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Principles of Economics- Mankiw (5th) 537

Principles of Economics- Mankiw (5th) 537 - CHAPTER 25 S AV...

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CHAPTER 25 SAVING, INVESTMENT, AND THE FINANCIAL SYSTEM 555 FINANCIAL MARKETS Financial markets are the institutions through which a person who wants to save can directly supply funds to a person who wants to borrow. The two most impor- tant financial markets in our economy are the bond market and the stock market. The Bond Market When Intel, the giant maker of computer chips, wants to borrow to finance construction of a new factory, it can borrow directly from the public. It does this by selling bonds. A bond is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. Put simply, a bond is an IOU. It identifies the time at which the loan will be repaid, called the date of maturity, and the rate of interest that will be paid periodically until the loan matures. The buyer of a bond gives his or her money to Intel in exchange for this promise of interest and eventual repayment of the amount borrowed (called the principal ). The buyer can hold the bond until maturity or can sell the bond at an
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