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Saving, Investment, and the financial system (Financial system: the group…

- - - - Bond: a certificate of indebtedness that specifies obligations of borrower to the holder of the bond
        
        Characteristics
        
        Bond's term --- the length of time until bonds mature
        
        Short-term
        
        Lower risk & lower return
        
        Long-term
        
        Higher risk & higher return
        
        Credit's risk --- the probability of borrower will fail to pay interest rate or principal
        
        Higher default (the risk) bonds, pay higher interest rate
        
        Junk bonds --- the bonds that pay very high interest rate issued by shaky firms
        
        Tax treatment: the way the tax laws treat the interest rate earned on the bond
        
        Municipal bonds the bonds that do not need to pay tax
        
        The bonds that taxable usually pay higher interest rate
        
        Debt financing: The sale of bonds to raise money
    - - Stock: a claim of partial ownership in a firm
        
        Differences between bond and stock
        
        Stocks provide higher risk and higher return
        
        Stock holder is a part owner of the firm. Bonds holder is a creditor of the firm
        
        Equity financing: the sale of stocks to raise money
        
        Stock price reflects expected profits
  - - - Primary job: to take in deposits from people who want to save& use them to make loans to people who want to borrow.