chapter 13 investing in bonds quizlet login
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Xe Currency Converter. These are the highest points the exchange rate has been at in the last 30 and day periods. These are the lowest points the exchange rate has been at in the last 30 and day periods. These are the average exchange rates of these two currencies for the last 30 and 90 days.

Chapter 13 investing in bonds quizlet login reliable binary options list

Chapter 13 investing in bonds quizlet login

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To this point, we have been looking at saving in total. Now let us consider what affects saving in different types of financial investments. In deciding between different forms of financial investments, suppliers of financial capital will have to consider the rates of return and the risks involved. Rate of return is a positive attribute of investments, but risk is a negative. If Investment A becomes more risky, or the return diminishes, then savers will shift their funds to Investment B—and the supply curve of financial capital for Investment A will shift back to the left while the supply curve of capital for Investment B shifts to the right.

In the global economy, trillions of dollars of financial investment cross national borders every year. In the early s, financial investors from foreign countries were investing several hundred billion dollars per year more in the U. The following Work It Out deals with one of the macroeconomic concerns for the U. Imagine that the U. Using the four-step process for analyzing how changes in supply and demand affect equilibrium outcomes, how would increased U. Step 1.

Draw a diagram showing demand and supply for financial capital that represents the original scenario in which foreign investors are pouring money into the U. Figure 2 shows a demand curve, D, and a supply curve, S, where the supply of capital includes the funds arriving from foreign investors. The original equilibrium E 0 occurs at interest rate R 0 and quantity of financial investment Q 0. Step 2. Will the diminished confidence in the U. Yes, it will affect supply.

Many foreign investors look to the U. As the U. Increasing U. Step 3. Will supply increase or decrease? Figure 3 shows the supply curve shift from S 0 to S 1. Step 4. The economy has experienced an enormous inflow of foreign capital.

According to the U. Bureau of Economic Analysis, by the third quarter of , U. If foreign investors were to pull their money out of the U. This reduced inflow of foreign financial investment could impose hardship on U. In a modern, developed economy, financial capital often moves invisibly through electronic transfers between one bank account and another.

Yet these flows of funds can be analyzed with the same tools of demand and supply as markets for goods or labor. As we noted earlier, about million Americans own credit cards, and their interest payments and fees total tens of billions of dollars each year. It is little wonder that political pressures sometimes arise for setting limits on the interest rates or fees that credit card companies charge.

The firms that issue credit cards, including banks, oil companies, phone companies, and retail stores, respond that the higher interest rates are necessary to cover the losses created by those who borrow on their credit cards and who do not repay on time or at all. These companies also point out that cardholders can avoid paying interest if they pay their bills on time.

Consider the credit card market as illustrated in Figure 4. In this financial market, the vertical axis shows the interest rate which is the price in the financial market. Demanders in the credit card market are households and businesses; suppliers are the companies that issue credit cards. This figure does not use specific numbers, which would be hypothetical in any case, but instead focuses on the underlying economic relationships. Imagine a law imposes a price ceiling that holds the interest rate charged on credit cards at the rate Rc, which lies below the interest rate R 0 that would otherwise have prevailed in the market.

The price ceiling is shown by the horizontal dashed line in Figure 4. The demand and supply model predicts that at the lower price ceiling interest rate, the quantity demanded of credit card debt will increase from its original level of Q 0 to Qd; however, the quantity supplied of credit card debt will decrease from the original Q 0 to Qs. At the price ceiling Rc , quantity demanded will exceed quantity supplied. Consequently, a number of people who want to have credit cards and are willing to pay the prevailing interest rate will find that companies are unwilling to issue cards to them.

The result will be a credit shortage. Many states do have usury laws , which impose an upper limit on the interest rate that lenders can charge. However, in many cases these upper limits are well above the market interest rate. A price ceiling that is set at a relatively high level is nonbinding, and it will have no practical effect unless the equilibrium price soars high enough to exceed the price ceiling.

