6. Saving, Investment and the Financial System Flashcards
What is the financial system
it consists of the group of institutions in the economy that help to match one person’s savings with another person’s investment
what does the financial system acheive
it moves the economy’s scarce resources from SAVERS to BORROWERS
Two categories of financial institutions + examples of each
Financial markets: share market and the bond market.
Financial intermediaries: banks, managed funds.
how do bonds work?
consumers give money to businesses and at the end of the bond term they pay them back - interest is paid on it.
what is the term when you sell shares to raise money?
equity financing, the share purchaser own a part of the company
what is the term when you trade bonds?
debt financing, you just lend money
what are junk bonds?
bonds offered by start-up companies that usually disappear after short amount of time
what is the credit risk of a bond?
The probability that the borrower will fail to pay some of the interest or principal
which of bonds and shares have higher risk and higher returns?
Shares offer the higher risk (when a company goes bankrupt, the bank claims first, then the bond holders then shareholders)
they also offer the largest potential return (% of profit)
Why are financial intermediaries important? (one reason covered)
small businesses like grocers can only raise money by borrowing from a bank. Only large companies can use bonds/shares
What is a medium of exchange provided by the bank?
Cheques. They are items that people can easily use to engage in transactions.
stores and bonds are __________ just like a bank
stores of value for people
alternative name for managed funds?
mutual fund
How do managed funds work?
Managed funds sells shares to the public and then use the proceeds to buy a portfolio of various types of stocks and bonds or both. They charge commission.
how do financial systems help
they facilitate long term economic growth, increasing GDP and increasing the quality of life for all