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Financial Markets And Banks Notes

This is a sample of our (approximately) 7 page long Financial Markets And Banks notes, which we sell as part of the Macroeconomic Principles Notes collection, a 2.1 package written at LSE in 2011 that contains (approximately) 260 pages of notes across 32 different documents.

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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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