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Econ 311 notes

Econ 311 notes - Econ 311 – Notes Ch.1 • The Financial...

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Econ 311 – Notes Ch.1 The Financial System o Links savers and investors o Provides productive uses for nation’s savings leading to economic growth o Finacial Intermediaries Banks Insurance Companies Mutual Funds Pensions o Finacial Markets Credit Market Equity markets Forgein exchange o Summary – the financial system channels funds from savers, who have surplus of funds but lack a productive use for those funds to investors, who face a shortage of funds but have a productive use for them Ch. 2 Direct Vs. Indirect finance o Direct Finance – individual savers hold claims issued directly by an individual borrower o Indirect Finance – finacial intermediaries pool funds from individual savers to lend to borrowes Monetary theory and policy o Monetary theory – examines the effects of money on the overall economy Business cycle Inflation Interest rates o Monetary policy – use of money supply and interest rates to effect the level of economic activity Role of the financial system o Provide industries, firms, and governments the capital to do things today that they could not otherwise afford – at a price o Storing, protecting, and providing profitable use for excess capital o To insure against risk o Speculation Structure of the financial market o Debit and equity market o Primary and secondary markets o Exchanges and over the counter markets o Money and capital markets Debits and equity Market o Debit securities – are promises to repay (the amount borrowed) and interest at specified dates. o Debt securities are the primary source of direct finance o A debt securities maturity describes the length of time until the final payment on the debt is made Short term debt – maturity < 1 year Intermediate term debt – 1 year < maturity < 10 years Long term debt – Maturity > 10 years
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o Equity securities / equity markets represent ownership of a corporation and entitle the stockholder to a firms earnings and assets Primary and Secondary Market o Primary Market – Newly issued debt or equity securities are sold to their initial buyer o Secondary Market – are financial markets where previously issued securities are bought and sold o Types of secondary markets Exchanges – buying and selling takes place in a centralized location Over the counter (OTC) markets – buying and selling takes place through computerized trading – there is no central location
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Econ 311 notes - Econ 311 – Notes Ch.1 • The Financial...

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