Chapter 1

• A security or financial instrument is a claim on the issuer's future income or assets.
• A bond is a debt security that promises to make payments periodically for a specified period of time.
• An interest rate is the cost of borrowing or the price paid for rental funds.
• Common stock represents a share of ownership in a corporation.
• A share of stock is a claim on the residual earnings and assets of the corporation.
• Financial intermediaries are institutions that borrow funds from people who have saved and in turn, make loans to people who need funds.
• Banks accept deposits and make loans
• Other financial institutions: insurance companies, finance companies, pension funds, mutual funds, and investment companies.
• Financial innovation is the development of new financial products and services.
• Financial crises is a mojor disruption in financial markets that are characterized by sharp declines.
• Monetary policy is the management od the money supply and interest rates.
• Fiscal policy deals with government spending and taxation.
• Foreign exchange market is where funds are converted from one currency into another.
• Foreign exchange rate is the price of one currency in terms of another currency.
• Three measures of the aggregate price level that are commonly encountered in economic data:

  • The GDP deflator
  • The PCE deflator
  • The Consumer Price Index (CPI)