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Monetary Banking#

Review of Key Content in Monetary Banking

1. Money is a product of commodity exchange, an inevitable result of the development of the value form of commodities, and is a general equivalent.

2. Functions of money: measure of value, means of circulation, means of storage, means of payment, world currency.

3. Stages of money development (three forms): commodity money form, representative money form, credit money form.

4. Classification of money levels: classified according to liquidity.

5. M0: cash in circulation, with the strongest liquidity.

6. M1: commonly referred to as narrow money. It refers to transaction money, including all currencies actually used for transactions. That is, M1 = C + Dd. Where C is cash in circulation, and D is demand deposits or checking deposits (which can be converted into cash for circulation at any time). M1 is the most active part of the money supply, representing the immediate demand of society and reflecting the short-term economic operation status.

7. M2: broad money. It refers to M1 plus items that are less liquid and cannot be used directly as payment instruments but can be conveniently converted into payment instruments, that is, M2 = M1 + Ds + Dt + other short-term liquid assets. Where Ds is savings deposits, and Dt is time deposits.

8. M3: M3 = M2 + Dn (liabilities issued by non-bank financial intermediaries).

9. Standard currency: the standard currency specified by a country's monetary system.

Sub-currency: Sub-currency is the counterpart of the main currency, which is small denomination currency below the unit of the standard currency, used for daily transactions and change.

Monetary System:

1. Silver standard: the earliest monetary system.

2. Bimetallism: both silver and gold serve as standard currencies. (Including dual standard and parallel standard)

3. Gold standard: refers to a monetary system where gold is used as the standard currency material. (Including gold coin standard, gold bar standard, gold exchange standard)

4. Paper currency standard: refers to a monetary system where a country's standard currency adopts paper currency without any connection to gold.

5. 1. Credit is a borrowing behavior.

6. Characteristics of credit: 1 Credit is a one-sided application of value conditioned on repayment and interest payment. 2 It is a special form of value movement. 3 It reflects a borrowing relationship.

7. Constituent elements: creditor and debtor, time interval, credit instrument.

8. Forms of credit

9. Commercial credit: refers to the credit provided between selling enterprises and buying enterprises when selling goods.

Characteristics: 1 The object is credit provided in the form of goods. 2 Commercial credit has duality; the credit-giving enterprise and the credit-receiving enterprise are both in a buying and selling relationship and a borrowing relationship. 3 The subjects of commercial credit, that is, the creditors and debtors of commercial credit, are all industrial and commercial enterprises. 4 The dynamics of commercial credit parallel the dynamics of industrial capital.

2. Bank credit: refers to the credit provided by banks or other financial institutions in the form of deposits and loans, mainly in monetary form, and is the main subject of contemporary credit economy.

Characteristics: 1 The scale of credit is not limited by the amount of monetary capital. 2 Bank credit has wide acceptability. 3 Bank credit has relatively strong planning.

3. National credit: also known as government credit. It refers to the government raising funds from the public through borrowing and providing loans to society as a result. Characteristics: The main forms of government credit are treasury bonds and public bonds, with creditors being domestic citizens and debtors being the state or government. The government credit method is loans. Role: to adjust the imbalance of government revenue and expenditure, to make up for fiscal deficits, to regulate currency circulation and economic development, and to create good social conditions for economic development.

4. Consumer credit: refers to the credit provided by enterprises and banks or other financial institutions to individual consumers for personal consumption. Methods: installment sales, consumer loans, credit cards. Role: to increase purchasing power, stimulate consumer demand, promote production development, etc.

5. Personal credit

6. Economic functions of credit: 1. Regulate the national economy. 1 Regulate the total economy: credit relationships direct surplus funds from surplus sectors to deficit sectors, which are used for consumption and investment, preventing the overall economic monetary circulation from shrinking and ensuring the normal operation of monetary circulation and stable development of the national economy. In short, through credit relationships, the monetary supply in the national economy is adjusted to align with monetary demand, ensuring the balance of total social supply and demand. 2 Regulate economic structure: credit can adjust demand structure and income structure through interest rate changes and changes in credit direction, to achieve adjustments in product structure, industrial structure, employment structure, and even economic structure. It can also adjust international trade and balance of payments through exchange rate adjustments and the development of international credit relationships, thus achieving coordinated development of foreign economies. 2. Effectively allocate economic resources. 1 Credit can enhance the total utility of the economy: the existence of credit channels promotes the improvement of resource allocation efficiency. Different households and individuals have different expectations and arrangements for current and future consumption. The development of credit allows households that do not prioritize current consumption to transfer part of their income in the form of savings through credit institutions to those households that prioritize current consumption and have lower expectations for future consumption, achieving a conversion between current and future consumption, allowing each household to optimally allocate its consumption resources over time, thus improving the total utility of consumption. 2 Credit can promote the expansion of effective scale investment: the growth of social economy requires expanded reproduction, which necessitates additional investment. Investment funds mainly come from bank loans, and the expansion of loan scale comes from the growth of savings; therefore, savings are the prerequisite for investment. In the process of transforming savings into investment, bank credit often needs guidance and promotion. Only by transferring the investment power of savings through credit relationships to those units with higher marginal productivity of capital can the overall level of social productivity and resource allocation efficiency be improved, thus promoting the expansion of effective investment scale.

