Chapter 30 - The basics of finance. After studying this chapter you will be able to understand: How to define financial markets and the market for loanable funds? What factors affect supply and demand for loanable funds? What differences exist between debt, equity, and their associated assets?. | Chapter 30 The Basics of Finance © 2014 by McGraw-Hill Education 1 What will you learn in this chapter? • How to define financial markets and the market for loanable funds. • What factors affect supply and demand for loanable funds. • What differences exist between debt, equity, and their associated assets. • What the main institutions are in financial markets. • What the risk-return trade-off is in financial assets. • Why savings equals investment in a closed economy. © 2014 by McGraw-Hill Education 2 The role of financial markets • A financial market is a market in which people trade future claims on funds or goods. • These “claims” can take many different forms. – When you get a loan, the bank gives you money now in return for repayment in the future. – Buying a company stock today gives you a right to a share of profits in the future. – When you purchase insurance, you pay premiums now in return for the right to submit a claim for compensation in the future. © 2014 by McGraw-Hill Education 3 1 The role of financial markets • People with spare funds don’t always have the most valuable way to spend them. • Financial markets allow funding to flow to the places where it is most highly valued. • A well-functioning market matches buyers and sellers, who can both gain from trade. – Buyers want to spend funds on something valuable now. – Sellers let others borrow funds for a price. © 2014 by McGraw-Hill Education 4 A whirlwind history of banks • Current financial markets are extremely complicated. • The origins of financial markets are not as complicated. • At the fundamental level, financial markets start with a bank, savers, and borrowers. – Savers earn more now than they need to spend. – Borrowers need to spend more now than they earn. © 2014 by McGraw-Hill Education 5 A whirlwind history of banks • Banks serve many useful functions. • They acts as an intermediary between savers and borrowers. • Banks make cash more readily accessible when and where you
