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Vocabulary for Chapter 12 Economics


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the absence of spending
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
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
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
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
stay with what you know
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
the stated interest on the debt
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
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
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
a person who buys or sells equities for clients
securities exchanges
places where buyers and sellers meet to trade securities
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

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