Money and Banking Ch.3

What are Financial instruments?

A written contract that represents a legal claim to future payments of money or assets and can be help as an investment or traded.

Example of financial instruments

Stocks, bonds, loans, and insurance contracts

Name the 3 functions of Financial instrument’s:

1. Means of payment

2. Store of value

3. Risk transfer

What is direct finance?

Borrowers sell financial instruments directly to lenders in financial markets without intermediaries

What is indirect finance?

Borrowers get funds through financial institutions that act as intermediaries

What are financial markets?

Platforms where financial instruments are traded, this facilitates price discovery, liquidity, and the efficient allocation of capital

How are markets categorized?

Maturity

Security insurance: primary markets and secondary markets

Asset types: equity, debt, derivatives, and foreign exchanges

What are financial institutions?

Help channel funds by transferring and reallocating assets, reducing information, and transaction costs.

Types of financial institutions:

1. Depository institutions like commercial banks and credit unions

2. Non depository like investment banks, insurance companies, and mutual funds

3. Others include pension funds or broker deals

A well functioning financial system enables…

Efficient allocation of resources, stabilizes risk, and support economic growth

Consumer Access example

Banks provide mortgage loans that enable ownership

Economic growth example

Capital raised through stock markets funds business expansion and job creation

Risk management

Derivatives allow companies to hedge against currency or interest rate risks