1. Chapter 11
Financial Markets

2. Introduction The benefits and risks of saving and investing. Savings
you deposit in a bank will grow with hardly any risk.
Investing
more risky, may yield a larger return for your initial investment.

3. Investing and Free Enterprise
Investing is essential to the free enterprise system.
It promotes
economic growth
contributes to a nation’s wealth.
Financial systems are established in an economy so investments can take place.

4. Savers and Investors
Financial systems bring together savers and investors, or borrowers, which fuels investment and economic growth.
Savers include:
Households
Individuals
Businesses
Investors include:
Government

5. The Financial System
When people save money they are really loaning it to other people.
Savers put money into the bank.
Banks lend the money out
Firms take the money to grow
Firms then pay back the money with interest
Bank charge an interest on their loan to make money
Banks then pay the Savers interest for use of their money.

6. Financial Intermediaries

7. Financial Intermediaries
Dealing with financial intermediaries offers three advantages:
Sharing risk
Providing information
Providing liquidity

8. Section 2
Bonds

9. Why are bonds bought and sold?
Bonds are sold by governments and or corporations to pay for projects.
Bonds offer a higher return than savings accounts, although they are generally riskier than savings accounts.

10. Bonds as Financial Assets
Bonds are loans that represent debt that the seller must repay to the investor.
Bonds have three basic components:
Coupon rate
Maturity
Par value

11. Advantages and Disadvantages
Once a bond is sold, the coupon rate remains the same.
The company does not have to share profits with bondholders if it is doing well.
Disadvantages
The company must make fixed interest payments and cannot change its interest payments.
A firm’s bonds may be given a low bond rating and be harder to sell when the firm is not doing well.

12. Types of Bonds Savings Bonds Treasury Bonds, Bills, and Notes
Low-denomination bonds issued by the U.S. government, who pays interest on the bonds.
Treasury Bonds, Bills, and Notes
The U.S. Treasury Department issue Treasury bonds, bills, and notes, which are among the safest investments in terms of default risk.
Answer: Treasury bill

13. Corporate and Junk Bonds
Corporate bonds are issued by corporation to help raise money to expand business.
These bonds have a moderate risk level because investors must depend on the corporation’s success.
Junk bonds are bonds with a high risk and a potentially high return.
Investors in junk bonds face a strong possibility that some of the issuing firms will default on their debt.

14. Other Types of Financial Assets
Certificates of Deposit
CDs are available through banks, which lend out funds deposited in CDs for a fixed amount of time.
Money Market Mutual Funds
Investors receive higher interest on a money market mutual fund than they would on a savings account. These funds, however, are not covered by FDIC insurance.

15. Financial Asset Markets
Bonds, CDs, and money market mutual funds are traded on financial asset markets.
One way to classify financial asset markets is according to the length of time for which the funds are lent.
Capital Markets
Money Markets

16. Financial Asset Market, cont.
Markets may also be classified according to whether or not assets can be resold to other buyers.
Primary Markets
In a primary market, financial assets can be redeemed only by the original holder. Examples include savings bonds and small CDs.
Secondary Markets
In a secondary market, financial assets can be resold, which provides liquidity to investors.
Checkpoint Answer: By the amount of time in which the funds are lent and by whether or not assets can be resold to other buyers.

17. Section 3
Stock Market

18. How does the stock market work?
Stock, or shares in a company, are bought and sold on the stock market.
Stock brokers help individuals and businesses invest their money in the stock market.
Investors can keep track of the stock market by checking their local paper.

19. Benefits of Buying Stock
In addition to selling bonds, corporations can raise money by selling stock shares in that corporation.
The benefits of buying stock include:
Dividends—part of the firm’s profits
Capital gains—selling the stock for more than you paid for it
Checkpoint Answer: Through dividends and capital gains.

20. Types of Stock
Stock may be classified by whether or not it pays dividends.
Income stock—provides investors with income by paying dividends
Growth stock—pays few or no dividends and earnings are reinvested in the company

21. Types of Stock, cont.
Stock is also classified by whether or not the holder has a voice in the company:
Common stock: These holders are voting members of the company.
Preferred stock: These holders are nonvoting members of the company.

22. How Stocks are Traded
You buy stocks on a secondary market known as a stock exchange.
The New York Stock Exchange is the country’s largest.
The Nasdaq is the second largest securities market and the largest electronic market.

23. Measuring Stock Performance
When the stock market rises steadily over a period of time it is known as a bull market.
When the stock market falls or stagnates for a significant period it is a bear market.
The Dow Jones Industrial Average measures stock performance. It represents the average value of a particular set of stocks, and it is reported as a certain number of points.