Demand and Supply for Financial Assets Essay Example

Demand and Supply for Financial Assets Essay Demand and Supply for Financial Assets Mishkin ch. 5: Bonds †¢ Motivation: Monetary policy works primarily by manipulating interest rates. Interest rates are determined by the demand and supply for bonds. Demand and supply for other financial assets are determined similarly. †¢ Perspectives on the bond market: 1. Bonds as financial assets = Determinants of Asset Demand. †¢ Bond demand affected by relative risk, relative liquidity, and wealth. †¢ Asset pricing (Finance) issues. Instantaneous responses to news. 2. Saving and Borrowing = Real Factors. Bond market matches savers and borrowers, affected by their behavior. †¢ Macro issues: Real savings/investment. Takes time. 3. Liquidity Preference †¢ View bonds as alternative to holding money. Affected by monetary changes. †¢ Special issues: Flexible versus â€Å"sticky† prices. DEFER. †¢ Application: Money Interest Rates †¢ Mishkin provides survey. Needs more analysis – Star t reading the lecture notes. [Mishkin ch. 5 P. 1] Perspective #1: Bonds as Financial Assets †¢ General Finance Question: What determines the demand for financial assets? . Expected return (+) 2. Risk (-) 3. Liquidity (+) 4. Wealth (+) Applies to all financial assets. Bonds as example. †¢ The Demand Curve for Bonds †¢ Remember â€Å"High price Low yield†. Implies downward sloping demand function. †¢ Demand function shifts if bonds’ risk or liquidity change. †¢ Demand is relative shifts if return, risk, or liquidity on other assets change. †¢ Note: Bond market responds quickly to financial news, to any news relevant for determining the return, risk, or liquidity of bonds relative to other assets. Time horizon: Instantaneous (within seconds). [Mishkin ch. 5 P. 2] Demand for other financial assets †¢ Same arguments as for bonds: Downward sloping, because â€Å"higher Price lower expected return† logic applies to all financial assets, provided the asset’s payment stream remains unchanged. Shifting down/left when risk increases. Shifting up/right when liquidity increases. Examples: Stocks, mutual funds, real estate, gold, investments abroad. Similar for equity-type assets, except future payments are uncertain New element: Unexpected new information about payments shift the demand curve †¢ Example: Stock with expected value next year $100 More demand now at $80 than at $90 = Downward sloping demand curve. Suppose the expected value next year rises to $120: Demand at $96 (20% discount) is similar to previous demand at $80 = Shift right/up in the demand curve †¢ Special factor for long-term bonds: Rising interest rate before maturity would reduce the price = Reduce the return = Expected increases in interest rates reduce the demand for long-term bonds. Mishkin ch. 5 P. 3] Wealth as Demand Factor: Caution †¢ Basic point: More wealth = More demand for all financial assets. †¢ Co ntrast wealth with the demand factors that affect relative values: Demands for different financial assets are negatively related when relative returns, relative risks, and relative liquidity levels shift. Demands for different financial assets are positive related when wealth changes. †¢ Wealth can change in two ways: 1. New savings. 2. Re-valuation. Re-valuation is a distraction (or even misleading): Not a source of new demand. Example: Hold 100 bonds @100 = $10,000 wealth. If price rises to $110 = Wealth $11,000. Will demand increase? Demand from existing wealth is still 100 bonds. New savings must come from real activity = Surplus of income over spending. New savings take time: NOT an instantaneous factor = Creates dynamics. Purchasing power of wealth is eroded by inflation = Real returns (after inflation) determine the incentives to save †¢ Lessons for applications: Source of wealth changes is savings. Savings raise all asset demands. Quantity axis in diagrams = Number of securities or their face value (not $ value). [Mishkin ch. 5 P. 4] The supply of bonds and other financial assets †¢ Simple: the supplier/issues of securities defines the market! Treasury bond market = supply by U. S. Treasury Market for Microsoft stock = supply by Microsoft †¢ Supply incentives in the primary market: 1. Need for funds: Private: Profitability of capital investments. Public: Level of government bu dget deficits. 