Test 1 - I ndirect finance Direct finance ECONOMICS 311...

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Unformatted text preview: I ndirect finance Direct finance ECONOMICS 311 TEST 1 REVIEW MATERIAL 22:29 Exam one Monday 9/20 Chapters 1,2,4,5 Bring 1 grey scantron #2 pencil ID Calculator 40 questions all multiple choice CH 1 – 5 questions CH 2 – 5 questions CH 4 – 15 questions (present value, yield to maturity, 4 basic, rate return, nominal vs. real interest rates ) CH 5 – 13 questions (theory of asset demand, what makes curve shift[7/13 questions], fisher effect) Econ 311 22:29 The bond market and interest rates • Security- (financial instrument) is a claim on the issuers future income or assets( any financial claim or piece of property that is subject to ownership). • Bond- is a debt security that promises to make payments periodically for a specified period of time. o Bond market is important because it enables corporations and governments to borrow to finance their activities and it is where interest rates are determined. • Interest rate- the cost of borrowing or the price paid for the rental of funds (usually expressed as a percentage of the rental of $100 per year). The stock market • Common stock-(typically called a stock) represents a share of ownership in a corporation. It is a security that is a claim on the earnings and assets of the corporation. Structure of the financial system • Financial intermediaries- institutions that borrow funds from people who have saved and in turn make loans to others. Banks o Savings & loans o Pensions o Insurance companies o Mutual funds • Financial markets Credit markets (bonds) o Equity markets (stocks) o Foreign Exchange markets (currencies) Econ 311 22:29 Financial system channels funds from savers, who have a surplus of funds but lack a productive use for those funds, to investors, who face a shortage of funds but have a productive use for them. Direct vs. Indirect finance • Direct finance- individual savers hold claims issued directly by an individual borrower. • Indirect finance- financial intermediaries post funds from individual savers to lend to borrowers. Monetary theory & policy • Monetary theory: examines the effects of money on the overall economy o Business cycles o Inflation rates o interests rates Monetary policy: use of money supply & interest rates to effect the level of economic activity. Econ 311 22:29 Role of the financial system • 1. Provides individuals, firms, and governments the capital to do things today they could not otherwise afford at a price....
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Test 1 - I ndirect finance Direct finance ECONOMICS 311...

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