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Chapter 8.docx

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ECN 204
Christos Shiamptanis

Chapter 8 Saving Investment and the Financial SystemFinancial systeminstitutions in ecn match one persons savings w another persons investmentLongrun ecn growthsave GDPmore resources for investment in capitalhigher capital raises countrys productivity and living stds Financial Institutions in the Canadian Economy Financial system moves the ecn scarce resources from savers spendingearning to borrowers spendingearningsaverssupplywith expectation will get it back w interest borrowersdemandwith knowledge will pay it back with interest Financial Marketsfinancial marketssavers can directly provide funds to borrowersThe Bond Market o bondcertificate of indebtedness specifies obligations of borrower to the holder of the bonddate of maturitytime repaid and rate of interest paid periodicallyprincipleamt borrowed1 termlength of time until the bond matures perpetuitybond pays interest forever but principle is never repaidlongterm bonds are riskier bc wait longer for repayment holder of long term bond needsearlier sell bond at reduced priceand pay higher interest rate 2 credit riskprobability borrower will fail to pay some of the interest or principledefaultprobability of default high demand a higher interest rate to compensateprovincial ecn tax rev more volatilefall in tax rev increase interest paid corp bonds pay higher rates of interestjunk bondshigher interest rates than bonds by more secure corp and govtThe Stock Market o stockownership in firm claim to profits that firm makeshigher risk higher returndemand for a stock its price reflect ppls perception of the corp future profitabilityoptimisticraise demandincrease price stock indexaverage of a group of stock pricesindicate future ecn conditionso equity financesale of stock to raise moneyo debt financesale of bonds o bondholdersget interest on bondsfinancial difficultybondholders paid what due b4 stockholders receive anything at all
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