1. Ch. 11
Financial Markets

2. Saving and Investing
Ch. 11.1

3. 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

4. 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

5. 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

6. Bonds and Other Financial Assets
11.2

7. 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

8. 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,
Yield-annual rate of return

9. 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.

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

11. 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

12. 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

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