Saving

The absence of spending; makes economic growth possible.

Savings

The money that becomes available when people quit consuming; makes investments possible.

Circular Flow of Funds

Shows how funds are transferred from savers to borrowers; governments and business are the largest borrowers.

Non-Bank Financial Intermediaries

Non-deposit institutions that channel savings to borrowers.

Financial System

A network of savers, investors, and banks that work to transfer savings to investors.

Financial Company

Makes loans directly to the consumer OR buys installment contracts from merchants who sell on credit; like expensive items; often charge very high interest rates.

Financial Assets

Claims on property and the income of the borrower; property that has value.

Life Insurance

Provides protection (money) for the survivors of the insured. Pay a premium for the policy.

Financial Intermediaries

Institutions that lend the money that savers provided to the borrowers; brings savers and borrowers together.

Mutual Funds

Company that sells its own stock and takes the money and invests it in other stocks/bonds from other companies.

Pension Fund

Fund set up to collect money and distribute the payments (pension) to those who are eligible.

Real Estate Investment Trust (REIT)

Loan money to construction companies that build homes.

Risk-Return Relationship

The higher the risk the high the potential return on investment

401(k)

Payroll deductions are invested in mutual funds and the employer will match. Pay taxes upon withdraw.

Bonds

A long-term obligation by the government or a corporation to pay a fixed amount of interest every year for a specified number of years.

What are the 3 parts of a bond?

Coupon, maturity, and par value

Coupon

States the interest on a bond

Maturity

States the life on a bond

Par Value

Staes the principle or total borrowed on a bond

Current Yield

Annua intrest/purchase price

Bond ratings

A way to classify the quality of the bond.

Certificate of Deposit (CD)

Low risk/low return

Corporate Bond

Bonds issued by corporations

Junk Bond

High risk corporate bonds (BB)

Municipal Bond

Issued by state and local government to finance highways, buildings, parks, libraries. Most are tax exempt.

Government Savings Bonds

Buy a $50 bond, get $2,000 in 15 years.

Treasury Notes

2-10 years and bonds 10-30 years until maturity.

Treasury Bills

13,26,52 weeks maturity

Individual Retirement Accounts (IRA)

Long term deposit for retirement

Traditional IRA

After tax contributions and pay taxes when you withdraw.

Roth IRA

After tax contributions you do not pay taxes when you withdraw.

Capital Market

Market where money is loaned for more than a year

Money Market

A market where the money is loaned for less than a year

Primary Market

A market where only the original issuer can repurchase or redeem a financial assets.

Secondary Market

A market where existing financial asses can be sold to new owners.

Equities

Stock that represent ownership shares in corporations.

Efficient Market Hypothesis (EMH)

The argument that stocks are priced correctly.

Portfolio Diversification

Acquire a large number of different stocks

Stockbroker

A person who buys and sells equities for clients.

Securities Exchange

A place where buyer/seller come together to buy/trade securities

NYSE

Oldest, located on wall street, lists stocks for 2,800 companies.

AMEX

In new york and has 750 listed stocks

Regional Stock Exchange

Located in smaller cities across the United States

Global Stock Exchange

Around the world

Over-the-Counter Markets

Electronic market place for securities not traded on an organized exchange

NASDAQ

Worlds largest electronic stock market with over 80 countries and list 400 companies.

Dow Jones Industrial Average

Measure the performance of the NYSE (30 large companies)

Standard and Poor's 500 (S&P 500)

Measure the performance of 500 companies on the NYSE, AMEX, and OTC.

Bull Market

Strong market, prices increased over a period of time.

Bear Market

Weak market, prices decreased over a period of time.

Spot Market

A transaction is made immediately at the prevailing price.

Futures Market

Future contracts are bought/sold at a specified date and price.

Option Market

Like a future market except you can back out of the agreement.

Call Option

Right to buy in the future

Put Option

Right to sell in the future