Chapter1WhyStudyMoney,Banking,andFinancialMarkets?©2013PearsonEducation,Inc.Allrightsreserved.1-2Preview•Toexaminehowfinancialmarketssuchasbond,stockandforeignexchangemarketswork•Toexaminehowfinancialinstitutionssuchasbanks,investmentandinsurancecompanieswork•Toexaminetheroleofmoneyintheeconomy©2013PearsonEducation,Inc.Allrightsreserved.1-3WhyStudyFinancialMarkets?•FinancialmarketsaremarketsinwhichfundsaretransferredfrompeopleandFirmswhohaveanexcessofavailablefundstopeopleandFirmswhohaveaneedoffunds©2013PearsonEducation,Inc.Allrightsreserved.1-4TheBondMarketandInterestRates•Asecurity(financialinstrument)isaclaimontheissuer’sfutureincomeorassets.•Abondisadebtsecuritythatpromisestomakepaymentsperiodicallyforaspecifiedperiodoftime.•Aninterestrateisthecostofborrowingorthepricepaidfortherentaloffunds.©2013PearsonEducation,Inc.Allrightsreserved.1-5Figure1InterestRatesonSelectedBonds,1950–2011Sources:BasedonFederalReserveBulletin;www.federalreserve.gov/releases/H15/data.htm.©2013PearsonEducation,Inc.Allrightsreserved.1-6TheStockMarket•Commonstockrepresentsashareofownershipinacorporation•Ashareofstockisaclaimontheresidualearningsandassetsofthecorporation©2013PearsonEducation,Inc.Allrightsreserved.1-7WhyStudyFinancialInstitutionsandBanking?•FinancialIntermediaries:institutionsthatborrowfundsfrompeoplewhohavesavedandmakeloanstootherpeople:–Banks:acceptdepositsandmakeloans–OtherFinancialInstitutions:insurancecompanies,financecompanies,pensionfunds,mutualfundsandinvestmentcompanies•FinancialInnovation:thedevelopmentofnewfinancialproductsandservices–Canbeanimportantforceforgoodbymakingthefinancialsystemmoreefficient©2013PearsonEducation,Inc.Allrightsreserved.1-8Figure2StockPricesasMeasuredbytheDowJonesIndustrialAverage,1950–2011Source:BasedonDowJonesIndexes:http://nance.yahoo.com/?u.©2013PearsonEducation,Inc.Allrightsreserved.1-9FinancialCrises•Financialcrisesaremajordisruptionsinfinancialmarketsthatarecharacterizedbysharpdeclinesinassetpricesandthef...