7. Interest rates.

8. Nominal interest rate: refers to the interest rate that does not exclude inflation factors. Real interest rate: refers to the interest rate after excluding price changes, under the condition of unchanged purchasing power. Nominal interest rate = real interest rate + inflation rate.

If the nominal interest rate remains unchanged and prices fall during the borrowing period, the real interest rate is higher than the nominal interest rate, which is favorable for the lender and unfavorable for the borrower; if the nominal interest rate remains unchanged and prices rise, it is unfavorable for the lender and favorable for the borrower. When the inflation rate exceeds the nominal interest rate, the real interest rate is negative.

2. Interest rate calculation: Compound interest: If interest is calculated M times in a year, then the compound interest for N years is:

S=P×(1+r/m)^(m*n)

Future value (FV), also known as future value or principal plus interest, refers to the value of a certain amount of funds at a certain point in the future. Present value (PV) refers to the value of a certain amount of cash at a certain point in the future discounted to the present, commonly referred to as "principal." Usually denoted as P.

FV=P×(1+r)^n

PV=P÷(1+r)^n

Yield to maturity: Yield to maturity refers to the income obtained from holding a bond until maturity, including all interest due at maturity. The yield to maturity is the discount rate that equates the present value of the returns from the debt instrument with its current value.

3. Main factors determining interest rate levels: average profit rate, supply and demand for funds, price level, interest rate policy, international interest rate levels.

4. Structure of interest rates: risk structure of interest rates (default risk, liquidity, income tax) and term structure of interest rates.

Three theories of term structure of interest rates: 1 Pure expectations hypothesis: explains the term structure based on expected short-term interest rates. 2 Liquidity preference hypothesis: believes that the term structure of interest rates is determined by expectations of future interest rates and risk premiums for interest rate risk. 3 Market segmentation theory: different term bond markets are independent markets, and interest rates for various term bonds are determined by the supply and demand for that type of bond.

10. Basic characteristics of credit instruments:

11. Term 2. Liquidity 3. Safety (default risk, market risk, purchasing power risk) 4. Yield (real yield refers to the ratio of the annual average yield of the credit instrument to its market price)

12. Classification of credit instruments: 1. By liquidity, fully liquid financing instruments (cash and demand deposits) and financial instruments with limited liquidity (commercial paper, stocks, etc.)

13. By issuer nature, direct securities and indirect securities

14. By repayment term, short-term financing instruments and long-term financing instruments

15. 1. Commercial paper: 1 Promissory note: a debt certificate issued by the debtor to the creditor, promising to pay a certain amount within a specified period. 2 Bill of exchange: a payment order issued by the creditor to the debtor, ordering him to pay a certain amount to a designated payee or holder within a specified period.

16. Bank notes: 1 Bank certificates 2 Checks 3 Large transferable time deposits (CDs)

17. Government bonds: 1 Public bonds: medium to long-term public bonds are mostly coupon bonds 2 Treasury bills: belong to zero-coupon bonds.

18. Corporate securities: 1 Stocks 2 Corporate bonds

19. Financial bonds: Financial bonds are issued by banks and other non-bank financial institutions to raise funds. They change the asset-liability structure by issuing financial bonds, increasing funding sources, and actively incurring liabilities. Mainly medium to long-term.

20. Innovations to avoid interest rate risk

21. Large transferable time deposits (CDs). Characteristics: large and fixed denominations, non-negotiable, fixed or floating interest rates, short deposit terms, tradable and active in the secondary market, good profitability, safety, and liquidity.

22. Money market mutual funds

23. Floating rate notes (LIBOR, the interest rate at which banks lend to each other in the London market, considered the benchmark interest rate for the London financial market)

24. Convertible bonds

25. Options (call options and put options) (If a bond is expected to have an interest rate increase, what credit instruments will be taken to avoid risk? Purchase put options or others? Multiple choice OR single choice?)

