CHAPTER 11 FINANCIAL MARKETS

SAVING AND INVESTING SECTION ONE

A FINANCIAL INTERMEDIARY HELPS CHANNEL FUNDS FROM SAVERS TO BORROWERS.

ADVANTAGES OF FINANCIAL INTERMEDIARIES Share risk (Diversification): they pool your money with other people’s investments to reduce the risk that you lose all of your investment. Provide information : give investors a report called a prospectus that shares information about potential investments Provide liquidity : An investor’s assets can be easily turned into cash

RISK, LIQUIDITY, AND RETURN Savings Account Liquid Low Risk Low Return Certificate of Deposit (CD) Not Liquid Low Risk Medium Return Investing in a New Business Not Liquid High Risk High Potential Return

` Banks, Savings & Loans, Credit Unions : take deposits from savers, then lend some of the funds to businesses and individuals Finance Companies : make loans to consumers and small businesses Mutual funds : pool the savings of many investors and invest in a variety of stocks, bonds, and other financial assets Life Insurance Companies : provide financial protection for the family or beneficiary of the insured; policies pay money to survivors; companies lend out part of the premiums they receive Pension funds : collect deposits and distribute payments; managers invest deposits; employees pay into such funds which provide income after retirement

BONDS AND OTHER FINANCIAL ASSETS SECTION TWO

THREE COMPONENTS OF BONDS Coupon rate : the interest rate paid to the bondholder Maturity : time at which payment to the bondholder is due Par value : amount an investor pays to purchase a bond, and that will be repaid at maturity

WHY DO COMPANIES ISSUE BONDS? Advantages Coupon rate will not change once the bond is sold. Bondholders do not own part of the company, so they will not have to share profits Disadvantages Company must make fixed interest payments even if they don’t do well Bonds may be downgraded to a lower rating making them harder to sell

OTHER FINANCIAL ASSETS Certificate of Deposit: attractive to small investors because they cost as little as $100. Money Market Mutual Funds: offer higher interest than savings accounts, but are not protected by FDIC insurance

THE STOCK MARKET SECTION THREE

BUYING STOCK Advantages Dividends Capital gains Stock splits Disadvantages Lower profits than expected Capital loss Bankruptcy (Stockholders paid last)