ECO 322 Study Guide 1

ECO 322 Study Guide 1 - Study Guide 1 ECO 322 Money and...

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Study Guide 1 ECO 322 – Money and Banking Timothy D. Terrell I. Introduction A. Overview of the Financial System B. Defining Money C. Macroeconomic Data Overview of the Financial System Definitions: Security : a claim on the issuer’s future income or assets. Includes, prominently, stocks and bonds. Bond : a debt security that promises to make payments periodically for a specified period of time. An interest rate is the cost of borrowing. Stock : a security that is a claim on the earnings and assets of a corporation. Foreign exchange market : the market for the exchange of one nation’s currency for another’s; where currency conversion takes place. Foreign exchange rate : the price of one country’s currency in terms of another’s. Financial intermediary : an institution that borrows funds from savers and makes loans to others. Bank : a financial institution that accepts deposits and makes loans. Under this term are included commercial banks, savings and loan associations, mutual savings banks, and credit unions. Money : anything that is generally accepted in payment for goods or services or in the repayment of debts. Functions of Financial Markets Essentially, financial markets channel funds from people who have excess funds (savers) to those who have a shortage of funds (borrowers). The place of financial markets and financial intermediaries is depicted in Figure 1 on p. 21. Structure of Financial Markets There are two basic ways to obtain funds in a financial market: 1. Issue a debt instrument, such as a bond or a mortgage 2. Issue an equity, such as common stock ECO 322 Study Guide 1
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A debt instrument is a contractual agreement to make payments to the bearer until the maturity date. The maturity of a debt instrument is the time to the instrument’s expiration date. Short-term instruments are less than 1 year; long-term are at least 10 years. In between are intermediate-term instruments. An equity is a claim to share in the net income (income after expenses and taxes) and the assets of a business. The periodic payments made to equity holders are called dividends. This type of security has no maturity date so is long-term. In the event of bankruptcy, debt instrument holders get paid first from the liquidation of the firm’s assets, while equity holders are residual claimants . There are two levels of financial markets: primary and secondary . Primary markets involve the new issues of stocks or bonds. Secondary markets involve the trade of financial instruments that have already been issued. Primary markets are not as well-known as secondary markets. They usually involve a financial institution called the investment bank . The investment bank guarantees a firm a price for its securities ( underwriting ) and then sells them to the public. There are two methods of organizing a secondary market.
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ECO 322 Study Guide 1 - Study Guide 1 ECO 322 Money and...

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