Vocabulary for Chapter 12 Economics
Terms
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- saving
- the absence of spending
- savings
- the dollars that become available when people abstain from consumption
- financial system
- a network of savers, investors, and financial institutions that work together to transfer savings to investors
- certificate of deposit
-
a receipt showing that an investor has made an interest-
bearing loan to a bank - financial assets
- claims on the property and the income of the borrower
- financial intermediaries
-
financial intermediaries- financial institutions that lend the funds that savers provide to borrowers
ex: depository institutions, life insurance companies, pension funds, and other institutions that channel savings from savers to borrowers - the circular flow
- savers can provide their funds directly through the many financial intermediaries in the economy such as banks and credit unions. The borrowers then generate the financial assets, which return to the lender
- nonbank financial institutions
-
nondepository institutions that channel savings to borrowers
ex: finance companies, life insurance companies, pension funds, and real estate investment trusts - finance company
- a firm that specializes in making loans directly to consumers and in buying installment contracts from merchants who sell goods on credit
- bill consolidation loans
- a loan consumers use to pay off other bills
- premium
- the price the insured pays to this policy and is usually paid monthly, quarterly, or annually for the length of the protection
- mutual fund
- a company that sells stock in itself to individual investors and then invests the money it receives in stocks and bonds issued by other corporations
- net asset value (NAV)
- the net value of the mutual fund divided by the number of shares issued by the mutual fund
- pension
- a regular payment intended to provide income security to someone who has worked a number of years, reached a certain age, or suffered a certain kind of injury
- pension fund
- a fund set up to collect income and disburse payments to those eligible for retirement, old age, or disability benefits
- real estate investment trust (REIT)
- a company organized primarily to make loans to construction companies that build homes
- risk
- a situation in which the outcome is not certain, but probabilities for each possible outcome can be estimated
- the risk-return relationship
- the relationship between risk and return
- investment objectives
- the reason for investing
- simplicity
- stay with what you know
- consistency
- invest consistently over long periods of time
- 401(k) Plans
- a tax-deferred investment and savings plan that acts as a personal pension fund for employees
- bond components
- three main components: the coupon, the maturity, and the par value
- coupon
- the stated interest on the debt
- maturity
- the life of the bond
- par value
- the principal or the total amount initially borrowed that must be repaid to the lender at maturity
- current yield
- the annual interest divided by the purchase price
- bond ratings
- AAA: the highest investment grade, to D: stands for default- hasn’t been up kept
- municipal bonds (munis)
- bonds issued by state and local governments
- tax-exempt
- the federal government does not tax the interest paid to investors
- savings bonds
- low denomination, nontransferable bonds issued by the United States government- usually through payroll-savings plans
- treasury notes
- United States government obligations with maturities of two to 10 years
- treasury bond
- United States government obligations with maturities ranging from more than 10 to as many as 30 years
- treasury bills (T-bill)
- a short-term obligation with a maturity of 13, 26, or 52 weeks and a minimum denomination of $1,000
- individual retirement accounts (IRA’s)
- long-term, tax-sheltered time deposits that an employee can set up as part of a retirement plan
- Roth IRA
- an IRA whose contributions are made after taxes so that no taxes are taken out at maturity
- capital market
- a market where money is loaned for more than one year
- money market
- a market where money is loaned for periods of less than one year
- primary market
- a market where only the original issuer can repurchase or redeem a financial asset
- secondary market
- a market in which existing financial assets can be resold to new owners
- equities
- stocks that represent ownership shares in corporations
- efficient market hypothesis (EMH)
- the argument that stocks are always priced about right and that bargains are hard to find because they are followed closely by so many investors
- portfolio diversification
- the practice of holding a large number of different stocks so that increases in some can offset unexpected declines in others
- stockbroker
- a person who buys or sells equities for clients
- securities exchanges
- places where buyers and sellers meet to trade securities
- seats
- memberships
- over-the-counter market (OTC)
- an electronic marketplace for securities that are not traded on an organized exchange
- Dow-Jones Industrial Average (DJIA)
- statistical series of 30 representative stocks used to monitor price changes on the New York Stock Exchange
- Standard & Poor’s 500 (S&P 500)
- statistical series of 500 stocks used to monitor prices on the NYSE, and OTC market
- bull market
- a “strong†market with the prices moving up for several months or years in a row
- bear market
- a “mean†market with the prices of equities moving sharply down for several months or years in a row
- spot market
- a market in which a transaction is made immediately at the prevailing price
- futures markets
- the marketplaces in which futures contracts, or “futures,†are bought and sold
- put option
- the right to sell a share of stock at a specified price in the future
- options markets
- the markets in which options are traded