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Financial Economics

Pricing Stocks

The intrinsic value approach or the fundamental analysis of stocks prices is equal to the dividend over the interest rate. This approach is based on predictions of future cash flows and profitability. Present Discount Value is one of the popular methods used in pricing stocks.The main use pricing stocks are to predict future market prices, and…
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Interest Rate Risk Structure

The interest rate risk structure for interest rates is called the Risk Premium or Risk Spread. It is the extra interest that a risky asset must pay relative to a risk-less asset since investors demand compensation for taking on higher risk.Interest Rate Risk StructureHighly rated investment-grade bonds are those with the lowest risk…
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Financial Institutions

The goal of financial Institutions is to provide access to financial markets, a.k.a. financial intermediaries (they serve as middlemen) and indirect finance. Most financial institutions are regulated by the government. For every $1 that an American business raises by borrowing or selling stocks directly to/from Households (HHS), $20 raised through…
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Asymmetric Information

The concept of Asymmetric Information means that there is unequal knowledge between each party to a transaction, that one party has better information than the other the party. This creates an imbalance in a transaction.Adverse selectionThe problem with asymmetric information, where one party has more information than another,…
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Theory of Storage

The Theory of Storage describes features observed in commodity markets. Here are some basic terminology that needs to be understood to understand the Theory of Storage.Commodity Market A commodity market is a market that trades in primary goods rather than manufactured products. Soft commodities are agricultural products such as wheat,…
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Money Supply

Money is anything that is widely accepted as a method of payment. However, credit cards are not considered to be “money,” they are just a convenient loan. Stocks and bonds are also not accepted as payment. The Money Supply (MS) is the total cash in circulation and bank account deposits. Changes in the money supply affect the rate of inflation, the…
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