The quantity is measured by the money that flows from those who supply financial capital to those who demand it. Two factors can shift the supply of financial capital to a certain investment: if people want to alter their existing levels of consumption, and if the riskiness or return on one investment changes relative to other investments.

Factors that can shift demand for capital include business confidence and consumer confidence in the future—since financial investments received in the present are typically repaid in the future. Skip to content Chapter 4.

Labor and Financial Markets. Learning Objectives By the end of this section, you will be able to: Identify the demanders and suppliers in a financial market. Explain how interest rates can affect supply and demand Analyze the economic effects of U. Figure 1. The equilibrium price is where the quantity demanded and the quantity supplied are equal. The Effect of Growing U. Debt Imagine that the U. Figure 2. Debt Uncertainty.

The graph shows the demand for financial capital from and supply of financial capital into the U. The original equilibrium E 0 occurs at an equilibrium rate of return R 0 and the equilibrium quantity is at Q 0. Figure 3. The graph shows the demand for financial capital and supply of financial capital into the U.

Self-Check Questions In the financial market, what causes a movement along the demand curve? What causes a shift in the demand curve? In the financial market, what causes a movement along the supply curve? What causes a shift in the supply curve? Which of the following changes in the financial market will lead to a decline in interest rates: a rise in demand a fall in demand a rise in supply a fall in supply Which of the following changes in the financial market will lead to an increase in the quantity of loans made and received: a rise in demand a fall in demand a rise in supply a fall in supply.

Review Questions How is equilibrium defined in financial markets? What would be a sign of a shortage in financial markets? Would usury laws help or hinder resolution of a shortage in financial markets? Critical Thinking Questions Suppose the U. Popular Courses. Table of Contents Expand. Table of Contents. Chapter 7. Chapter Chapter 7 vs. Chapter Key Differences. How to Prevent Bankruptcy.

Part of. Part Of. Bankruptcy Basics. Types of Bankruptcy. Personal Bankruptcy. Corporate Bankruptcy. Bankruptcy: Your Legal Rights. Bankrupty Terms C-I. Bankrupty Terms J-Z. Key Takeaways Chapter 7 and Chapter 11 are two common forms of bankruptcy. In a Chapter 7 bankruptcy, the assets of a business are liquidated to pay its creditors, with secured debts taking precedence over unsecured debts.

In a Chapter 11 bankruptcy, the company continues to operate and restructures under the supervision of a court-appointed trustee, with the goal of emerging from bankruptcy as a viable business. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Related Articles. Debt Management Bankruptcy Rates by State. Debt Management When to Declare Bankruptcy.

Debt Corporate bankruptcy: An Overview. Partner Links. Related Terms. Proof of Claim A proof of claim is a form submitted by a creditor in order to receive money from a debtor who has filed for bankruptcy. Bankruptcy Trustee A bankruptcy trustee is a person appointed by the United States Trustee to represent the debtor's estate during a bankruptcy proceeding. What Is Bankruptcy? Bankruptcy is a legal proceeding for people or businesses that are unable to repay their outstanding debts. Chapter 13 Chapter 13 is a U.

What Is a Preferred Creditor? A preferred creditor is an individual or organization that has priority in being paid the money it is owed if the debtor declares bankruptcy. What Is Chapter 11 Bankruptcy?

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If the corporation does well, its value increases, and you share in the appreciation. However, if the corporation goes bankrupt, you can lose your entire initial investment. What are bonds? Your risk is repayment of the principal amount invested. Stocks and Bonds They represent shares of ownership in a Corporation. A Stockholder is actually one of many owners of a Publicly Owned Corporation. They are sold by the Corporation in order to raise money for various purposes for use by the company.

Bonds offer an interest rate to the Bondholder for the period of time that the Bondholder owns the bonds. The lowest rating is D. A D rating indicates the bond is in default. Create Presentation Download Presentation. If interest rates rise, the investor will be stuck with an instrument yielding below market rates. The greater the time to maturity, the greater the interest rate risk an investor bears, because it is harder to predict market developments farther out into the future.

