Chapter 11

Chapter 11 - Chapter 11 Financial Markets and International...

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Chapter 11: Financial Markets and International Capital Flows A. Financial System: Introduction and Operation 1. Definition: the process by which we move funds from the initial lender to the ultimate borrower (we’re talking about credit) 2. Two parts: a. Indirect finance (e.g. commercial banks) i) Interact indirectly, the bank is borrowing and lending (middleman) b. Direct finance (e.g. bond markets) i) Transacting directly ii) THE most important: U.S. government bonds- the government issues bonds as a way of borrowing iii) Government usually runs at a deficit (concern of fiscal policy—nothing to do with monetary until Fed comes in) iv) It is here where interest rates are determined B. Bonds: What are they? 1. Definition: a debt security which promises to make payments periodically for a specified period of time (type of loan) 2. Two types of payments: a. Face Value (FV): fixed value promised to be paid at maturity i) Ex: 5 year Treasury note, FV = $1000, paid $1000 at the time of maturity b. Coupon Payments: fixed nominal payments promised before maturity 1
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Chapter 11 - Chapter 11 Financial Markets and International...

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