Call option expiration profit: Buyer = (market price - exercise price) × number of contracts [market price > exercise price]

Buyer = 0 [market price ≤ exercise price]

Seller = (exercise price - market price) × number of contracts [market price > exercise price]

Seller = 0 [market price ≤ exercise price]

Put option expiration profit: Buyer = (exercise price - market price) × number of contracts [market price < exercise price]

Buyer = 0 [market price ≥ exercise price]

Seller = (market price - exercise price) × number of contracts [market price < exercise price]

Seller = 0 [market price ≥ exercise price]

Option expiration profit: Buyer = expiration profit - option fee

Seller = expiration profit + option fee

6. Forward rate agreements

7. Swaps: a financial derivative contract in which two parties agree to exchange a series of cash flows on a future date.

8. Innovations to avoid exchange rate risk: choosing bonds, foreign exchange options

9. Innovations to avoid regulatory constraints: 1. Automated transfer service accounts (ATS) 2. Negotiable order of withdrawal accounts (NOW) 3. Money market mutual funds (MMMF) 4. Money market deposit accounts (MMDA) 5. Repurchase agreements.

10. Commercial banks.

11. Nature: Commercial banks are financial enterprises aimed at maximizing profits.

12. Functional characteristics: 1 (financial intermediaries) Commercial banks are banks that specifically handle monetary credit business, acting as credit intermediaries and payment intermediaries for enterprises and individuals. 2 Commercial banks are banks that create derivative deposits and credit instruments. 3 Commercial banks are the core medium for the transmission of central bank monetary policy. 4 Modern commercial banks are financial department stores.

13. Organizational forms: unit banking system, branch banking system, bank holding companies

14. Main businesses: 1 Liability business [most liquid]

Deposits (demand deposits, time deposits, savings deposits)

Loans (interbank borrowing, rediscounting and collateral loans, rediscounting and re-loaning from the central bank, borrowing from the international financial market). Discounting: Discounting refers to the act of transferring a forward bill of exchange after acceptance, where the holder of the bill transfers it in the discount market, and the transferee pays the transferor the bill amount after deducting the discount interest. Or the business of banks purchasing bills that have not yet matured.

2 Asset business. (Loans, investments, other assets)

3 Intermediate business.

Settlement business: remittance, collection, letter of credit settlement.

Agency business: agency payment and collection business, agency financing business, agency promotion of securities business

Trust business

Leasing business: operating leases and financing leases (a commonly accepted long-term leasing form internationally, where the selection and maintenance of the leased item are the responsibility of the lessee, who usually obtains ownership of the equipment at a symbolic price after the lease period ends.)

Consulting business.

17. 1. Specialized banks (referring to financial institutions that do not engage in retail business and only provide specialized financial services within a specific scope): Development banks (non-profit policy-oriented specialized banks), savings banks

18. Non-bank financial institutions: investment banks, commercial banks, central banks, and financial institutions outside specialized banks.

19. Insurance companies 2. Financial companies 3. Brokers and securities dealers 4. Leasing companies 5. Financial companies

20. Differences between investment banks and commercial banks:

First, from the source of funds: Investment banks mainly raise funds by issuing their own stocks and bonds. Commercial banks' main source of funds is various deposits and other borrowed funds.

Second, from the main business: Investment banks mainly engage in securities underwriting, trading, the creation and trading of derivatives, mergers and acquisitions, and related services and financing; while commercial banks' main business is deposits and loans and financial services.

Third, from the main functions: Investment banks provide direct financing services to enterprises, while commercial banks can only provide indirect financing.

Fourth, from the source of profits: Investment banks' profits come from commissions, fees, and financing income, while commercial banks' profits come from interest rate spreads and service income.

Finally, from the regulatory agencies: Investment banks are mostly regulated by securities regulatory departments, while commercial banks are mainly regulated by central banks.

19. Central banks: Central banks are the core of a country's financial system, the highest, overarching, and special financial organization, and one of the important regulatory agencies of the national macro economy. In today's highly developed commodity economy and financial industry, they bear the special responsibilities of supervising and managing, ensuring the sound and stable development of the national financial system, implementing monetary policy, controlling the overall scale of social credit, and managing the money supply.

The establishment of the Bank of England marked the development of modern banking.

