ec-2 - Savings Investment Financial Markets Chapter Outline...

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Savings, Investment & Financial Markets
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Chapter Outline The Financial System Savings and Investment Loanable Funds Market Present Value Efficient Market Hypothesis Slide 2
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The Financial System Slide 3 Obtaining Funds If you are profitable, reinvest the profits back into your firm Take on a partner Borrow from a bank, government or friends/family Sources of Borrowing Indirect finance: A flow of funds from savers to borrowers through financial intermediaries such as banks (chapter 15) Direct finance: A flow of funds from savers to firms through financial markets, such as the New York Stock Exchange
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The Financial System Slide 4 Financial system: The system of financial markets and financial intermediaries through which firms acquire funds from households. Financial markets : Markets where financial securities, such as stocks and bonds, are bought and sold Financial intermediaries: Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers
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The Financial System: Bond & Stock Markets The Bond Market A bond is a certificate of indebtedness that specifies obligations of the borrower to the holder of the bond Characteristics Term: The length of time Credit Risk: The probability that the borrower will fail to pay some of the interest or principal Tax Treatment: The way in which the tax laws treat the interest on the bond Municipal bonds are federal tax exempt Slide 5
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The Financial System: Bond & Stock Markets Slide 6 Sources of External Funds: Bonds Bond: A financial security that represents a promise to repay a fixed amount of funds Coupon payment: A payment on a bond Interest rate: The cost of borrowing funds, usually expressed as a percentage of the amount borrowed $60/$100 = .06, or 6%
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The Financial System: Bond & Stock Markets The Stock Market Stock represents a claim to partial ownership in a firm and is therefore, a claim to the profits that firm makes. Dividends: Payments by a corporation to its shareholders The sale of stock to raise money is called equity financing Compared to bonds, stocks offer both higher risk and potentially higher returns The most important stock exchanges in the United States are the New York Stock Exchange, the American Stock Exchange, and NASDAQ
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