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Chapter 2 Economic Systems and Decision Making Section 1 p. 33
Chapter 2 Economic Systems and Decision Making Section 1 p. 33

... – Most investors sell their bonds to other investors long before the term is up = quick profit – Other investors are looking for safer (slower) ways to make/protect money = long-term assets • Usually part of many other investments (portfolio), that might ...
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... one of its regular customers, which agrees to exchange $1,000,000 for the new bond. The market for this bond could be described as: d.. An over-the-counter market and a primary market. 3. A coupon bond pays a coupon of $100,000 and has a face value of $1,000,000. You calculate the yield to maturity ...
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... be purchased in large amounts for a relatively small initial premium, it is well suited for providing life insurance protection during the child-raising years.  Liability Insurance is insurance protects you from being held responsible for another party’s losses; for example when you own a store or ...
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Answers to Practice Questions 7

... (b) Increasing the RRR while selling bonds in the market. (c) Buying bonds in the market. (d) None of the above would have any effect on the money supply. ANS: (c) by observations from Q3 in the problems. 5. Money Demand, when plotted against the interest rate, is downward sloping because: (a) At hi ...
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... next three years. At that time, you expect Nokia and its dividend payment to grow at a constant rate of 7% per year. If your required return on Nokia is 12%, what is the intrinsic value of this stock based on the DDM model? In this problem, we need to discount the first three cash flows individually ...
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Interest Rate Risk Management using Duration Gap

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Present value

In economics, present value, also known as present discounted value, is the value of an expected income stream determined as of the date of valuation. The present value is always less than or equal to the future value because money has interest-earning potential, a characteristic referred to as the time value of money, except during times of negative interest rates, when the present value will be greater than the future value. Time value can be described with the simplified phrase, “A dollar today is worth more than a dollar tomorrow”. Here, 'worth more' means that its value is greater. A dollar today is worth more than a dollar tomorrow because the dollar can be invested and earn a day's worth of interest, making the total accumulate to a value more than a dollar by tomorrow. Interest can be compared to rent. Just as rent is paid to a landlord by a tenant, without the ownership of the asset being transferred, interest is paid to a lender by a borrower who gains access to the money for a time before paying it back. By letting the borrower have access to the money, the lender has sacrificed the exchange value of this money, and is compensated for it in the form of interest. The initial amount of the borrowed funds (the present value) is less than the total amount of money paid to the lender.Present value calculations, and similarly future value calculations, are used to value loans, mortgages, annuities, sinking funds, perpetuities, bonds, and more. These calculations are used to make comparisons between cash flows that don’t occur at simultaneous times. The idea is much like algebra, where variable units must be consistent in order to compare or carry out addition and subtraction; time dates must be consistent in order to make comparisons between values or carry out simple calculations. When deciding between projects in which to invest, the choice can be made by comparing respective present values of such projects by means of discounting the expected income streams at the corresponding project interest rate, or rate of return. The project with the highest present value, i.e. that is most valuable today, should be chosen.
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