1. Nature: Legally, the central bank is responsible to society, is the highest management authority in a country's financial system, and acts as the government's agent in the financial field. Regardless of who owns the capital, it should be regarded as a functional department of the government or a financial management institution under government control. Economically, the central bank is a bank that handles deposits, loans, and settlement business, but its customers are different from those of other financial institutions, thus making it a special bank.

The central bank is both an institution and a bank.

2. Functions: The central bank is the "issuing bank." It monopolizes the right to issue currency.

The central bank is the "government's bank." As an important tool for the government's macroeconomic regulation, the central bank implements monetary policy, acts as the treasury, buys and sells government securities, accepts government deposits, and provides necessary short-term financing to the government. It acts as the government's financial advisor, participates in international financial activities, promotes the internationalization of the national economy, and maintains exchange rate stability.

The central bank is the "bank of banks." It is responsible for safeguarding the deposits that domestic commercial banks and other deposit-taking financial institutions are required to hold and adjusts the statutory reserve ratio according to the financial market situation. It provides refinancing and rediscounting services to commercial banks. It serves as the national bill clearing center. It supervises and manages the national banking system and its financial activities.

Policy functions: reflected in the central bank's responsibility for formulating and implementing the country's monetary policy.

Supervision and management functions: reflected in its supervision and management of the banking system, financial business, financial markets, and the macro implementation of monetary policy.

Research functions: The central bank's research function refers to its position as the nerve center of the national economy and the hub of the credit system, mastering various data and information, collecting and organizing various economic information, accurately predicting, and timely researching and formulating relevant financial policy proposals for government decision-making and reference. Research intelligence is a supplement to the central bank's policy functions and plays an important role in strengthening the central bank's policy functions.

Development or promotion functions: the ability to promote financial deepening.

3. Organizational forms:

Single central bank system (most widely used in the world): also known as the "unitary central bank system," refers to the establishment of a single central bank within a country.

Composite central bank system (often adopted by federal countries): also known as the "dual central bank system," refers to a system where a central bank institution is established at the national level, and several local-level central bank institutions are established at the local level.

Transnational central bank system (European Union); quasi-central bank system (Singapore, Luxembourg, Fiji, Hong Kong)

Unified central bank system (the Soviet Union and Eastern European countries after the 1960s and China before economic reform implemented this system)

20. Basic principles of commercial bank management: profitability principle, safety principle, liquidity principle.

21. Safety principle: credit risk, market risk, management risk.

6C: quality, capability, capital, collateral, operating conditions, continuity

5P: personal factors, purpose funds, repayment factors, guarantee factors, outlook.

2. Liquidity principle: The liquidity of banks includes the liquidity of assets (three aspects) and the liquidity of liabilities (two aspects).

3. Main measures for joint management of assets and liabilities:

4. Interest rate sensitivity gap management measures: When interest rate trends are clear and last for a long time, adopt an aggressive strategy; conversely, when interest rates fluctuate unpredictably, it is advisable to adopt a defensive strategy.

5. Duration management

Duration refers to the average time required for a financial instrument to recover its present value at a certain yield to maturity, and it measures the average time needed for a bank to recover an investment project.

Definition:

D is the duration; t is the time of each cash flow occurrence; Ct is the cash flow of the financial instrument in the t period; r is the market interest rate.

22. Why does information asymmetry occur?

Information products have quasi-publicity, indivisibility, and post-value characteristics. Their value can only be measured afterwards, easily forming information asymmetry between the two parties in a transaction, resulting in two phenomena: adverse selection and moral hazard. Information is scarce, and obtaining information incurs certain costs. Private information is information owned by one person that others must pay to obtain—information asymmetry. There are two forms of information asymmetry: hidden information and hidden behavior.

Information cannot be evenly distributed from the moment it is generated; interest relationships hinder the disclosure of information.

Adverse selection: the phenomenon of mixing good with bad and confusing the genuine with the fake.

Main measures to reduce risk:

1. Reduce internal information asymmetry: improve the internal credit operation management mechanism of banks.

2. Set up reasonable organizational structures and improve internal control mechanisms.

3. Increase technical support and fully utilize advanced tools.

4. Overcome the adverse selection and moral hazard caused by information asymmetry between enterprises and banks.

5. Screening and monitoring

6. Establish long-term relationships with borrowing customers

7. Collateral and establish compensatory balance accounts—weakening the consequences of adverse selection and moral hazard.

8. Strengthen interbank communication to jointly prevent information asymmetry.

9. Establish a credit system and social credit management system.

10. Establish correct public opinion guidance and cultivate social credit awareness.

11. Establish and improve the social credit management system as soon as possible.

12. Establish a credit guarantee system.

The capital composition of banks: equity capital, debt capital, loss reserves, and capital reserves.

