Ch.26 Saving, Investments, and the Financial System

Ch.11

Financial System

The group of institutions in the economy that help to match one person’s savings with another person’s investments.

Financial Markets

Institutions through which savers can directly provide funds to borrowers.

Bond

A certificate of indebtness

Date of Maturity

The time at which the loan will be repaid.

Principal

The eventual repayment of the amount borrowed.

Term

Length of time until the bond matures

Perpetuities

Bonds pay interest forever, but the principal never needs to be repaid.

Credit Risk

Pronability that the borrower will fail to pay some of the interest or principal.

Default

Failure to pay

High Yield Bonds

pay high interest rates

Tax Treatment

The way tax laws treat the interest earned. Mostly taxable income

Municiple Bonds

Bond owners are not required to pay federal income tax on the interest income, and some may not need to pay state/local taxes.

Inflation Protection

Most are written in nominal terms. Promise to pay interest and principal in a specific number of dollars.

Stock

A claim to partial ownership in a firm

Equity Finance

The sale of stocks to raise money.

Debt Finance

sale of bonds

Stock index

Computed as an average of a group of stock prices

Financial Intermediaries

A financial institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.

Mutual Fund

An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds.

Index Funds

A type of mutual fund designed to track the performance of a specific financial benchmark

National Savings

The total income in the economy that remains after paying for consumption and government purchases

Saving

The total income in the economy that remains after paying for consumption and government purchases

Private Saving

The income that households have left after paying for taxes and consumption.

Public Savings

The tax revenue that the government has left after paying for its spending

Budget Surplus

An excess of tax revenue over goverment speding

Budget Deficit

A shortfall of tax revenue from the government spending

Market for Loanable Funds

The market in which those who want to save supply funds and those who want to borrow to invest demand funds.

Crowding Out

A decrease in investment that results from government borrowing.