Macroeconomics-Savings, Investment, and the Financial System

Saving

when someone has more income than they wish to spend

Financial markets

institutions through which individuals who have money they wish to save can supply these funds directly to people/companies that wish to borrow money

Bond

certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond

Date of maturity

date when a loan will be repaid

Principal

original amount of money given by the purchaser of a bond

Face/par value

amount a bond issuer promises to pay at maturity, equivalent to the principal

Discounts on bonds

determined by interest rates; the higher the interest rates, the steeper the discount is

Bond prices

inversely related to the interest rate

Coupon rates

payments to bondholders that are unattached to the discount rate

Bond interest rates

higher the longer the maturity of the bond is and the greater the risk of the borrower’s bankruptcy is

Equity finance

sale of shares of stock

Debt finance

sale of bonds

Stocks

share of stock represents ownership of a portion of a firm

Dividends

payment given to shareholders when the company they own shares of is profitable

Intermediary

third party who acts as a link between two others

Banks

get funds by accepting deposits, pay their depositors interest and charge borrowers more than they pay to depositors, facilitate purchases by providing checking accounts

Mutual funds

purchase a portfolio of stocks and bonds and sell shares to savers; make it possible to achieve more diversification and provides access to the knowledge of professional money managers

Equality of income and expenditures

Y=C+I+G+NX

National savings

S=Y-C-G

Private saving

Y-C-T; amount of money households have left over after they pay for taxes and consumption

Government saving

T-G; difference between government income and government income

Budget surplus

government saving is positive

Budget deficit

government saving is negative

Net capital outflow

purchase of foreign capital/financial assets by domestic residents minus the purchase of domestic assets by foreigners

Foreign direct investment

when a company or individual acquires assets in a foreign country that they will manage actively

Portfolio investment

when a business or individual buys shares of stock or bonds issued by a foreign corporation

Fisher Equation

real interest rate=nominal-inflation

Crowding out

tendency of government deficits to reduce private investments