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Financial Economics

Introduction to the Federal Reserve

The Federal Reserve or the Fed is the central bank of the United States of America. The Federal Reserve is a network of 12 regional Federal Reserve banks, but the Fed’s power center is in its New York bank.The Fed's Liabilities: Commercial banks’ reserves, government deposits, and mostly dollar billsThe Fed Assets: Emergency discount loans…
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Risk

Risk is the uncertainty of an asset’s return over a given period of time. Risk perception is the individual judgment people make about the severity of a risk and may varies from person to person.There are three types of people when it comes to risk: 1. Risk Averse They hate to lose more than they love to win. They try to avoid taking risks as…
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Financial Markets

In financial markets, people trade financial securities, commodities, and instruments at prices that reflect supply and demand. There are two types of Financial Markets - the primary market and the secondary market. All well developed financial markets have standardized financial instruments.Financial Instruments are assets (claim) for people…
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Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) is an application of ‘Rational Expectations Theory’ where people who enter the market, use all available & relevant information to make decisions. The only caveat is that information is costly and difficult to get.This Efficient Market Hypothesis implies that stock prices reflect all available and…
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Bonds

A bond is a type of financial instrument. Bonds are debt that firms and governments can issue to raise money and they earn interest.Characteristics of Bonds1. Inverse Relationship There is an inverse relationship between the price of a bond and the market interest rate. Bonds have a resale (or secondary) market. A bond's secondary…
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Yield Curve

A Yield Curve is a graph of the yields (interest rates) of bonds with different maturities. Short terms bonds generally have a lower yield because they are most liquid.Three Basic Facts about Yield CurvesInterest rates on bonds of different maturities tend to move together over time. This means that yield curves from different…
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