Econ 2035 Notes
ECON 2035
8/27/13
Overview of Financial System * Financial market players: 1. Households 2. Firms, which issue stocks and bonds 3. Governments 4. Foreigners * Financial market- a place or channel for buying stocks, bonds, and other securities 1. Functions of financial markets: a. You have the money b. You can borrow from friends, banks, etc. c. Get funds in exchange of partnership d. Transferring funds:
Savers and spenders
(send) (borrow)
Financial markets * Direct finance: borrowers borrow funds from lenders in the financial market by selling them securities (no intermediaries) 1. Securities Financial instruments
a. Stocks b. Bonds c. Money d. Foreign exchange e. Securitized loans 2. Selling security Liability 3. Securities Buying individuals Assets Selling individuals Liability * Promoting economic efficiency * Increasing well-being of consumers
Structure of Financial Markets * Debt and Equity Market 1. Issue a debt instrument Bond or mortgage a. Bond- contract between lender and borrower; there are fixed payments; there is a maturity date and an interest rate. b. Bonds are issued by firms and governments to get funds. c. Maturity date- the number of years until the instrument reaches its expiration date d. Maturity date < 1 year = short-term e. Maturity date > 10 years = long-term f. Maturity date is between 1 and 10 years = intermediate term 2. Issue Equities a. Equity- common stock and assets of a business b. Periodic payments (dividends) c. Ex. Stock is a claim to share in the net income and assets of a corporation. A stock represents partial ownership. * Firm Issuing bonds Debt finance Issuing stocks Equity finance * Household Buys a bond
8/27/13
Overview of Financial System * Financial market players: 1. Households 2. Firms, which issue stocks and bonds 3. Governments 4. Foreigners * Financial market- a place or channel for buying stocks, bonds, and other securities 1. Functions of financial markets: a. You have the money b. You can borrow from friends, banks, etc. c. Get funds in exchange of partnership d. Transferring funds:
Savers and spenders
(send) (borrow)
Financial markets * Direct finance: borrowers borrow funds from lenders in the financial market by selling them securities (no intermediaries) 1. Securities Financial instruments
a. Stocks b. Bonds c. Money d. Foreign exchange e. Securitized loans 2. Selling security Liability 3. Securities Buying individuals Assets Selling individuals Liability * Promoting economic efficiency * Increasing well-being of consumers
Structure of Financial Markets * Debt and Equity Market 1. Issue a debt instrument Bond or mortgage a. Bond- contract between lender and borrower; there are fixed payments; there is a maturity date and an interest rate. b. Bonds are issued by firms and governments to get funds. c. Maturity date- the number of years until the instrument reaches its expiration date d. Maturity date < 1 year = short-term e. Maturity date > 10 years = long-term f. Maturity date is between 1 and 10 years = intermediate term 2. Issue Equities a. Equity- common stock and assets of a business b. Periodic payments (dividends) c. Ex. Stock is a claim to share in the net income and assets of a corporation. A stock represents partial ownership. * Firm Issuing bonds Debt finance Issuing stocks Equity finance * Household Buys a bond