Chapter 1_The Financial System

Chapter 1_The Financial System -...

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Chapter 1: The Financial System I. Financial Markets a. Financial Market- a collection of people and firms that buy and sell securities or currencies b. Currencies- foreign exchange c. Security- claim on some future flow of income, such as a stock or bond d. Bond  (loans) i. Bond- (fixed-income security) Security thta promises predetermined payments at certain  points in time. At maturity, the bond pays its face value. Before that, the owner may  receive  coupon payments.   Coupon Bonds     - fixed payment loan a. $1000- Face Value (5yrs will mature in 2014 to receive face value) Coupon Rate      –the percentage of face value paid every year a. 5% = $50 per year Medium Term   about 5 yrs Long-term   more than 5 yrs Discount Bond      (zero coupon bond) (a.k.a. Commercial Paper  – an I.O.U of 2- 270days) a. Usually 1 yr or less b. No coupon rate – no yearly payment c. Buy at discount and receive face value at maturity T Bills     - government discount Bond  Default Risk     - probability of paying back the bond ii. Interest- payments for the use of borrowed funds  iii. Default- failure to make promised payments on debts  e. Stocks i. Stocks- (equity) ownership share in a corporation  Generally more risk than a bond
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Chapter 1_The Financial System -...

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