Why is capital adequacy management necessary?

1. It is conducive to fair competition among banks. 2. It is conducive to controlling the scale of credit and improving asset quality. 3. It can protect depositors' interests. 4. It is conducive to promoting internal reform of banks and improving their profitability. 5. It is conducive to promoting innovation in the business of state-owned commercial banks.

2. Financial markets.

3. Direct financing: the process by which the supply and demand sides of funds directly negotiate or buy and sell direct securities in the open market.

4. Indirect financing: a financing method in which surplus units and deficit units conduct financing through financial institutions as intermediaries.

5. Differences between direct and indirect financing:

6. The main body of financing behavior is different: direct financing only involves the fundraisers and investors, while other institutions only provide services for financing without substantial value transfer; the main body of indirect financing includes fundraisers, investors, and financial institutions, with financial institutions being the central subject of fund intermediation.

7. Different modes of financing movement: in direct financing, there is only one process, that is, funds flow from surplus funders to deficit funders through the purchase of securities; in indirect financing, there are two processes, that is, surplus funders deposit funds into financial intermediary institutions, and financial intermediary institutions then transfer funds to deficit funders in the form of loans or investments.

8. Different costs and risks of financing: in terms of costs, the costs of indirect financing include interest and operating expenses of the banking sector, while the costs of direct financing mainly include dividends and interest on stocks and securities, as well as issuance costs of securities; therefore, the cost of indirect credit is lower. In terms of risk, for initial investors, the risks of stocks and bonds are higher than bank deposits, meaning that the risks of direct financing are higher than those of indirect financing.

9. Different impacts on the money supply: the main body of indirect financing is banks, which can create credit money by absorbing deposits and handling transfer settlements, thus generating multiples of the initial money supply; therefore, the scale of indirect financing directly affects the money supply. The impact of direct financing on the money supply varies depending on the duration.

Although direct financing is relatively simple, it has limitations in its applicability, and its financing efficiency is relatively low, with high costs and risks. Therefore, indirect financing plays a very important role in modern economies and is continuously developing.

From the perspective of the entire financial field, direct and indirect financing complement each other, and both play important roles in economic development.

4. Classification of financial markets:

5. By the duration of trading objects, money market and capital market

6. By financing instruments, securities market, commercial paper market, transferable time deposit market

7. By the different types of trading objects, domestic currency market, foreign exchange market, gold market, securities market, spot market, futures market.

8. By the nature and method of financial transactions, lending market, leasing market, securities market, open market, bargaining market

9. By geographical scope, domestic financial market and international financial market

10. Money market and capital market.

11. Money market: refers to the sum of the supply and demand places and their price operation mechanisms formed by trading short-term financial instruments within one year.

12. Characteristics of the money market: short trading duration, low risk, strong liquidity.

13. Functions of the money market: adjustment function, indicator function, connector function, the money market is an important place for the central bank to implement monetary policy.

14. Interbank lending market: refers to the market for short-term borrowing and lending of funds between banks and other financial institutions. Participants include commercial banks and other financial institutions.

15. Characteristics of the interbank lending market:

16. Short financing duration (one day or several hours) 2. Transaction homogeneity (must be between financial institutions) 3. Large transaction volume and non-collateralized (credit transactions) 4. Reference interest rate LIBOR (mainly refers to highly marketized interest rates) 5. Intangible market (agreements reached through telephone negotiations, with automatic clearing through the central bank)

17. Interbank lending: refers to short-term borrowing and lending conducted between financial institutions (mainly commercial banks) to adjust temporary capital shortages and surpluses, utilizing the time, spatial, and interbank differences in capital flow.

18. Short-term bill market:

Treasury bill market (short duration, high liquidity, high safety, regarded as zero-risk bonds or gilt-edged bonds; in non-negotiable form)

Large transferable time deposit market (CD): (the issuing unit is each commercial bank)

Characteristics: non-negotiable, non-loss; deposit amounts are integers and very large; short duration, with a minimum of fourteen days, mostly within one year.

8. Repurchase market: refers to the market for short-term financing conducted through repurchase agreements.

Reverse repurchase: the fund demander sells securities while signing an agreement to buy them back at a later date at the agreed price.

Repurchase price: RP=P(1+r*t/360)

9. Capital market: also known as the long-term financial market, refers to the totality of various funds borrowing and securities trading venues and their operating mechanisms with a duration of more than one year.

