Bonds

What are the components of the financial system toolset for maintaining money flow?

A sophisticated payment mechanism, borrowing and lending, pooling risk, and providing information.

What is the role of a sophisticated payment mechanism in the financial system?

It allows individuals to make and receive payments quickly and safely over long distances.

What is a bond?

A promise, a financial claim that mirrors the bond issuer's financial health, representing a cash flow claim.

What does holding a bond entitle you to receive?

Annual payments based on the coupon rate and the face value of the bond at maturity.

Who is the largest issuer of bonds?

Governments.

What is 'time to maturity' in the context of bonds?

The time it takes for the bondholder to receive the bond's face value.

What does 'yield to maturity' represent?

The rate of return that the investor gets over the life of the bond.

What does it mean if the price of a bond is less than its face value?

It is a Discount Bond; the bond is paying an interest rate lower than current rates of similar risk investments.

What characterizes a Premium Bond?

The price of the bond is greater than its face value; it is paying more than current rates.

What happens if the price bond equals face value?

It is classified as a Par Bond.

What information is considered the 'scourge of information' in financial markets?

Company share prices, interest rates, and inflation rates.

What are financial markets?

Any market in which trading takes place.

List one functionality of financial markets related to companies.

Source of funding through issuing stocks and bonds.

How do financial markets provide investor liquidity?

Investors can easily buy and sell financial securities.

Why do individuals pool risk in the financial system?

To share risk among participants.

What is the significance of providing information in the financial system?

It allows estimations of expected rates of return.