Chapter 13 - The financial markets. After reading the material in this chapter, you should be able to: Discuss the demand and supply curves for loans and list some factors affecting interest rates, explain the role of a financial intermediary and discuss how banks work, describe the risk-return principle and explain how it applies to the stock market,. | Chapter 13 The Financial Markets McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Discuss the demand and supply curves for loans and list some factors affecting interest rates. Explain the role of a financial intermediary and discuss how banks work. Describe the risk-return principle and explain how it applies to the stock market. Review the benefits of the diversity of financial intermediaries. Summarize the key causes of the financial crisis. 13- Market for Loans Some definitions in the lending market: The lender gives the borrower a sum of money called the principal. The price of the loan is the interest rate, which defines how much the borrower has to pay the lender in exchange for the use of the money. The length of the loan is called its term. 13- Reasons for Borrowing Households borrow to finance purchases of goods such as cars and homes. A business typically needs to borrow to fund the expansion of the business. Ability to borrow is important for growth in the economy. Without borrowing, fewer goods would be sold and less investment would be made by businesses. 13- Demand Curve for Loans The amount of borrowing by households, businesses, and state and local governments depends on interest rates. Federal government borrowing is not sensitive to interest rates. In general, the willingness to borrow will fall as the interest rate rises. This is the law of demand for loans. The demand curve is downward-sloping. 13- How High Interest Rates Discourage Borrowing Low-rate scenario Medium-rate scenario High-rate scenario Purchase cost of land $1,000,000 $1,000,000 $1,000,000 Construction cost $2,000,000 $2,000,000 $2,000,000 Total loans needed $3,000,000 $3,000,000 $3,000,000 Interest rate on loan 1% 5% 10% Interest cost $30,000 $150,000 $300,000 Total cost $3,030,000 $3,150,000 $3,300,000 Revenues from selling homes $3,200,000 $3,200,000 $3,200,000 Profits $170,000 $50,000 -$100,000 . | Chapter 13 The Financial Markets McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives Discuss the demand and supply curves for loans and list some factors affecting interest rates. Explain the role of a financial intermediary and discuss how banks work. Describe the risk-return principle and explain how it applies to the stock market. Review the benefits of the diversity of financial intermediaries. Summarize the key causes of the financial crisis. 13- Market for Loans Some definitions in the lending market: The lender gives the borrower a sum of money called the principal. The price of the loan is the interest rate, which defines how much the borrower has to pay the lender in exchange for the use of the money. The length of the loan is called its term. 13- Reasons for Borrowing Households borrow to finance purchases of goods such as cars and homes. A business typically needs to borrow to fund the expansion of the .