2. Cost of borrowing: Borrow more if the cost is low = upward-sloping supply curve. Inflation reduces the real value of debt = Real returns (after inflation) determine the incentives to issue securities †¢ Secondary market: Fixed supply except for buyback/new issues. = Steep or vertical supply curve. †¢ Mishkin’s demand supply diagrams: generic up/down slopes [Mishkin ch. 5 P. 5] Demand Supply = Equilibrium Price and Volume †¢ For bonds: Exact price-yield relationship (Example: F=1000) †¢ For all financial assets: High price tends to imply low future returns. [Mishkin ch. 5 P. 6] We will write a custom essay sample on Demand and Supply for Financial Assets specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Demand and Supply for Financial Assets specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Demand and Supply for Financial Assets specifically for you FOR ONLY $16.38 $13.9/page Hire Writer Applications: Predict the Effect of Changes †¢ Reasons why bond demand may shift †¢ Reasons why bond supply may shift †¢ Scenarios that involve shifts in demand and supply: Business cycles Inflation: The Fisher Effect †¢ In each case: Task: Determine the impact on prices and quantities. Ask additional questions: What’s the time horizon? What’s the likely impact on other markets, e. g. , the stock market? †¢ Alternative view: Loanable Funds analysis (see Online Appendix5#1) Supply of securities = Demand for financing Demand for securities = Supply of funds to financial markets. Helpful way to think about markets, but not required for exams. [Mishkin ch. 5 P. 7] Summary: Factors that shift the Demand for Bonds [Mishkin ch. 5 P. 8] Summary: Factors that shift the Supply for Bonds [Mishkin ch. 5 P. 9] Notes on Mishkin’s Examples (1) †¢ About higher expected interest rates: Higher yield expected = Lower expected return = Declin e in demand = Reduced price = Yield rises immediately. Lesson: Rational investors act on expectations. Markets move when information arrives that changes investor expectations. About the slopes of demand and supply curves: Demand: Depends on how easily investors can go elsewhere when prices rise: For a specific bond relative to others: Essentially horizontal/very flat. For bonds as an asset class: Elastic/flat. Investors can substitute to stocks etc. For bonds as reflecting the supply of savings: Quite inelastic/steep. Consumptionsavings decisions are not highly sensitive to interest rates. Supply: usually inelastic/steep. New issues are small relative to outstanding quanties of identical or similar securities. Relevance of slopes: Steeper vs. flatter Larger vs. smaller price changes. [Exam: Generic slopes okay. But remember for real-world applications. ] [Mishkin ch. 5 P. 10] Notes on Mishkin’s Examples (2) †¢ About the time horizon and level of aggregation: Ins tructive to separate two sets of issues: 1. Allocation of existing financial assets: Instantaneous: Supply is well-approximated by a vertical line. Pricing is relative to other financial assets. Economic arguments involve relative return, risk, liquidity (nothing else). In equilibrium, all financial assets must attract investors = Must offer the same risk- and liquidity-adjusted return. 2. Flows of savings and capital investment: Takes time: New demand and supply more important relative to existing financial assets the more time passes. Savings are unspecific: Savers will invest in any savings vehicles that pays the equilibrium return: Markets clear at the aggregate level. Equilibrium return must match aggregate flow of funds into financial markets with total demand for funds from issuers of securities. [Mishkin ch. 5 P. 11] Scenario: Business Cycle Expansion †¢ Shifts in Demand and Supply: Higher incomes. Real capital investment is more profitable. [Caution: Distinguish real and financial investments! ] †¢ Questions: What causes business cycles? How do we know that supply shifts more than demand? = Macroeconomic issues. [Mishkin ch. 5 P. 12] Scenario: Increase in Expected Inflation †¢ Lower real cost of borrowing = More security issues (supply). †¢ Lower real return = Less savings (demand). Conclude: Fisher effect. †¢ Questions: What causes higher expected inflation? = Macroeconomic issue. Mishkin ch. 5 P. 13] Evidence on the Fisher Effect (Fits the data at least in the long-run) [Mishkin ch. 5 P. 14] Collect Open Questions †¢ Why does expected inflation change? Leading answer: Money growth. Not an exogenous disturbance. = Needs analysis. Topic: Money and Inflation. †¢ What causes business cycles? Many causes. Among them: â€Å"Mistakes† in monetary policy . = Needs analysis. Topic: Money and Output. †¢ Agenda: 1. Reinforce the lessons on demand and supply: More examples. 