ECON-E 202 Lecture Notes - Lecture 16: Loanable Funds, Financial System, Autarky
Module 6
Loanable Funds
Watch crisis of credit visualized video at coc.com
● Types of Financing Markets
○ Financial Systems recessions caused by financial crisis are deeper and longer
● Finance
○ Obtaining funds
■ Reinvest own profits
■ Borrow from Banks
■ Add partners
○ Source of Borrowing
■ Indirect financing-flow from savers to borrowers through intermediaries
(banks)
■ Direct Financing- flow through financial markets i.e stock exchanges
○ WHy is wall street important to the economy?
■ It redistributes financial capital from lenders to borrowers
○ Financial system- system of financial markets and intermediaries that firms get
funds from
○ Markets- where financial securities (stocks and toms) are bought
○ If interest rates goes up what will happen to bond prices?
■ They will fall. They have an inverse relationship
● BOND MARKET
○ Bond- certificate of indebtedness that obligates the borrower (seller of bond
who is BORROWING the money from the person) to pay back holder of bond
■ Backed by companies assets
○ Maturing- what happens at the end of a bonds term
○ Credit Risk- probability bond fails, the higher the risk the higher the interest rate
○ Tax treatment- how tax laws treat interest on bonds
■ Municipal bonds- federally tax exempt, issued by cities
Document Summary
Watch crisis of credit visualized video at coc. com. Financial systems recessions caused by financial crisis are deeper and longer. Indirect financing-flow from savers to borrowers through intermediaries (banks) Direct financing- flow through financial markets i. e stock exchanges. It redistributes financial capital from lenders to borrowers. Financial system- system of financial markets and intermediaries that firms get funds from. Markets- where financial securities (stocks and toms) are bought. Bond- certificate of indebtedness that obligates the borrower (seller of bond who is borrowing the money from the person) to pay back holder of bond. Maturing- what happens at the end of a bonds term. Credit risk- probability bond fails, the higher the risk the higher the interest rate. Tax treatment- how tax laws treat interest on bonds. Municipal bonds- federally tax exempt, issued by cities. Bonds are a source of external funds. Coupon payments- the payment of interest on a bond. Demand is down, price goes down but interest rate rises!
