Chp 26

Chapter 26 is the beginning of a Unit 9 which is about the Real economy in the long run.  Chapter 26 is specifically about savings, investments, and the financial system. The financial system is a group of institutions in the economy that help to match one persons savings with another person's investment. Savings and investments are key ingredients to the long run economic growth: When a country saves a large portion of its GDP, more resources are available for investment in capital and higher capital raises a country's productivity and living standard. The financial system can be broken into two categories, Financial markets and financial intermediaries. Financial markets  are the institutions through which savers can directly provide funds to borrowers. The two most important financial markets in the economy are the bond markets and the stock markets. A bond is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. It specifies the time at which the loan will be repaid, which is called the date of maturity, and the rate of interest that will be paid periodically until the loan matures. The principal is the promise of interest and eventual repayment of the amount borrowed. A buyer can hold the bond until maturity or sell it at an earlier date to someone else. Three characteristics to a bond: term (length of time until the bond matures, a bond that never matures is called a perpetuity which pays interest forever and principal is never paid), Credit risk The probability that the borrower will fail to pay some of the interest or principal (failure to pay= default) (junk bonds=high interest rates  bc corporations are financially riskayyy, and tax treatment the way the tax laws treat the interest earned on the bond.