: Present Value Analysis. The present value analysis is similar to a discounting process sometimes used for bonds. The future stream of cash flows to be received from a common stock is discounted back to the present at an appropriate discount rate, usually the investors required rate of return. Intrinsic Value.
The intrinsic value of an asset is that value that exists when the asset is correctly valued-its true value based on the capitalization of income process. Price to Earnings Analysis. Investors determine a stocks value by deciding how many dollars they are willing to pay for every dollar of estimated earnings. Alternative Valuation Techniques. Investors use other valuation techniques, based on fundamental analysis concepts.
Three that are fairly often referred to are: price to book value, price / sales ratio and economic value added (Investment Planning). 4. Company analysis involves two types of approaches These approaches is used by investors and security analysts when doing fundamental analysis. These approaches are referred to as the "top-down" approach and the "bottom-up" approach. With the "bottom-up" approach, investors focus directly on a company's basics, or fundamentals.
Analysis of such information as the company's products, its competitive position, and its financial status leads to an estimate of the company's earnings potential, and, ultimately, its value in the market. Bottom-up fundamental research is often broken into two categories, growth investing and value investing. Growth stocks carry investor expectations of above-average future growth in earnings and above-average valuations as a result of high price/ earnings ratios. Value stocks, on the other hand, feature cheap assets and strong balance sheets. The top-down approach is the opposite to the bottom-up approach. Investors begin with the economy and the overall market, considering such important factors as interest rates and inflation.
They next consider likely industry prospects, or sectors of the economy that are likely to do particularly well (or particularly poorly). Finally, having decided that macro factors are favorable to investing, and having determined which parts of the overall economy are likely to perform well, individual companies are analyzed (Investment Planning). Technical analysis is based on published market data as opposed to fundamental data, such as earnings, sales, growth rates, or government regulations. Market data include the price of a stock or the level of a market index, volume (number of shares traded), and technical indicators, such as the short interest ratio. The focus of technical analysis is identifying changes in the direction of stock prices, which tend to move in trends as the stock price adjusts to a new equilibrium level. These trends can be analyzed, and changes in trends detected, by studying the action of price movements and trading volume across time.
The emphasis is on likely price changes. Bibliography: Roubini Nouriel, Backus David. Lectures in Macroeconomics. Stern School of Business, NYU, 1998.
Investment planning Module. Center for professional development. Florida State University. Homepage < web > Investor Guide University. Stock. Types of stock.
Article. Homepage. < web > Investopedia Tutorial on Investment. Stocks. Homepage. < web > Mathis Rock. Corporate Finance Live.
Stock valuation. Homepage. < web app / cfl demo /SV/CG Stock. html>
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Research essay sample on Open Market Operations Interest Rate
