Ch. 11 Financial Markets

Saving and Investing Ch. 11.1

When people save, u are lending funds to other people Saving and Investing Investing-redirecting resources from being consumed today so that they may create benefits in the future: the use of assets to earn income or profit Financial System The system that allows the transfer of money between saver and borrowers When people save, u are lending funds to other people

Financial Intermediaries -Institution that help channel funds from savers to borrowers -Finance Institutions Banks, savings, credit unions, and finance companies Pension Fund Life Insurance The family or other beneficiaries of the insured Hedge Funds Private investment that employs risky strategies to try to make huge profits for investors. Mutual Funds Pool of investments in a variety of stocks, bonds and financial assets

The Risks of Investment Liquidity-converting an asset into cash Return-money an investor receives above and beyond the sum of money initially invested ***The higher the potential return, the riskier the investment

Bonds and Other Financial Assets 11.2

Bonds and Other Financial Assets Bonds are loans -Bonds typically pay the investor a fixed amount of interest at regular intervals for fixed amount time. -Low-risk Investments

Components of Bonds -Coupon Rate-the interest rate that a bond issuer will pay to a bondholder Maturity-time at which payment to the bondholder is due Par value-amount that investor pays to purchase the bond and that will be repaid to the investor at maturity Ex: Coupon Rate: 5%, paid to bond holder regularly Maturity: 10 years Par Value: $1, 000.00 Yield-annual rate of return

Advantages Disadvantages -Fixed coupon rate -Bondholders do not own apart of the company. Company does not share profits. Disadvantages Companies must make fixed interest payment even in bad years.

Types of Bonds Savings Treasury Bonds, Bills, and Notes Different lengths Safest investments

Municipal Bonds Corporate Bonds Junk Bonds A bond issued by a state or local government or municipality to finance such improvements as highways, state buildings, libraries, parks and schools Tax Exempt Corporate Bonds A bond that a corporation issues to raise money to expand its businesses Regulated by SEC (Securities and Exchange Commission) to enforce laws and prohibit fraud Junk Bonds High risk & yield

Other Types of Financial Assets Money Market Mutual Funds Investors receive higher interest then on saving accounts, but not covered by FDIC insurance Certificates of Deposit (CDs) Available through banks, which lend out the funds for a fixed amount of time

Financial Asset Markets Capital Markets-money lent for longer period of time Money Markets-lend for periods of less then a year