Financial Markets: Chapter 10
Financial Markets: Chapter 10 PSY110
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This 2 page Class Notes was uploaded by Alyssa Rothfeld on Thursday February 26, 2015. The Class Notes belongs to PSY110 at University of Miami taught by Professor Gillis in Spring2015. Since its upload, it has received 74 views. For similar materials see Psychology in Psychlogy at University of Miami.
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Date Created: 02/26/15
Chapter 10 Financial Markets and Securities 1 How do financial markets help the economy 2 What are the key financial tools for the macroeconomy Financial Intermediaries firms that help channel funds from savers to borrowers eg banks Banks private firms that accept deposits and extend loans 0 Why are they important 0 Center of financial markets 0 Help connect borrowers demanders with savers suppliers Indirect Finance 0 occurs when savers deposit funds into banks and banks then loan these to borrowers 0 banks pay lower interest rates to savers than they charge borrowers Direct Finance 0 firms sell a security stock or bond directly to the public in exchange for funds 0 security pays future income andor gives part ownership of the firm Borrowing Direct 0 Stocks company issued ownership shares in the firm shareholders have some influence in the operations of the firm if a shareholder owns more than 50 of the shares they control more than 50 of the ownership votes firms can sell shares to others and move fonNard without the burden of debt from having to pay back a bond in the future 0 Bonds company and government issued used by large established firms when they need an infusion of money securities are issued and sold to the public funds generated are used for investment a bond is a formal IOU a contract specifying who owes how much and a date for payment Information on every bond name of borrower repayment date maturity date amount due at repayment face value 0 Maturity Date Interest Rate Formulas Bond buyers savers look for the highest interest rates want the highest return on their money want to pay the lowest possible price at inception Bond sellers lenders try to sell bonds at the lowest interest rate possible want to sell the bonds at an inception price that is very close to the face value Interest Rate Face ValuePrice at nception Two Bond Price Principles 1 The dollar price of a bond determines its interest rate and vice versa 2 The dollar price and interest rate of a bond move opposite one another inverse relationship Default Risk the risk that the borrower will not pay off the bond the greater the risk of default 0 two possible outcomes for the bond borrow pays maturity value of the bond to the lender borrower defaults on the loan lender gets 0 back Bond Ratings 0 there are rating agencies 0 purpose evaluate the default risk of all borrowing entities and give a grade showing the likelihood of defaulting difficult for a typical bond holder to assess the risk of any one company bondholders look to rating agencies for information Secondary Markets where securities are traded after their first sale analogous to used car markets often sold to investors through a broker enables firms to sell bonds at higher prices lower interest rates since demanded for assets increases when they can be resold stock markets fall in this category NYSE NASDAQ Two Special Debt Instruments 0 Treasury Securities US gov borrows by selling treasury securities an auction determines the interest rate generally considered less risky than other bonds since no one expects US to default plays central role in monetary policy 0 Home Mortgage Loan market expanded leading up to the 2008 recession
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