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Financial Markets And Banks Notes

Economics Notes > Macroeconomic Principles Notes

This is an extract of our Financial Markets And Banks document, which we sell as part of our Macroeconomic Principles Notes collection written by the top tier of LSE students.

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Financial Markets and Banks Summary

* Present Discounted Values

* Bonds

Present Discounted Values Bonds The Stock Market

* Firms raise funds in two ways:
* Debt finance: bonds and loans
* Equity finance: through issues of stocks (shares)

* Stocks pay dividends of an amount decided by the firm Graph showing the S&P composite index since 1950


Stock prices
* Price of a stock must equal the PV of future expected dividends
* In real terms:

* This relation has two important implications:

* Expected future real dividends | Real stock price |

* Current and expected future one-year real interest rate | Real stock price |

Stock market & economic activity Graph demonstrating the effect of an unanticipated monetary expansion


* LM curve shifts to the right

* Output | Profits and Dividends |

* Interest rate | Effect of discounting |
Stock prices unexpectedly |
Course Notes Page 64

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