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Financial Markets. Saving and Capital Formation. Saving money makes economic growth possible One’s person savings can represent another person’s loan Savings make investments possible. Financial Assets and the Financial System. Consist of a network, including Savers Investors

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Saving and capital formation
Saving and Capital Formation

  • Saving money makes economic growth possible

  • One’s person savings can represent another person’s loan

  • Savings make investments possible


Financial assets and the financial system
Financial Assets and the Financial System

  • Consist of a network, including

    • Savers

    • Investors

    • Financial institutions

    • Work together to Transfer savings to investors


Financial assets and the financial system1
Financial Assets and the Financial System

  • Financial assets

    • Claims on the property and the income of the borrower

    • Open a Savings accounts

    • Certificates of deposits

    • Government bonds

    • Corporate bonds


Financial assets and the financial system2
Financial Assets and the Financial System

  • Financial Intermediaries

    • Financial institutions that bring together savers and lenders

      • Commercial banks

      • Savings and loan Asso.

      • Savings bank

      • Mutual savings banks

      • Credit unions

      • Life insurance companies

      • Mutual funds

      • Pension Funds

      • Real Estate Investment Trust

      • Finance Companies


Circular flow of funds shows how funds are transferred from savers to borrowers
Circular flow of funds: shows how funds are transferred from savers to borrowers

  • Any part of the economy can supply and borrow savings

  • Largest Borrowers = Government and businesses


Nonbank financial intermediaries
Nonbank Financial Intermediaries from savers to borrowers

  • Non-depository institutions that channel savings to borrowers

    • Finance companies

    • Life Insurance

    • Mutual Funds

    • Pension Funds

    • Real Estate Investment Trust



Basic investment considerations
Basic Investment Considerations from savers to borrowers

  • Risk: a situation in which the outcome is not certain but can be estimated

    • Higher risk = higher rate of return

    • Low risk = lower rate of return


Basic investment considerations1
Basic Investment Considerations from savers to borrowers

  • Investments depends on goals of the investor

    • Consistent investment can yield large returns

    • Avoid complex investments

  • 401K Plan: tax deferred investment plan that acts as a personal pension fund for employees


Basic Investment Considerations from savers to borrowers


Bonds as financial assets
Bonds as Financial Assets from savers to borrowers

  • Three main components

    • The Coupon: stated interest on debt

    • The Maturity: life of the bond

    • The par value: principal or the total amount initially borrowed that must be repaid at maturity

  • Prices are determined by supply and demand

  • Yield = annual interest rate divided by the purchase price


Bond ratings
Bond Ratings from savers to borrowers

  • Rated on

    • the financial health of the investor

    • The ability to make future coupon

    • Principal payments

    • Issuer’s past credit history

  • Range from D (lowest) to AAA (highest)

  • Default = the issuer has not kept up with the interest of the par value payments


Financial assets and their characteristics
Financial Assets and Their Characteristics from savers to borrowers

  • Most common form of investment = Certificates of deposit

  • Corporate Bonds

    • Issued by corporations

    • Usually used for long term investment

  • Municipal bonds

    • Issued by the state and local gov’t

    • Safe, tax exempt investment


Financial assets and their characteristics1
Financial Assets and Their Characteristics from savers to borrowers

  • Savings bonds

    • Low-denomination, non-transferable

    • Issued by federal gov’t

    • Virtually no risk

  • Treasury and Bonds

    • Long-term obligations

    • Issued by fed gov’t

    • Safest of all financial assets


Financial assets and their characteristics2
Financial Assets and Their Characteristics from savers to borrowers

  • Treasury Bills

    • Short-term obligations

    • Issued by federal gov’t

  • Individual Retirement Accounts (IRA’s)

    • Long-term

    • Tax sheltered time deposits

    • Intended for retirement


Markets for financial assets
Markets for Financial Assets from savers to borrowers

  • Capital markets: money is loaned for more than one year

  • Money Markets: money is loaned for more less one year

  • Primary Markets: only the original issuer can repurchase or redeem a financial asset

  • Secondary Markets: financial assets can be resold to new owners


Markets for financial assets1
Markets for Financial Assets from savers to borrowers



Market efficiency
Market Efficiency from savers to borrowers

  • Efficient Market Hypothesis (EMH)

    • Argument that stocks are always priced about right and that bargains are hard to find

    • It is not possible to “beat the market” regularly

    • Investors should diversify their portfolios

    • Or enlist the assistance of a stock broker


Organized stock exchanges
Organized Stock Exchanges from savers to borrowers

  • New York Stock Exchange (NYSE)

    • List share of 2,800 large companies

    • 1,400 seats or memberships

  • American Stock Exchange (AMEX)

    • List shares of 750 companies

  • Regional Stock Exchanges

    • list shares too small or to new to be listed on NYSE or AMEX

  • Global Stock Exchange

    • Include stock exchanges around the world


Over the counter markets otc
Over the Counter Markets (OTC) from savers to borrowers

  • Electronic Marketplace for securities not traded on an organized exchange

    • I.E. National Association of Securities Dealers Automated Quotation (NASDAQ)

    • List information on companies traded on (OTC)


Measure of stock performance
Measure of Stock Performance from savers to borrowers

  • Dow-Jones Industrial Average (DJIA)

    • Index made up of 30 stocks

    • Most popular and widely publicized measure of stock market performance on the NYSE

  • Standard & Poor’s 500

    • Index made up of 500 representative stocks

  • Bull Market: prices are rising

  • Bear Market: prices are falling


Trading in the future
Trading in the Future from savers to borrowers

  • Spot Market

    • “Spot” meaning immediate

    • Transactions are made at the prevailing price

    • Futures contract

    • Futures market


Trading in the future1
Trading in the Future from savers to borrowers

  • Option Market

    • Put and Call options are bought and sold

    • Call option

      • Gives the owner the right to buy at a specific price in the future

    • Put option

      • Gives the owner the right to sell at a specific price in the future


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