10. Functions of the capital market: capital intermediation, property rights intermediation, resource allocation.

11. Securities market: the venue for the issuance and trading of various securities such as stocks, bonds, and investment fund certificates.

12. Securities issuance market: also known as the primary market. It is the market formed by the issuance of securities, where the issuer sells new securities to investors according to certain legal regulations and issuance procedures to expand operations.

Issuance methods: public offering; private placement (only targeting specific investors, small scope) private placement is further divided into internal allotment and private allotment.

Internal allotment refers to: a joint-stock company distributing new stock subscription rights to existing shareholders at par value.

Private allotment refers to: selling new stocks to third parties with special relationships, such as employees and customers, other than shareholders.

Issuance channels: self-issuance; through intermediaries (investment banks, securities companies, law firms, accounting firms)

[Main work of investment banks: a. Design fundraising plans (price, amount, time) b. Find law firms and accounting firms c. Edit documents d. Market securities (underwriting, agency sales, assisting sales).]

Among them, underwriting, agency sales, and assisting sales belong to public offerings (services provided for initial issuance).

13. Securities circulation market (venue for realizing circulation transfer): also known as the secondary market. It refers to the market for buying and selling already issued securities. It consists of stock exchanges and over-the-counter trading markets.

14. Stock exchange (bidding transactions) [The largest stock exchange in the world is the New York Stock Exchange]

Membership qualifications:

1. Commission brokers. Characteristics: Commission brokers accept customer commissions for buying and selling securities, acting as intermediaries between the two parties and charging commissions.

2. Floor brokers. Characteristics: Help busy commission brokers execute tasks.

3. Floor traders: refer to those who mainly buy and sell for themselves within the stock exchange and earn the price difference while maintaining trading continuity. However, this may lead to abnormal price fluctuations.

4. Special traders (market makers): accept, safeguard, and execute orders sent by various brokers and charge commissions. They are always ready to buy and sell on their own account to maintain fairness. Characteristics: one person can manage multiple stocks, but one stock can only be managed by one person.

Three types of orders:

Market order: Customers do not specify a price and buy at the best market price.

Limit order: Specific price level, a price level that is more favorable than that price level.

Stop-loss order: Customers instruct brokers to sell or buy immediately when the price fluctuates beyond a certain direction.

15. Over-the-counter trading market (negotiated transactions): refers to the intangible trading network established by dealers through computers, telephones, and other communication tools for buying and selling securities.

OTC characteristics: 1 Intangible, trading through the network. 2 Low entry threshold, any security can be traded without requiring public disclosure of the company's financial status. 3 Transactions can be conducted through brokers or directly with customers. 4 The trading parties can negotiate prices.

16. Differences between futures and forward contracts.

Characteristics of futures: standardized; no default risk; futures contracts require margin deposits; the actual delivery rate of futures is very low, and they can be hedged.

Forward contracts: unstandardized; high default risk; no margin deposits; contracts must be delivered upon expiration, and hedging is not allowed.

24. Coupon bonds.

If the bond price P equals its face value F, then YTM (yield to maturity) equals C (coupon rate).

If P > F, then YTM < C

If P < F, then YTM > C

P = C1/(1+YTM) + C2/(1+YTM)^2 + ... + Cn/(1+YTM)^n + F/(1+YTM)^n

Perpetual bonds: P = C/YTM

If C = 0, then P = F/(1+YTM)^n

25. Zero-coupon bonds.

Pz is the price of a zero-coupon bond, the market interest rate is r, let the term of the zero-coupon bond be n (usually less than one year), F is the face value of the zero-coupon bond; paid at maturity. Then

Pz = F/(1+r*n/12)

26. 1. Base money: refers to the sum of the reserves of commercial banks and cash held by the public outside the banking system. It is the basis for the multiplier expansion of the banking system and the creation of money, and is the most liquid form of money, also seen as the central bank's monetary liability to society as a whole.

27. Formula: B = C (cash in circulation) + R (deposits held by financial institutions at the central bank) [including RR reserve deposits and ER excess reserves]

28. Factors affecting the deposit multiplier: statutory reserve ratio, cash leakage rate, excess reserve ratio.

29. The meaning of the money multiplier: The money multiplier indicates the elasticity of the money supply relative to base money, that is, the amount by which the central bank increases or decreases one unit of base money, resulting in a corresponding increase or decrease in the money supply. Denote △B as the change in base money, △Ms as the change in money supply, Km as the money multiplier, then:

Km = △Ms/△B = (△C + △D)/(△C + △R)

5. The main factors affecting the money multiplier and money supply: the behavior of residents holding money, the behavior of residents and enterprises, the behavior of commercial banks and financial institutions, and the money supply.

