Chapter 1: Why Study Money, Banking and Financial Markets?
Financial Markets – markets in which funds are transferred from people who have an excess of available
funds to people who have a shortage
- ex. Bond and stock markets; these are crucial to promoting greater economic efficiency
Security (financial instrument) – claim on the issuer’s future income or assets
Bond – debt security that promises to make payments periodically for a specified period of time
Interest Rate – cost of borrowing or the price paid for the rental of funds
- ex. Mortgage rates, car loan rates, interest on bonds
The interest rate on 3 month T-bills fluctuate more than other interest rates and is lower on average.
The interest rate on Long Term corporate bonds is higher on average than the other interest rates, and
the spread between it and the other rates fluctuates over time.
Common Stock – represents a share of ownership in a corporate; a security that is a claim on the
earnings and assets of the corporation
The financial system is complex, comprising many types of private sector financial institutions, including
banks, insurance companies, mutual funds, finance companies, and investment banks, all of which are
heavily regulated by the government.
Financial Intermediaries – institutions that borrow funds from people who have saved and in turn make
loans to others
Financial Crises – major disruptions in financial markets that are characterized by sharp declines in asset
prices and failures of many financial and nonfinancial