This preview shows page 1. Sign up to view the full content.
Unformatted text preview: three days later it falls to $1
and stays at that price (or thereabouts) for
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
a face value of a bond
b. coupon rate of a bond
c. yield Review Facts and
2. a. Is an issuer of a bond
a lender or borrowe...
View Full Document
This document was uploaded on 01/16/2014.
- Winter '14