2. Examine how monetary policy influences inflation and output. 3. Return to the interest rates – remainder of Mishkin ch. 5 [Mishkin ch. 5 P. 15] Applications of Asset Demand Supply Analysis 1. A Classic: The â€Å"Flight to Quality† (Lesson: Asset demand is relative) Stock Market Price Supply Price Bond Market Supply Demand Stocks Demand Bonds 1987 stock market crash: stocks - flight to bonds 1994 Mexican Peso crisis: emerging market stocks - to US stocks and bonds 1997 Asian crisis: Asian stocks and bonds - to US and Europeans stocks and bonds 1998 Russian default: risky bonds (foreign and US low quality) - to US Treasury bonds . The Term Structure of interest rates: (Mishkin ch. 6, part 2) Defer discussion, raises macro issues. [Mishkin ch. 5 P. 16] 3. The Risk-structure of interest rates: (Mishkin ch. 6, part 1) Good measures of riskiness: Bond Ratings Good measures of promised return: Yield to maturity. Find: (1) Changes in risk = Changes in relative yields (2) Holding risk constant, yields move together 4. The Stock Marke t Crash of 1987 Can we always assume that demand is downward sloping? . The Market for Foreign Exchange (Mishkin ch. 17. Much improved in 8ed. ) Exchange rate = Relative price of different country’s financial assets Demand = Function of relative return, risk, and liquidity Supply = Fixed in short run (apart from official interventions – later) More later if time – for now, note one key point: High US interest rates relative to foreign interest rates increase the demand for dollar assets = Stronger dollar [Mishkin ch. 5 P. 17]

Chapter 2 Motion in one dimension Essays - Classical Mechanics

Chapter 2 Motion in one dimension Essays - Classical Mechanics Chapter 2 Motion in one dimension Chapter 2 Motion in one dimension 1 / 4 Chapter 2: Motion in one dimension The study of motion and of physical concepts such as force and mass is called dynamics. The part of dynamics that describes motion without regard to its causes is called kinematics. The purpose of this chapter is to describe motion using the concepts of displacement, velocity, and acceleration. For the sake of simplicity, we begin with the study of 1-dimensional motion. 1) Displacement Motion involves the displacement of an object from one place in space and time to another. Describing the motion requires some convenient coordinate system and a specified origin. A frame of reference is a choice of coordinate axes that defines the starting point for measuring any quantity. Ex: Consider a body moving in 1-dimension; a train traveling down a straight railroad track: The x-coordinate of the train at any time describes its position in space. The displacement of an object is defined as its change in position, and is given by: SI unit: meter (m) where the initial position of the object is labeled and the final position is . Note: The displacement of an object is not the same as the distance it travels: when you toss a ball 1 m up and you catch it; the displacement is zero but the distance covered by the ball is 2 m. Chapter 2 Motion in one dimension 2 / 4 2) Velocity 2.1) Speed vs velocity In day-to-day usage, the terms speed and velocity are interchangeable. In physics, however, theres a clear distinction between them: Speed is a scalar quantity, having only magnitude, while velocity is a vector, having both magnitude and direction. 2.2) Average speed The average speed of an object over a given time interval is defined as the total distance traveled divided by the total time elapsed: Average speed is always positive. 2.3) Average velocity a) Definition The average velocity during a time interval t is the displacement divided by t : The average velocity of an object in one dimension can be either positive or negative, depending on the sign of the displacement. Example 1: If you run from x = 0 m to x = 25 m and back to your starting point in a time interval of 5 s. Compare your average speed with your average velocity. 2.4) Instantaneous velocity Average velocity doesnt take into account the details of what happens during an interval of time. To do so, we use the concept of instantaneous velocity. The instantaneous velocity is the limit of the average velocity as the time interval becomes infinitesimally small: SI unit: (m/s) 1 m/s = 3.6 km/h. SI unit: (m/s) SI unit: (m/s) Chapter 2 Motion in one dimension 3 / 4 3) Acceleration The changing of an objects velocity with time is called acceleration. The instantaneous acceleration is given by: 4) One dimensional Motion with constant velocity For a 1-D motion with constant velocity, the kinematic equation of motion is given by: 5) One dimensional Motion with constant acceleration For a 1-D motion with constant acceleration, the Kinematics equations are: We can also use: Example 2: A race car starting from rest accelerates at a constant rate of 5 m/s. 1) What is the velocity of the car after it has traveled 30.5 m? 2) How much time has elapsed? 