ECO 304L Chapter 13: Chapter 13 Notes

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University of Texas at Austin
ECO 304L
M O S T A S H A R I, S H A L A H

Chapter 13: Saving, Investment, and the Financial System Financial Markets: Financial institutions through which savers can directly provide funds to borrowers Bond Market Bond: A certificate of indebtedness Term: Length of time until bond matures Credit Risk: Probability that the borrower will fail to pay some of the interest or principal Tax Treatment: The way tax laws treat interest earned on a bond Municipal Bonds: Bonds issued by state and local governments in which bond owners are not required to pay federal income tax on the interest income Junk Bonds: Bonds of financially shaky corporations which pay very high interest rates Default: Failure to pay some of interest or principal Perpetuity: Bond that never matures Date of Maturity: The time at which a loan will be repaid Principal: Repayment of amount borrowed Stock Market Stock: A claim to partial ownership in a firm Price Dividend PriceEarnings Ratio Equity Finance: The sale of stock to raise money Debt Finance: The sale of bonds Stock Index: An average of a group of stock prices Financial Intermediaries: Financial institutions through which savers can indirectly provide funds to borrowers Banks Mutual Funds Mutual Fund: An institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds Allows people with small amounts of money to diversify their holdings Closed Economy: Economy that does not interact with other economies Open Economies: Economies that interact with other economies around the world National Saving: The total income in the economy that remains after paying for consumption and government purchases Y C G = I S = I Private Saving The income that households have left after paying for taxes and consumption Y T C Public Saving: The tax revenue that the government has left after paying for its spending
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