ECO 212 Chapter Notes - Chapter 10: United States Treasury Security, Interest Rate, Credit Risk
15 Nov 2016
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Indirect financing: occurs when savers deposit funds into banks and banks then loan these to borrowers, banks pay lower interest rates to savers than they charge borrowers. Direct finance: firms sell a security (stock or bond) directly to the public for funds, security pays future income and/or gives part ownership of the firm. Financial tools that facilitate exchange between savers and borrowers: bonds. Very attractive to be stolen does not have your name on it anyone can deposit. Used by large/ established firms when they need an infusion of money. Bond is essentially an iou specifies who owes the money, how much, and the date of payment. Face value/ par value amount set at the inception of the bond for repayment. The dollar price of a bond determines its interest rate and vice versa. The dollar price and interest rate of a bond move opposite one another.
