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January 27, 2005

Progress Report 2

The Reference Report Form and some other material can be found here. Last semester's people had to come up with six references. Your handout said two, but you would be well advised to try for a few more.

Posted by bparke at 11:37 PM | Comments (0)

Interest Rates

We worked with the first page of the interest rates handout and the interest rate tables.

Annual and quarterly compounding:


Instantaneous compounding:


Continous compounding more elegant mathematically and monthly compounding is more common in the real world, but we will stick with annual compounding.


Use Table A to value pure discount bonds.


Table C simplifies the task of valuing periodic payments like the coupons on a coupon bond.


We concluded by showing that, if the interest rate changes to 5% or 15%, the value of a 10% 30-year coupon bond changes a lot.


Posted by bparke at 12:12 AM | Comments (0)

January 25, 2005

Arbitrage Pricing

What determines the price of a given financial asset on a given day?


If the deposit/loan interest rate is 10% and a pure discount $1000 bond that matures in one year sells for $900, you can collect arbitrage profits by borrowing money to buy the bond.


You can collect the arbitrage profit immediately.


If the bond sells for $920, selling the bond and making a bank deposit produces aebitrage profits.


The bond yield is that interest rate that would eliminate the arbitrage profit. Firm belief that efficient markets eliminate such obvious arbitrage profits leads people to equate the bond yield with "the interest rate."


Posted by bparke at 09:24 PM | Comments (0)

January 20, 2005

Theory of the Firm

A decreasing average cost curve (with a constant marginal cost curve) is easy to describe in terms of a fixed cost and a variable constant proportional to the number of units produced.


The increase in AC for large Q is due to some additional, limited factor of production. Managerial talent is a good example. Congestion in a limited workspace is another.


The profit maximizing condition is to produce where the marginal cost equals the sales price. The MC curve then becomes the supply curve.

One interesting extension of this analysis is to consider competing firms with different AC curves. They might, for example, be stores or restaurants with differing locations.


Posted by bparke at 09:23 PM | Comments (0)

January 18, 2005

Theory of the Consumer

We can derive the demand curve from the Two Goods - Two Prices diagram from the Theory of the Consumer.


The movement from A to B (above) occurs because lowering the price pivots the budget constraint.


The slope of the demand curve is not unambiguous. The decomposition of the budget constraint change into income and substitution effects (not shown here) can lead to a decrease in quantity when the price decreases.


Posted by bparke at 09:23 PM | Comments (0)

January 11, 2005


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