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Unformatted text preview: Saving, Investment, and the Financial System The financial system consists of the group of institutions in the economy that help to match one persons saving with another persons investment. It moves the economys scarce resources from savers to borrowers. FINANCIAL INSTITUTIONS IN THE U.S. ECONOMY The financial system is made up of financial institutions that coordinate the actions of savers and borrowers. Financial institutions can be grouped into two different categories: Financial markets Financial intermediaries Financial Markets Stock Market Bond Market Financial Intermediaries Banks Mutual Funds Financial markets are the institutions through which savers can directly provide funds to borrowers. Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers. Financial Markets The Bond Market A bond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond. Characteristics of a Bond Term: The length of time until the bond matures. Credit Risk: The probability that the borrower will fail to pay some of the interest or principal. Tax Treatment: The way in which the tax laws treat the interest on the bond. Municipal bonds are federal tax exempt. The Stock Market Stock represents a claim to partial ownership in a firm and is therefore, a claim to the profits that the firm makes. The sale of stock to raise money is called equity financing. Compared to bonds, stocks offer both higher risk and potentially higher returns. The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange, and NASDAQ. The Stock Market Most newspaper stock tables provide the following information: Price (of a share) Volume (number of shares sold) Dividend (profits paid to stockholders) Price-earnings ratio 1 1. A certificate of indebtedness that specifies the obligations of the borrower to the holder is called a a. bond. b. stock. c. mutual fund. d. All of the above are correct. 2. Which of the following is not a nonsensical headline? a. British perpetuities about to mature. b. Disney issues new bonds with term of $1,000 each. c. Government bonds currently pay less interest than corporate bonds. d. Standard and Poor's judges new junk bond to have very low credit risk. 3. Which of the following is correct? a. The maturity of a bond refers to the amount to be paid back. b. The principal of the bond refers to the person selling the bond. c. A bond buyer cannot sell a bond before it matures. d. None of the above is correct....
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This note was uploaded on 07/22/2009 for the course ECON 203 taught by Professor Nelson during the Fall '08 term at Texas A&M.
- Fall '08