Chapters_26 - 26 Saving, Investment, and the Financial...

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26 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. How does the fnancial system works? Various ±nancial institutions The relationship between the ±nancial system and some key macroeco- nomic variables: saving, investment, and interest rate A model of the supply and demand for money in ±nancial markets Government policies and responses of the ±nancial markets 26.1 Financial Institutions in the U.S. Economy Two categories of the ±nancial institutions: Financial markets: the institutions through which a person who wants to save can directly supply funds to a person who wants to borrow. Financial intermediaries: the institutions through which savers can indi- rectly provide funds to borrowers. Two important ±nancial markets: The bond market Bond: a bond is a certi±cate of indebtedness that speci±es the obliga- tions of the borrower to the holder of the bond with principal, date of maturity, and rate of interest. (c.f. perpetuity – pays interest forever, but the principal is never repaid) Three important characteristics of the bond: · The bond has the length of time (term) until the bond matures. · It considers potential credit risk (the probability of default; default – the borrower fails to pay some of the interest or principal) · It yields taxable income (by federal government) (c.f. municipal bonds – not required to pay federal income tax) Debt ±nance: the sale of bonds (by a ±rm) to raise money (capital) The stock market Stock: a claim to partial ownership and pro±ts in a ±rm Equity ±nance: the sale of stock to raise money Characteristics of stock: riskier than the bond (why?) 4
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Stock indexes (an average of a group of stock prices) in the U.S.: Dow- Jones Industrial Average, Standard & Poor’s 500 Index, and NASDAQ Index
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This note was uploaded on 04/05/2010 for the course ECONOMICS 2009 taught by Professor Lee during the Spring '09 term at Yonsei University.

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Chapters_26 - 26 Saving, Investment, and the Financial...

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