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ECON 105 (113)
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Chapter 8-13

ECON 105 - Principles of Macroeconomics, 4th Canadian Edition - Chapters 8-13

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Simon Fraser University
ECON 105
Junjie Liu

Chapter 8Saving Investment and the Financial System financial systeminstitutions in the economy that help to match one persons saving with another persons investmentsavings and investment for economic growthcountrys saved large portion of GDPmore resources available for investment in capitalhigher capitalhigher country productivity and living standardFinancial Institutions in the Canadian Economy financial system moves scarce resources from savers people who spend less than they earn to borrowers people who spend more than they earnsaverssave to put child through postsecondary school or retire o supply money and expect to get interest back laterborrowersborrow to buy house or start a business o borrow money and required to pay interest laterFinancial Markets financial marketsinstitutions through which savers can directly provide funds to borrowersThe Bond Marketo bonda certificate of indebtednessspecifies the obligations of the borrower to the holder of the bond IOUidentifies date of maturity when the loan will be repaidrate of interest paid periodically until loan maturesbuyer of bond gives money to company in exchange for interest and repayment of principal money borrowedbuyer can hold the bond until maturity or sell it o large corporations federal government provincial governments issues bonds o two important characteristicstermthe length of time until bond maturescan be short few months or long 30 yearsperpetuitybond that never matures interest paid forever principal never repaidlong term bonds pay more because holder needs to wait longer for repayment of principal they risk having to sell the bond earlier at reduced price if holder needs the moneycredit riskprobability borrower will fail to pay the interest or principaldefaultfailure to payborrowers can default their loans by declaring bankruptcyif probability is high buyers demand higher interest rate affected by the level of debt carried by issuer of bond recent changes in the amount of debt carried and stability of issuers revenue o provincial governments that issue bonds have greater credit risk than federal government because of less diverse economy therefore tax revenues are more volatile sudden fall in tax revenuedifficulty paying debts o interest paid on provincial bonds are higher and varies by province o corporate bonds pay higher rates because revenues are even more volatilejunk bondsfinancially shaky corporations raise money by paying higher interest rates The Stock Marketo stockpartial ownership in a firm a claim to profits o equity financesale of stock to raise moneyowner of stock becomes part owner of corporationshareholders benefit from profitshigher risk and potentially higher return o debt financesale of bondsowner of bond becomes creditor of corporationbondholders only get interest paid from bondsbondholders get paid first if corporation runs into financial difficulty o after corporation issues stock and sell shares to public shares trade on organized stock exchanges corporation receives no money when stock changes handsNew York Stock Exchange American Stock Exchange NASDAQToronto Stock Exchange TSX and TSX Venture Exchange junior o the prices at which shares trade on stock exchanges are determined by supply and demand for stock demand for stock price reflects peoples perception of the corporations future profitabilityo stock indexcomputed as an average of a group of stock prices to monitor overall level of stock pricesDow Jones Industrial AverageSPTSX Composite Indexover 200 major firms listed on TSXstock indexes watched closely as indicators of future economic conditions Newspapers Stock Tableso priceprice of share is the most important information o volumenumber of shares sold during the past day of trading o dividend profits paid out to shareholders by corporations o retained earningsprofits not paid out and used for additional investment o dividend yielddividend expressed as a percentage of the stocks price o priceearnings ratio PEcorporations earningsamount of revenue minus cost of productionearnings per sharetotal earnings divided by number of shares of stockPEprice of stock divided by amount earned per sharetypical ratio is 15
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