Treasury bonds for example will often pay relatively

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Unformatted text preview: three days later it falls to $1 and stays at that price (or thereabouts) for 10 years. Back in Chapter 1 you encountered a wellknown principle in economics: There is no such thing as a free lunch. Applied to stocks and bonds (or any investment), it means that you never get something for nothing. In short, higher returns come with higher risks and lower returns come with lower risks. Treasury bonds, for example, will often pay (relatively) low returns because they are so safe (risk-free). 448 Chapter 16 Stocks and Bonds 16 (428-459) EMC Chap 16 11/18/05 9:34 AM Page 449 What Would Life Be Like Without Financial Markets? In Section 1, you learned that the purpose of a financial market (such as the stock or bond market) is to channel money from some people to others. Now you have a better idea of how this process happens. People with saved funds might buy stock in a company that wants the money to buy a piece of machinery or a new plant. Similarly, people with saved funds might buy bonds (and therefore lend money) from a company that wants to borrow the money to buy a piece of machinery or a new plant. To see just how important financial markets are, imagine a world without them. Suppose that in this world you are a person with a great idea for a new product. The only problem is that it is almost impossible for you to save enough money (on your current salary) to develop, produce, and sell the new product. In a world without financial markets, you have nowhere to turn. You can’t issue stock in your new company because no stock market provides a place of trade. You can’t borrow the funds because no bond market provides a place of exchange. So, your good idea is never acted upon. Society never gets the new product. In a world of financial markets, though, the people with the good ideas can be matched up with the people who saved Defining Terms 1. Define: a face value of a bond b. coupon rate of a bond c. yield Review Facts and Concepts 2. a. Is an issuer of a bond a lender or borrowe...
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This document was uploaded on 01/16/2014.

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