econ201 final 11-16

econ201 final 11-16 - Chapter 11 Financial markets and...

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Chapter 11 Financial markets and international capital flows A high rate of national savings permits a high rate of capital formation which will tend to increase labor productivity and living standards. New capital does not guarantee a richer more productive economy. A successful economy not only saves but also uses its savings wisely in projects that seem to be most productive. Market financial systems not influenced by politics Provides info to savers how to use their funds in the most productive ways paying the highest returns Financial markets also share the risk of individual investment projects, allowing for development of new technologies which are potentially risky. Banks are the most important example of a class of institutions called financial intermediaries Financial intermediaries - firms that extend credit to borrowers using funds raised from savers Banks have a comparative advantage in evaluating the qualities of borrowers. Savers also are able to earn a return on their savings and write checks or use ATM cards. Bond - a legal promise to repay a debt, usually including the principal amount and regular interest payments Principal amount - the amount originally lent Maturation date - the date at which the principal will be repaid Coupon payments - regular interest payments made to the bond holder Coupon rate - the interest rate promised when a bond is issued; the annual coupon payments are equal to the coupon rate times the principal amount of the bond Bonds differ in their tax treatment. Interest paid on bonds issued by local governments, called municipal bonds, is exempt from federal taxes, where other bonds are considered income. Bond owners are don't have to hold bonds until they mature, they can sell their bonds in the bond market. The bond market depends on the current prevailing interest rate compaired to the rate when issued Stock - or equity is a claim to partial ownership of a firm Dividend - a regular payment received by stockholders for each share they own
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Risk premium - the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets Factors affecting stock prices 1. Increase in expected future dividends or future market of a stock raises the current price 2. Increase in interest rates lowers the current price of stocks 3. Increase in perceived risk lowers current price of stocks Diversification - the practice of spreading one's wealth over a variety of different financial investments to reduce overall risk Mutual fund - a financial intermediary that sells shares in itself to the public, then uses the funds raised to buy a wide variety of financial assets International capital flows - purchases or sales of real and financial assets across international borders Capital inflows - purchases of domestic assets by foreign households and
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econ201 final 11-16 - Chapter 11 Financial markets and...

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