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Lecture 8

ECON 102 Lecture 8: ECON 102 - Chapter 8 Notes

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ECON 102
Karl Pinno

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Tuesday, October 18, 2016 ECON 102 Chapter 8: Saving, Investment, and The Financial System Financial System: the group of institutions in the economy that help to match one persons savings with another persons investment. Financial Institutions in the Canadian Economy Financial institutions can be grouped into two categories: Financial Markets Financial Intermediaries (e.g. banks) NOTE: The nancial system moves the economys scarce resources from savers (people who spend less than they earn) to borrowers (people who spend more than they earn). Savers supply their money to the nancial system with the expectation that they will get it back with interest at a later date. Borrowers demand money from the nancial system with the knowledge that they will be required to pay it back with interest at a later date. Financial Markets Financial Markets: nancial institutions through which savers can directly provide funds to borrowers. The two most important nancial markets in our economy are the bond market and the stock market. Financial Markets: The Bond Market Bond: a certicate of indebtedness that species the obligation of the borrower to the holder of the bond Debt Finance: the sale of a bond to raise money Characteristics: the bonds term the bonds credit risk NOTE: Put simply, a bond is an IOU. It identies the time at which the loan will be repaid, called the date of maturity, and the rate of interest that will be paid periodically until the loan matures. The buyer of a bond gives his or her money to Intel in exchange for this promise of interest and eventual repayment of the amount borrowed (called the principal). The buyer can hold the bond until maturity or can sell the bond at an earlier date to someone else. 1
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