Chapter 19 - Saving, capital formation & financial markets

Life cycle

saving: saving to meet long- term objectives such as retirement, college attendance, or the purchase of a home.

Bond

: legal promise to repay a debt, usually including both the principal amount and regular interest, or coupon, payments.

Life cycle

saving: saving to meet long- term objectives such as retirement, college attendance, or the purchase of a home.

Bond

: legal promise to repay a debt, usually including both the principal amount and regular interest, or coupon, payments.

Balance sheet

: list of an economic unit's assets and liabilities on a specific a date.

Stock

: measure that is defined at a point in time.

Dividend

: regular payment received by stockholders for each share that they own.

Flow

: measure that is defined per unit of time.

Diversification

: practice of spreading one's wealth over a variety of different financial investments to reduce overall risk.

Lower taxes

on the revenues generated by capital.

Mutual fund

: financial intermediary that sells shares in itself to the public and then uses the funds raised to buy a wide variety of financial assets.

Capital gains

: increases in the value of existing assets.

Capital losses

: decreases in the value of existing assets.

Assets

: anything of value that one owns.

Government budget

deficit: excess of government spending over tax collections (G- T)

Stock

(or equity): claim to partial ownership of a firm.

Saving

current income minus spending on current needs

Saving rate

saving divided by income

Wealth

value of assets minus liabilities

Assets

anything of value that one owns

Liabilities

debts one owes

Balance sheet

list of an economic unit's assets and liabilities on a specific a date

Flow

measure that is defined per unit of time

Stock

measure that is defined at a point in time

Capital gains

increases in the value of existing assets

Capital losses

decreases in the value of existing assets

Transfer payments

payments the government makes to the public for which it receives no current goods/services in return

Life-cycle saving

saving to meet long-term objectives such as retirement, college attendance, or the purchase of a home

Precautionary saving

saving for protection against unexpected setbacks such as the loss of a job or a medical emergency

Bequest saving

saving done for the purpose of leaving an inheritance

Bond

legal promise to repay a debt, usually including both the principal amount and regular interest, or coupon, payments

Principal amount

amount originally lent

Maturation date

date at which the principal of a bond will be repaid

Coupon payments

regular interest payments made to the bondholder

Coupon rate

interest rate promised when a bond is issued; the annual coupon payments are equal to the coupon rate times the principal amount of the bond

Stock (or equity)

claim to partial ownership of a firm

Dividend

regular payment received by stockholders for each share that they own

Risk premium

rate of return that financial investors require to hold risky assets minus the rate of return on safe assets

Diversification

practice of spreading one's wealth over a variety of different financial investments to reduce overall risk

Mutual fund

financial intermediary that sells shares in itself to the public and then uses the funds raised to buy a wide variety of financial assets