Saving, Investment And The Financial System

Question 1

Financial markets

Answer 1

Financial institutions through which savers can directly provide funds to borrowers

Question 2

Bond

Answer 2

A certificate of indebtedness

Question 3

Stock (or share or equity)

Answer 3

A claim to partial ownership in a firm

Question 4

Characteristics of bonds

Answer 4

1) their term– length of time the bond matures
2) it’s credit risk– probability that the borrower will fail to pay some of the interest or principal = default
3) yield

Question 5

Financial intermediaries

Answer 5

Financial institutions through which savers can indirectly provide funds to borrowers

Question 6

Examples of financial intermediaries

Answer 6

Banks and investment funds

Question 7

Investment funds

Answer 7

An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds

Question 8

Advantages of investment funds

Answer 8

1) they allow people with small amounts of money to diversify
2) give ordinary people access to the skills of professional money managers

Question 9

Credit default swap (CDS)

Answer 9

A means by which a bond holder can insure against the risk of default

Question 10

Sub prime market

Answer 10

Individuals not traditionally seen as being part of the financial markets because of their high credit risk

–problems for CDOs began when holders of subprime mortgages began to default on payments

Question 11

What is a financial system

Answer 11

The group of institutions in the economy that help to match one person’s saving with another person’s investment