Chapter 26

Chapter 26 shifts from big monetary concepts such as GDP and CPI, to discussing the financial system. A group of institutions makes up the financial system, in which they match savings with investments. These institutions can be divided into financial markets and financial intermediaries. Financial markets provide a way for savers and investors to give money to borrowers. These financial markets can further be divided into bond and stock markets. A bond is a type of investment in which a person loans money to a company that will be paid back over time with interest. The safest of these bonds are government bonds as they are virtually guaranteed to be paid back in full. The two important factors when considering purchasing bonds is the term, or length of time until the bond is fully matured, and the credit risk, which is the chance that the borrower will not be able to pay in full. The other financial market are stocks. Stocks are an investment in a company that means the buyer has part ownership in that company. When a bond is sold, it is called equity finance, however when a bond is sold its called debt finance. A stock index is the average of a group of stock prices. Financial intermediaries are institutions that  savers use to indirectly give money to borrowers. This position that financial intermediaries holds reflects the fact that they are called intermediaries. Finally, a mutual fund is an investment in which the money invested is dispersed among a multitude of companies through stock and bonds.