Financial System

Financial System

• Financial System - group of institutions that match people's savings and investments together.

• Financial Intermediary- a financial institution through which savers can provide funds to borrowers. Example: Commercial banks like Citibank

• Bond - this is a loan or debt for a company or the government The person that buys the bond is the

  lender

  ---

  and the firm that sells the bond is the

  borrower

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  . Example: If you buy $1000 bond from Apple Inc. that means you are lending Apple $1000 and they will pay you coupons (which are like interest payments).

• Example: If you have bought a bond that will pay you $1050 next year and the current market interest rate is 7%, then the present value (price) of this bond today is

  1050/1.07^1 = $981.31

  ---

• If the interest rate increases, the price of the bond

  decreases

  ---

  .

• Stocks - represent equity, shares or ownership in a company. Example: If you buy $1000 of stocks in Apple Inc that means you are buying equity or ownership in the company. Stocks are generally

  more

  ---

  risky compared to bonds.
• Mutual Fund - an institution that sells shares to the public and uses the money to buy a portfolio of stocks and bonds

Example: Present Value