Ch 1 Notes FINN 3053 - FINN 3053 Financial Markets Institutions Chapter 1 Why Study Money Banking and Financial Markets Intro Text examines how

Ch 1 Notes FINN 3053 - FINN 3053 Financial Markets...

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FINN 3053: Financial Markets & Institutions Chapter 1: Why Study Money, Banking, and Financial Markets? IntroText examines how financial markets (bonds, stocks, foreign exchange), financial institutions, and money functionFinancial MarketsFinancial Markets are markets where funds are transferred from those who have excess funds to those who need fundsEfficient financial markets contribute to economic growth and prosperityFinancial markets affect personal wealth, business behavior, and consumers, and the cyclical performance of the economySecurities (financial instruments) are claims on an issuer’s future income or assetsBond Market and Interest RatesBonds are debt securities whose issuer promises periodic payments for a specified period The bond market enables corporations and governments to borrow to finance their activitiesInterest rates are determined in the bond marketAn interest rate is the cost of borrowing or price paid for rental of fundsThere are many interest rates: mortgage interest rates, car loan rates, and interest rates on various types of bonds, including bonds with different coupon rates, time to maturity, etc.High interest rates, ceteris paribus (other things equal) deter economic activity because the cost of borrowing funds is high for consumers and businessesHigh interest rates also encourage savingsChanges in interest rates affect individuals, financial institutions, businesses, and the economyFigure 1 therefore shows interest rates over 1950-2008Figure 1 shows short term interest rates, measured by the 3-month Treasury Bill rate, are more volatile than U.S. government long term bondsFigure 1 also shows Corporate Baa (investment grade) bond volatilityStock MarketCommon stock are equity securities that represent a share of ownership in a corporationCommon stock represents a claim on the residual earnings and assets of the corporation (i.e., what is left after creditors, including bond holders, are paid what they are owed)Figure 2 shows the stock market, as represented by the Dow Jones Industrial Average, is
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