Download Financial Markets

Financial Markets
NEXT
Chapter 11: Financial Markets
KEY CONCEPT
•
The financial system consists of institutions, such as banks,
insurance markets, bond markets, and stock markets, that help
transfer funds between savers and investors.
WHY THE CONCEPT MATTERS
•
When you open a savings account, you play an important role in our
economy. Your savings will be borrowed and invested by businesses
and the government. The new products created by these investments
help to fuel the nation’s economy.
NEXT
Savings and Investment
The Financial System
KEY CONCEPTS
•
•
•
Savings—income not used for consumption
Investment—use of income now in a way that provides a future
benefit
– economic investment: money lent to businesses
– personal investment: individuals putting savings into financial
assets
Financial system—transfers funds between savers and investors
NEXT
The Financial System
Bringing Savings and Investment Together
•
•
•
People, businesses save funds; receiver issues written confirmation
– confirmation called financial asset, or claim on borrower’s property
Financial market—where buyers and sellers exchange assets
directly
Financial intermediary—collects funds from savers, invests in
financial assets
NEXT
Questions:
Why are savings important to the economy?
What do financial intermediaries do?
What is the difference between personal and economic
investment?
NEXT
Financial Intermediaries
KEY CONCEPTS
•
Includes banks and thrifts (e.g., credit unions)
– also finance companies, e.g. pension funds, life insurance companies
Banks take deposits and make loans to people and businesses.
Thrifts do the same as banks but pay higher interest on deposits and charge
lower interest on loans. Exist to help the member.
NEXT
Financial Intermediaries
Example: Banking Financial Intermediaries
•
•
•
Provide checking, savings, money market deposit accounts, CDs
– depositors earn interest
– federal government insures deposits up to $250,000
Make loans; to make profit charge higher interest than pay depositors
Offer uninsured money market mutual funds, stocks, bonds,
insurance
NEXT
Other Financial Intermediaries
Pensions are payments to retired employees. Sometimes, these require
employee contributions.
Life Insurance Companies make payments to a beneficiary when someone
dies
Mutual fund—pools individuals’ money to buy range of financial assets
–investors own shares of entire fund that a professional manages
NEXT
Financial Asset Markets
KEY CONCEPTS
•
•
•
•
•
Financial markets categorized according to time, resalability
Capital market—for buying and selling long-term financial assets
Money market—for buying and selling short-term financial assets
Primary market—for financial assets that original buyer must redeem
Secondary market—where financial assets are resold
NEXT
Questions
What is the difference between a bank and a credit union?
What is a pension? Who pays for a pension?
Is life insurance a good idea?
How do mutual funds work?
NEXT
Financial Asset Markets
Factor 1: Time
•
•
Capital markets—assets held for over a year
– include stocks, bonds, mortgages, long-term CDs
Money markets—loans made for less than a year
– include short-term CDs, Treasury bills
NEXT
Financial Asset Markets
Factor 2: Resalability
•
•
Primary markets—financial assets can be redeemed only by original
buyer
– include savings bonds, small denomination CDs
– also market where first issue of stock sold through investment
bankers
Secondary markets—resale markets; offer liquidity to investors
– include stocks, bonds
NEXT
Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
•
•
capital market and money market
primary market and secondary market
NEXT
Reviewing Key Concepts
Use each of the three terms below in a sentence that
illustrates the meaning of the term:
•
•
•
investment objective
Return
diversification
NEXT