Lecture 5

Financial System

The group of institutions in the economy that help match one person's savings with another person's investment.

Bond

A certificate of indebtedness.

Date of Maturity

The date when the loan will be repaid.

Rate of Interest

The interest paid periodically until the date of maturity, also known as the coupon.

Principal

The amount borrowed.

Treasury Bonds

Bonds issued by the U.S. government.

Corporate Bonds

Bonds issued by corporations to raise funds.

Mortgage-related Bonds

Bonds backed by real estate mortgage loans.

Municipal Bonds

Bonds issued by state and local governments.

Long-term Bonds

Bonds that are riskier than short-term bonds and usually pay higher interest rates.

Credit Risk

The probability of default; the chance that the borrower will fail to pay some of the interest or principal.

National Income Accounting

The method used to measure a country's economic performance through GDP and its components.

Closed Economy

An economy that does not interact with other economies (zero exports and imports).

Open Economy

An economy that interacts with other economies.

National Saving (S)

Total income in the economy that remains after paying for consumption (C) and government purchases (G).

Private Saving

Income that households have left after paying for taxes and consumption.

Public Saving

Tax revenue that the government has left after paying for its spending.

Budget Surplus

When tax revenue (T) exceeds government spending (G).

Budget Deficit

When government spending (G) exceeds tax revenue (T).

Animal Spirits

The mood of business owners which can drive investment decisions.

S&P 500

A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States.

Equity Finance

The sale of stock to raise money.

Real Interest Rate

Nominal interest rate adjusted for inflation.

Investment Tax Credit

A credit that allows businesses to deduct a certain percentage of their investment costs from taxes.

Individual Retirement Account (IRA)

A long-term savings account that offers tax advantages for retirement savings.

Loanable Funds Market

The market where savers supply funds for loans to borrowers.

Interest Rate

The price of borrowing money or the return for saving it.

Crowding Out

A situation where increased government spending leads to reduced private sector investment.