Credit or default risk is the risk that interest and principal payments due on the obligation will not be made as required. When an investor buys a bond, they expect that the issuer will make good on the interest and principal payments—just like any other creditor. When an investor looks into corporate bonds, they should weigh out the possibility that the company may default on the debt.

Safety usually means the company has greater operating income and cash flow compared to its debt. If the inverse is true and the debt outweighs available cash, the investor may want to stay away. Prepayment risk is the risk that a given bond issue will be paid off earlier than expected, normally through a call provision. This can be bad news for investors because the company only has an incentive to repay the obligation early when interest rates have declined substantially.

Instead of continuing to hold a high-interest investment, investors are left to reinvest funds in a lower interest rate environment. Most bonds come with a rating that outlines their quality of credit. That is, how strong the bond is and its ability to pay its principal and interest.

Ratings are published and are used by investors and professionals to judge their worthiness. Ratings range from AAA to Aaa for high-grade issues very likely to be repaid to D for issues that are currently in default. Bonds rated BBB to Baa or above are called investment grade. This means they are unlikely to default and tend to remain stable investments. Bonds rated BB to Ba or below are called junk bonds —default is more likely, and they are more speculative and subject to price volatility.

Because the rating systems differ for each agency and change from time to time, research the rating definition for the bond issue you are considering. Bond yields are all measures of return. Yield to maturity is the measurement most often used, but it is important to understand several other yield measurements that are used in certain situations.

As noted above, yield to maturity YTM is the most commonly cited yield measurement. It measures what the return on a bond is if it is held to maturity and all coupons are reinvested at the YTM rate. A simple function is also available on a financial calculator. The current yield can be used to compare the interest income provided by a bond to the dividend income provided by a stock. Keep in mind, this yield incorporates only the income portion of the return, ignoring possible capital gains or losses.

As such, this yield is most useful for investors concerned with current income only. The nominal yield on a bond is simply the percentage of interest to be paid on the bond periodically. It is calculated by dividing the annual coupon payment by the par or face value of the bond. It is important to note that the nominal yield does not estimate return accurately unless the current bond price is the same as its par value.

Therefore, nominal yield is used only for calculating other measures of return. A callable bond always bears some probability of being called before the maturity date. Investors will realize a slightly higher yield if the called bonds are paid off at a premium. An investor in such a bond may wish to know what yield will be realized if the bond is called at a particular call date, to determine whether the prepayment risk is worthwhile.

The realized yield of a bond should be calculated if an investor plans to hold a bond only for a certain period of time, rather than to maturity. In this case, the investor will sell the bond, and this projected future bond price must be estimated for the calculation. Because future prices are hard to predict, this yield measurement is only an estimation of return. Once an investor masters these few basic terms and measurements to unmask the familiar market dynamics, they can become a competent bond investor.

Securities and Exchange Commission. Moody's Investors Service. Accessed Jan. Fixed Income. Your Money. Personal Finance. Your Practice. Popular Courses. Investopedia Investing. Part of. How to Invest with Confidence. Part Of. Stock Market Basics.

How Stock Investing Works. Investing vs. Managing a Portfolio. Stock Research. Key Takeaways Some of the characteristics of bonds include their maturity, their coupon rate, their tax status, and their callability. Most bonds come with ratings that describe their investment grade. Bond yields measure their returns. Bonds are a form of IOU between the lender and the borrower. Article Sources. Investopedia requires writers to use primary sources to support their work.

These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

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Chapter 13 Investing in Bonds

Study with Quizlet and memorize flashcards terms like face value, fixed-income investments, registered bond and more. A bond that can be exchanged for a specified number of shares of common stock. Study with Quizlet and memorize flashcards terms like Face value, Corporate bonds, Contract rate and more.