3) Calculate the average velocity two different ways. Example 3: A typical jetliner lands at a speed of 71.5 m/s and decelerates at the rate of 4.47 m/s. If the plane travels at a constant speed of 71.5 m/s for 1.00 s after landing before applying the brakes, what is the total displacement of the aircraft between touchdown on the runway and coming to rest? 6) Freely falling objects A freely falling object is any object moving freely under the influence of gravity alone, regardless of its initial motion. Ex: Objects thrown upward, downward or released from rest. If we neglect air resistance and assume that the free-fall acceleration doesnt vary with altitude over short vertical distances, then the motion of a freely falling object is the same as motion in one dimension under constant acceleration. If we choose the up-direction as the +y-direction: SI unit: (m/s2 ) for constant a Chapter 2 Motion in one dimension 4 / 4 The kinematics equations of motion with the y-variable are: Example 4: A stone is thrown from the top of a building with an initial velocity of straight upward, at an initial height of above the ground. The stone just misses the edge of the roof on its way down, as shown in the figure. Neglect air drag. Determine: 1) the

History 2 Essay Example | Topics and Well Written Essays - 1000 words

History 2 - Essay Example As in earlier novels, Grass uses Crabwalk to ask whether subsequent generations of German citizens have adequately dealt with the horrors of the Third Reich. The nation's policy of remorse does not provide the analysis and the assumption of personal responsibility which Grass thinks is necessary. In the deftly-woven plot of Crabwalk, shortsightedness and regret characterize modern Germany, but this vision is far more bleak than the reality. This essay will look at the protagonist Paul Pokriefke – namely his relationships with his mother and son – as well as the significance of the sinking of the MV Wilhelm Gustloff. Germany's reaction to its past is an issue which has not been left dormant over the seventy years since the war. The Reader, written by Bernhard Schlink in 1995 and made into a film in 2008, is just one other of the Vergangenheitsbewaltigung genre, in which German writers struggle to come to terms with their collective past. The problem to be resolved is tha t different factions of society obviously have different solutions for how to deal with the repercussions of the Third Reich. ... The first step of this process is portrayed in Tulla's relationship with her son. Paul refuses to believe his mother's statement that she went into labor with him when the ship MV Wilhelm Gustloff began to sink, attributing this to her sense of drama rather than actual fact. The repercussions of Paul's secret disbelief of his mother will be discussed below. In general terms, Tulla's demand of Paul that he write a history of the capsizing reflects her generation's incapability to deal with Nazism, and the way this responsibility was handed off to a generation who felt equally as unable, as well as far less culpable. In The Reader, Bernhard Schlink expresses the reaction of the second generation as a complete laying of the blame on the silent parents, regardless of whether they had actually been personally involved in the Nazi regime. This approach is just as untenable and unfair as Grass's insistence that the blame should be taken on the shoulders of subsequent generations. Paul's rel ationship with his mother portrays the uneasy dysfunction between those who lived through Nazism and those who came immediately after it. Tulla's silence, coupled with her wish that her son break that silence for her, creates an unhappy family and an unhappy country. This silence, borne of shame, means that following generations will not fully understand the evil of Nazism – the oft-repeated and almost clicheic statement that â€Å"those who forget the past are condemned to repeat it† (George Santayana) is wholly appropriate in the case of Konrad. Grass's antagonist is Konrad Pokriefke, Paul's estranged son, whose close relationship with his