Chapter 1: Why Study Money, Banking, and Financial Markets?
WHY STUDY FINANCIAL MARKETS?
x Financial Markets
o Markets in which funds are transferred from people who have excess of available funds to
people who have a shortage.
o Crucial to promoting greater economic efficiency by channelling funds from people who do not
have a productive use for them to those who do.
o When functioning well, it serves as a key factor in producing high economic growth.
o Poorly performing financial markets are one reason that many countries in the world remain
o Activities in financial markets also have direct effects on personal wealth, the behaviour of
businesses and consumers, and the cyclical performance of the economy.
o i.e. bond and stock markets
The Bond Market and Interest Rates
o Also known as a financial instrument.
o Any financial claim or piece of property that is subject to ownership.
o A debt security that promises to make payments periodically for a specified period of time.
x Bond Market
o Especially important to economic activity because it enables corporations and governments to
borrow to finance their activities.
o Where interest rates are determined.
x Interest Rates
o The cost of borrowing.
o The price paid for the rental of funds (usually expressed as a percentage of the rental of $100
o i.e. mortgage interest rates, car loan rates, and interest rates on many different types of bonds
o Have an impact on the overall health of the economy because they affect v}}voÇ}vµu[
Could deter you from buying a house because the cost of financing it would be high.
Could encourage you to save because you can earn more interest income by putting
aside some of your earnings as savings.
May cause a corporation to postpone building a new plant that would ensure more jobs.
x }v}u](µvoÇoµu]v}PZv(}^Z_]vuse they have
a tendency to move in unison.
x Interest rates on several types of bonds can differ substantially.
o The interest rate on three-u}vZµÇ]ooY
Fluctuates more than the other interest rates.
Is lower on average.
o The interest rate on long-teu}}}vY
Is higher on average than the other interest rates.
The spread between it and the other rates fluctuates over time.
The Stock Market
x Common Stock
o Typically just called a stock.
o Represents a share of ownership in a corporation.
o A security that is a claim on the earnings and assets of the corporation.
o Issuing and selling it to the public is a way for corporations to raise funds to finance their
x Stock Market
o Where shares of stock are traded.
o The most widely followed financial ul]vou}ÀÇ}µvÇZZ}v~Z[ÁZÇ]]
o A place where people get richvand poorvquickly.
o Is also an important factor in business investment decisions because the price of shares affects
the amount of funds that can be raised by selling newly issued stock to finance investment
A higher price for a firm[Zoo}ÁZ(]u}]oPu}µv}((µvZ
can be used to buy production facilities and equipment.
x Stock Prices
o Are extremely volatile.