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 ________ and the firm that sells the bond is the ________. 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).

\boxed{\text{Present\ Value} =\ \frac{\ Future\ Value}{\ (1 + i)^n} }

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 ________
If the interest rate increases, the price of the bond ________.

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 ________ 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

If the interest rate is currently 7%, the present value of $500 to be received in 4 years is:

A) $381.45

B) $640

C) $140.22

D) $570.44

$PV\ =\ \frac{Future\ Value}{\left(1+i\right)^n}\$

$\frac{500}{1.07^4}=381.45$

In general, if interest rates rise, this will be:

A) Good for people buying bonds and good for firms selling bonds

B) Bad for people buying bonds and bad for firms selling bonds

C) Good for people buying bonds and bad for firms selling bonds

D) Bad for people buying bonds and good for firms selling bonds

I don't know