6. The behavior of the central bank and the money supply:

7. The central bank can influence the money multiplier and money supply by deciding the statutory reserve ratio r for demand deposits and rt for time deposits.

8. The scale of the central bank's claims on commercial banks affects base money and money supply.

9. The central bank's open market operations (mainly the scale of claims on the treasury) affect base money and money supply.

10. The scale of foreign exchange and gold holdings affects base money and money supply.

11. 1. Classical demand for money theory: 1 Cash transaction quantity theory—Fisher's transaction equation MV=PT;

Conclusion: Changes in the quantity of money M will lead to proportional changes in the price level P. The formula can be rearranged to M=PT/V, when the money market is in equilibrium, the quantity of money M is the demand for money. It indicates that the demand for money is only a function of nominal income PT, and interest rates have no effect on the demand for money.

2. Cash balance quantity theory—Cambridge equation M=KPY

Conclusion is consistent with Fisher's transaction equation conclusion.

2. Keynes's demand for money theory—liquidity preference theory.

Three motives for money demand: transaction motive, precautionary motive, speculative motive.

Keynes's money demand function: (real money demand balance) Md/P = L1 + L2 = f(I,Y)

Keynes divides assets into money and bonds. Interest rates are inversely related to money demand.

3. Square root formula: Baumol and Tobin believe that transactional money demand is not only related to income but also to market interest rates, that is, transactional money demand is an increasing function of real income and a decreasing function of market interest rates.

Conclusion: Other conditions being equal, the higher the transaction volume or national income, the greater the demand for transactional money; the higher the conversion cost between money and profitable assets, the greater the demand for transactional money; if interest rates rise, the demand for transactional money decreases; if interest rates fall, the demand for transactional money increases.

4. Development of precautionary money demand—Whelan model (cube root formula).

The above formula indicates that the most appropriate precautionary cash balance is positively correlated with the variance S^2 of net expenditure distribution and negatively correlated with the opportunity cost rate r of holding cash balances. This is the Whelan model formed on the basis of Keynes's money demand theory.

5. Tobin's asset choice theory

6. Friedman's demand for money theory—modern quantity theory of money

Factors affecting money demand: total wealth, represented by "permanent income," permanent income is positively correlated with money demand; wealth structure, that is, the proportion of human wealth and non-human wealth in total wealth; expected returns on various assets (the opportunity cost of holding money); preferences of wealth holders and the utility of holding money.

7. Comparison of Keynes's money demand theory and modern quantity theory of money

8. Keynes studies money demand from the perspective of psychological motives; Friedman, on the other hand, disregards people's motives for holding money and believes that factors affecting the demand for other assets must also affect the demand for money.

9. Keynes believes that money demand is merely a function of income and interest rates; Friedman believes that money demand is not only a function of income and interest rates but also a function of the expected returns on all assets.

10. Friedman breaks the limitation of Keynes's financial market, which only has money and bonds as available assets, and believes that there are various assets available in the financial market, placing money at the center in contrast to other assets (stocks, bonds, commodities), determining the demand for money based on the returns of other assets. This compensates for the defect of the Keynesian school that places money and other assets on an equal footing.

11. Keynes believes that interest rates are an important factor determining money demand; the modern quantity theory of money believes that changes in interest rates have little effect on money demand.

12. Friedman believes that the money demand function is stable in the long run because both permanent income and the opportunity cost of holding money are relatively stable; while Keynes, on the contrary, believes that money demand fluctuates randomly, and changes in interest rates and income significantly cause changes in money demand.

13. Another difference from Keynes is that Friedman regards money and commodities as substitutes, that is, the demand for money is affected by the expected returns on commodities, determining the position of expected factors in money demand, which is precisely ignored by Keynes and his followers. At the same time, the assumption that commodities and money are substitutes indicates that changes in the quantity of money may directly affect total expenditure and thus total output.

14. 1. The ultimate goal of monetary policy: price stability (primary goal); full employment; economic growth; balance of payments.

15. The relationship between monetary policy goals: 1 Economic growth and full employment: a mutually complementary and mutually promoting relationship.

2 Price stability and full employment: there exists a short-term trade-off effect (Phillips curve).

3 Price stability and economic growth: there exists a trade-off effect in the short term, while in the long term, they are mutually prerequisite and mutually promoting.

