Chapter 1 & 2 Flashcards
are crucial to a healthy economy.
Well-functioning financial markets and financial intermediaries
Financial markets
1) Channel funds from savers to spenders which… 2) promotes the efficient allocation of capital which…3) contributes to higher production and greater efficiency.
Borrowers sell securities (stock or bond) directly to savers in the financial market. A security is a liability (debt) for the seller and an asset for the buyer.
Direct Finance
The financial intermediary borrows funds from saver and makes loans to borrowers. As a result, financial intermediaries incur risk.
Indirect Finance
new issues of a security are sold to initial buyers
Primary market
where previously issued securities are traded
Secondary market
a)Make securities more liquid; liquidity– how easily and quickly an asset can be converted to cash without losing significant value.
b)It’s where price is determined for securities sold in the primary market.
Secondary market
where longer-term debt instruments (maturity of 1 year or greater) and equity instruments are traded
Capital market
where only short-term debt instruments (maturity less than 1year) are traded
Money market
U.S. Treasury Bills–used to finance the federal government, most liquid of the money market instruments, low risk of default, no interest payments but are sold at a discount (price below par or face value)
Money Market Instruments
has declined before almost every recession
Monetary growth