All Flashcards
How does liquidity apply to choosing between stocks and real estate?
Stocks are generally more liquid than real estate because they can be quickly converted to cash, whereas selling real estate takes time.
How do companies use stocks to finance operations?
Companies sell shares of stock (equity financing) to raise capital without incurring debt. This dilutes ownership but provides funds for growth.
How do companies use bonds to finance operations?
Companies issue bonds (debt financing) to borrow money from investors, promising to repay the principal plus interest over a set period.
How does using a credit card work as a loan?
When you use a credit card, the bank pays for your purchase, and you repay the bank later with interest if you don't pay the balance in full by the due date.
How do debit cards relate to demand deposits?
Debit cards allow you to directly access your demand deposits (money in your checking account) to make purchases without incurring interest.
Explain the opportunity cost of buying bonds.
The opportunity cost of buying bonds is the potential alternative use of that money, such as spending it or investing in other assets like stocks, which may offer higher returns but also carry more risk.
How does risk tolerance affect investment choices?
Individuals with a high risk tolerance may prefer investments like stocks, which have the potential for high returns but also carry a higher risk of loss. Those with low risk tolerance may prefer bonds or savings accounts.
How does the stock market facilitate company growth?
The stock market allows companies to raise capital through initial public offerings (IPOs) and subsequent stock offerings, providing funds for expansion and innovation.
How do bond prices affect a company's ability to borrow?
When bond prices are high, it indicates lower interest rates, making it cheaper for companies to borrow money by issuing new bonds. Conversely, low bond prices (high interest rates) make borrowing more expensive.
How do interest rates affect the attractiveness of bonds?
When interest rates are rising, newly issued bonds offer higher returns, making existing bonds with lower interest rates less attractive and decreasing their price.
Stocks vs. Bonds: Risk?
Stocks generally have higher risk than bonds.
Stocks vs. Bonds: Return?
Stocks generally offer higher potential returns than bonds.
Stocks vs. Bonds: Ownership?
Stocks represent ownership in a company, while bonds represent a loan to a company or government.
Equity vs. Debt Financing?
Equity financing involves selling stocks, while debt financing involves issuing bonds.
Demand Deposits vs. Bonds: Liquidity?
Demand deposits are more liquid than bonds, as they can be accessed immediately, while bonds need to be sold.
Stocks vs. Bonds: Income Generation?
Stocks may provide income through dividends, while bonds provide income through interest payments.
High vs. Low Liquidity Assets?
High liquidity assets (e.g., cash) can be quickly converted to cash, while low liquidity assets (e.g., real estate) take longer.
Stocks vs. Bonds: Impact of Interest Rate Changes?
Bond prices are inversely related to interest rates, while stock prices are influenced by a wider range of factors including company performance and economic conditions.
Stocks vs. Bonds: Claim on Assets in Bankruptcy?
Bondholders have a higher claim on a company's assets in bankruptcy than stockholders.
Stocks vs. Bonds: Suitability for Different Investors?
Stocks are generally more suitable for investors with a higher risk tolerance and longer time horizon, while bonds are more suitable for investors seeking stability and income.
Impact of lowering the discount rate on money supply?
Increases the money supply by encouraging banks to borrow more from the central bank.
Impact of increased money supply on interest rates?
Leads to a decrease in interest rates due to the increased availability of loanable funds.
Impact of lower interest rates on bond prices?
Causes an increase in demand for bonds, leading to higher bond prices.
Impact of increased bond prices on aggregate demand?
Leads to an increase in aggregate demand because lower interest rates encourage more investment and consumption.
Impact of quantitative easing on bond yields?
Quantitative easing, which involves a central bank buying government bonds, typically lowers bond yields (interest rates) by increasing demand and driving up bond prices.
Impact of government fiscal stimulus on bond markets?
Government fiscal stimulus, such as increased spending or tax cuts, can increase the supply of government bonds, potentially leading to higher interest rates (bond yields) as the government borrows more money.
Impact of inflation targeting on bond market stability?
Inflation targeting by central banks can help stabilize bond markets by providing clear expectations about future monetary policy, reducing uncertainty and volatility in bond prices.
Impact of capital controls on domestic bond markets?
Capital controls, which restrict the flow of capital in and out of a country, can insulate domestic bond markets from external shocks but may also reduce liquidity and efficiency.
Impact of negative interest rates on bank profitability?
Negative interest rates, implemented by some central banks, can squeeze bank profitability by reducing net interest margins, potentially leading to decreased lending and economic activity.
Impact of forward guidance on long-term interest rates?
Forward guidance, where central banks communicate their intentions and expectations about future monetary policy, can influence long-term interest rates by shaping market expectations.