Chapter 8 - Chapter 8 Saving, Investment, and the Financial...

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Chapter 8 – Saving, Investment, and the Financial System 1. Financial Institutions in US Economy a. Financial system moves economy’s scarce resources from savers to borrowers. b. Two Types of Institutions i. Financial Markets 1. The Bond Market – a. Date of maturity – Time at which the loan will be repaid. b. Principal – The eventual repayment of the amount borrowed. c. Bond can be held until maturity or sold to someone else at earlier date. 2. Three Important Characteristics of Bond a. Term – Length of time until the bond matures. Those that never mature are called perpetuity . It pays interest forever b. Credit Risk – Probability the borrower will fail to pay some of the interest or principal. Failure to pay is called a Default (Bankruptcy). Junk Bonds may be used if risk is high in investment, which pays a high interest rate. c. Tax Treatment – Interest on some bonds is taxable. Bonds which are not are Municipal Bonds . Another reason why government bonds pay lower interest rates is because they are municipal. 3.
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This note was uploaded on 12/03/2008 for the course ECO 2013 taught by Professor Johnhodgson during the Spring '08 term at University of South Florida - Tampa.

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Chapter 8 - Chapter 8 Saving, Investment, and the Financial...

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