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Lecture Notes for FIN 4224 - Fixed Income Securities at Virginia Tech (VT)

Notes Information

Material Type:Class Note
Professor:Staff
Class:FIN 4224 - Fixed Income Securities
Subject:Finance, Insurance, and Business
University:Virginia Polytechnic Institute And State University
Term:Fall 2008
Keywords:
  • Opportunity
  • Consumption
  • Provided That
  • Combination
  • Individuals
  • (to/for) Him/it
  • Availability
  • Municipal Bonds
  • Production Function
  • Substitution
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Sample Document Text

The Importance of Borrowing/Lending OpportunitiesThe Hirshleifer-Fisher Model The purpose of this presentation is to demonstrate how the availability of borrowing and lending opportunities increases economic welfare Meaning: Individual have more and better choices when allocating their consumption over time Model is stylized: • Two points of time: Now (t=0) and a year from now (t=1) • Individuals have a money endowment at t=0 (but not at t=1) • Individuals are endowed with a given production function that requires an investment of I0 at t=0 but produces a cash flow of f(I0) at t= 1 • Initially: no borrowing/lending opportunities exist • What are the possible (C0,C1) consumption possibilities 1 Potential production functions: case 1 C1 What is wrong with this picture? C0 Initial Endowment 2 Potential production functions: case 2 C1 What is not-so-OK with this picture? Assumption about the production function: C0 Initial Endowment 3 Potential production functions: case 3 C1 Assumption abou...

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