4. Common long-term intermediary targets: money supply, long-term interest rates, exchange rates

5. Common short-term intermediary targets: short-term money market interest rates, excess reserves of banks, base money, inflation rate.

6. Friedman supports money supply, Keynes supports interest rates

7. Three major tools (general monetary policy): open market operations, discount rate, and statutory reserve ratio policy.

8. Other monetary policy tools: direct credit control and indirect credit control.

9. Keynes's monetary policy transmission mechanism theory: Keynes advocates that changes in the money supply indirectly affect industry and employment. According to Keynes's analysis, an increase or decrease in the money supply by the central bank will lead to a decrease or increase in interest rates. Under the condition of constant marginal efficiency of capital, a decrease in interest rates will lead to an increase in investment, while an increase in interest rates will lead to a decrease in investment. The increase or decrease in investment will, in turn, cause changes in expenditure and income in the same direction through the multiplier effect. If M represents the money supply, r represents the interest rate, I represents investment, E represents expenditure, and Y represents income, then Keynes's monetary transmission mechanism theory can be expressed as: M increases ---- r decreases ---- I increases --- E increases --- Y increases.

10. Tobin's Q theory: provides a theory about the interrelationship between stock prices and investment expenditure. If Q is high, then the market value of the firm is higher than the replacement cost of capital for new plants and equipment. In this case, the company can issue fewer stocks to acquire more investment goods, thus increasing investment expenditure. If Q is low, that is, the market value of the company is lower than the replacement cost of capital, the firm will not purchase new investment goods. If the company wants to acquire capital, it will purchase other cheaper firms to obtain old capital goods, thus reducing investment expenditure. The impact reflected in monetary policy is: when the money supply increases, stock prices rise, Tobin's Q rises, and corporate investment expands, thus expanding national income. According to Tobin's Q theory, the monetary policy transmission mechanism is: money supply increases ---- stock prices rise ---- Q rises --- investment expenditure rises ---- total output rises.

11. Comparison of Keynesian and monetarist monetary policy transmission mechanisms

12. The Keynesian school places great importance on the role of interest rates in the monetary policy transmission mechanism, while the monetarist school, represented by Friedman, believes that the impact of monetary policy is not mainly through interest rates indirectly affecting investment and income, but because the money supply exceeds the real cash balances that people need, thus directly affecting nominal income.

13. The Keynesian school believes that investment has a direct impact on output, employment, and GDP, while the monetarist school believes that changes in the money supply have a direct relationship with changes in nominal national income, and an increase in the money supply directly leads to an increase in nominal national income.

14. The Keynesian school believes that the transmission mechanism first adjusts in the money market, then leads to increased investment, which increases consumption and national income, ultimately affecting the goods market. The monetarist school believes that the transmission mechanism can operate simultaneously in both the money market and the goods market, affecting both financial and real assets.

15. Main factors affecting monetary policy: policy lags, expectation factors, and institutional factors.

16. Reasons for innovation: one is the innovation induced by constraints; the other is the dialectical innovation of regulation.

Economic effects of interest rate changes

Micro: 1. Impact on investment. 1 Physical investment: other conditions being equal, interest rates affect investment costs and thus affect final investment. An increase in interest rates means an increase in investment costs, which will reduce profits after investment, leading to a decrease in investment scale. 2 Securities investment: if interest rates fall, it will lead to an increase in demand, thus increasing securities prices, which will increase profits after purchase.

2. Impact on consumption and savings. When interest rates are high, asset returns increase, which means that the cost of current consumption rises, leading to a decrease in consumption and an increase in savings. High interest rates will lead to a reduction in enterprise scale and a decrease in personal income, thus reducing consumption.

3. Impact on the asset structure of financial institutions: loan interest rates are determined by financial institutions based on market supply and demand, while the interest rates on securities are determined by the central bank based on financial policy, mainly referring to government bonds, and the loan and investment ratios are adjusted based on the interest rates between the two.

Macro: 1. Impact on money supply and demand: interest rates are positively correlated with supply and negatively correlated with demand. 2 Impact on money demanders. When loan interest rates fall, it stimulates the demand for funds, leading to an increase in demand; conversely, when loan interest rates rise, it stimulates the demand for funds, leading to a decrease in demand. 3 Impact on money investors. When deposit interest rates fall, it suppresses the desire to save, converting savings into liquidity.

2. Impact on inflation: when interest rates are high, investment decreases, leading to inflation; when the economy is in recession, interest rates decrease, leading to deflation.

3. International balance of payments situation.