03 ACTIVITY 1

FINANCIAL MARKETS

Patrick Jeremel Baesa

BSA3A
ANSWER:

1ST THEORY: LOANABLE FUNDS THEORY

PLUS MINUS INTERESTING

-recognizes the -Keynes opined that INVESTMENT. The main

importance of hoarding loanable funds theory is source of demand for
as a factor affecting the based on the unrealistic loanable funds is the
interest rate which the assumption of full demand for investment.
classical theory has employment. As such, Investment refers to the
completely overlooked. this theory also suffers expenditure for the
from the defects as the purchase of making of new
classical theory does. capital goods including
inventories. 
-links together liquidity
preference, quantity of
money, savings and
investment.
-Like classical theory, HOARDING. The demand
loanable funds theory is for loanable funds is also
also indeterminate. This made up by those people
-takes into theory assumes that who want to hoard it as
consideration the role of savings and income both idle cash balances to
bank credit which acts are independent. But satisfy their desire for
as a very important savings depend on liquidity.
source of loanable income. As the income
funds. changes savings also
change and so does the
supply of loanable
funds.
2ND THEORY: EXPECTATIONS THEORY

PLUS MINUS INTERESTING

-predicts future short- -is not always a reliable -this is a tool used by
term interest tool. investors to analyze
rates based on current short-term and long-
long-term interest rates. - it’ sometimes term investment
overestimates future options. The theory is
-suggests that an short-term rates, purely based on
investor earns the same making it easy for assumption and
amount of interest investors to end up with formula.
by investing in two an inaccurate prediction
consecutive one-year of a bond’s yield curve. -assists the investors to
bond investments foresee the future
versus investing in one -the expectations theory interest rates and also
two-year bond today. does not consider the assist in the investment
outside forces and decision making;
-long-term rates can be fundamental depending on the
used to indicate where macroeconomic factors outcome from the
rates of short-term that drive interest rates expectations theory, the
bonds will trade in the and, ultimately, bond investors will figure out
future. yields. if the future rates are
favorable or not for
investment.

PART II.

1. INVESTMENT B

Corporate Bonds is much better than fixed rate treasury note,

given the years (5 years) which are the same for both investment,
corporate bonds is a better option despite being a little riskier,
corporate bonds always earned a high interest rates than of
treasury notes. Regarding on its YTM, a higher YTM indicates
higher returns, but it is also associated with higher risk, as the
fund may be holding risky papers offering higher yields.
2. INVESTMENT X

Corporate bonds are better than preferred shares, because bonds

are offered to investors a regular interest payments, while the
preferred shares are in a pay set of dividends. Plus bonds is always
put at first than shares/stock, like when a company reaches a
bankruptcy and a shutdown, bondholders are paid back first than
of the preferred shareholders. Regarding on its rates, coupon rate
is much better than dividend rate. Dividend rate are obviously
base on dividends which technically based on profit, which means
it can be high or low profit, however coupon rate are regular
payments of fixed interest on a bond.