Exam #2 Notes

Exam #2 Notes - debt finance Three characteristics o A...

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Chapter 8: Saving, Investment, and the Financial System Financial system: the group of institutions in the economy that help to match one person’s saving with another person’s investment Financial institutions in the U.S. economy o Move the economy’s scarce resources from savers to borrowers o Savers supply their money to the financial system with the expectation that they will get it back with interest at a later date. Borrowers demand money from the financial system with the knowledge that they will be required to pay it back with interest at a later date. o Financial Markets Financial markets: the institutions through which a person who wants to save can directly supply funds to a person who wants to borrow The Bond Market Borrow directly from the public do this by selling bonds Bond: certificate of indebtedness
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Unformatted text preview: debt finance Three characteristics o A bonds term The length of time until the bond matures The interest rate on a bond depends, in part, on its term Long term bonds are riskier that short term bonds o Credit risk The probability that the borrower will fail to pay some of the interest or principal o Tax treatment The way the tax laws treat the interest earned on the bond Government issue bonds (municipal bonds) and the bond owners are not required to pay federal income tax on the interest income The Stock Market Stock: represents ownership in a firm and is, therefore, a claim to the profits that the firm makes equity finance Stocks offer the holder both higher risk and potentially higher return...
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Exam #2 Notes - debt finance Three characteristics o A...

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