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Chapter 1

ECO2115 Chapter 1: Why Study Money, Banking, and Financial Markets

Course Code
ECO 2115
Lilia Karnizova

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ECO 2115 ― Chapter 1: Why Study Money, Banking, and Financial Markets?
Why Study Financial Markets?
Financial Markets: channel funds from those who do not have a productive use for them to
those that do
It directly affects our lives, businesses, and economy
To learn about bond markets, interest rates, and stock markets
The Bond Market and Interest Rates
A security (or a financial instrument) is a claim on the issuer’s future income or assets
A bond is a debt security that promises to make payments periodically for a specified period
of time
An interest rate is the cost of borrowing or the price paid for the rental of funds
Usually expressed as a percent
4% interest on $100 means you must repay $104 when due
Interest Rates on Selected Bonds:
The Stock Market
A stock is a share of ownership in a corporation
Gives claim to the corporation’s earnings and assets
A stock market is where stocks are bought and sold
The value of stocks reflects the current value of a company, and expectations of future
earnings growth
Big swings in share price are often major news stories
Stock Prices:
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ECO 2115 ― Chapter 1: Why Study Money, Banking, and Financial Markets?
Why Study Financial Institutions and Banking?
They play a crucial role in the economy
Banks and other financial institutions are what make financial markets work
In short: they are the entities that move funds from people who save to people who have
productive investment opportunities
Financial Intermediaries
Institutions that borrow funds from people who have saved and then make loans to people
who need funds
Banks: Borrow funds by accepting deposits
chartered banks, trust and mortgage loan companies, and credit unions and caisses
Other Financial Institutions: insurance companies, finance companies, pension funds, mutual
funds and investment banks
Financial Innovation
Innovation in financial markets is the development of new financial products and services
As with innovation in any sector, it is an important force for good by making the
financial system more efficient
E-Finance: Delivering financial services electronically
Creative thinking by financial institutions can improve efficiency, increase profits, but can also
sometimes result in financial disasters
Financial Crises
Financial crises: major disruptions in financial markets
sharp declines in asset prices and the failures of many financial and nonfinancial firms
Are a feature of economies throughout history
Typically followed by severe business cycle downturns
August 2007, the U.S. experienced a serious crisis
Defaults in subprime residential mortgages
Major losses in financial institutions, with many failing
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