Chapter 1 - b. Risk requires compensation • Investors...

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Chapter 1 An Introduction to Money and the Financial System I. The Five Parts of the Financial System a. Money To pay for purchases and store wealth b. Financial instruments Transfer resources from savers to investors Transfer risk to those who are best equipped to bear it c. Financial markets Buy and sell financial instruments quickly and cheaply d. Financial institutions Access to the financial markets Collection of information about prospective borrowers Examples: banks, securities firms, insurance companies e. Central banks Monitor and stabilize the economy Federal Reserve System II. The Five Core Principles of Money and Banking a. Time has value Interest payments to compensate the lender for the time during which the funds are used
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Unformatted text preview: b. Risk requires compensation • Investors must be paid to assume risk c. Information is the Basis for Decisions • Stock exchanges are organized to eliminate the need for costly information gathering, facilitating the exchange of securities d. Markets Determine Prices and Allocate Resources • The higher the price investors are willing to pay in the market, the more appealing the idea will be, and the more likely it is that the firm will issue securities to raise capital for the investment e. Stability Improves Welfare • Related to core principle 2- risk requires compensation • Business cycle fluctuations is an instability that individuals cannot get rid of themselves...
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This note was uploaded on 05/10/2010 for the course ECO 3223 taught by Professor Staff during the Spring '08 term at University of Central Florida.

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