ECON 102 Chapter Notes - Chapter 10: Efficient-Market Hypothesis, Financial Intermediary, Life Insurance

• School: U of M
• Department: Economics
• Course: ECON 102
• Professor: Adam Stevenson

Document Summary

Financial asset: paper claim that entitles a buyer to future income from the seller: stocks, bonds, bank deposits. Investment: the purchase of a physical or financial asset. Problems with loanable funds market: transaction costs: the costs of making deals, money, legal documents, time, certifications. Solution: bonds limit transaction costs: this will be explained in detail later, risk, people are risk a(cid:448)erse a(cid:374)d do(cid:374)"t like to take a (cid:272)ha(cid:374)(cid:272)e that they"ll lose, stock is more risky than bonds. Loans: tailored to needs of borrowers, high transaction costs. Bonds: low transaction costs, legally obligated to be paid back the fixed amount of initial plus interest for each year, default if not paid back, easy to resell. Loaned back securities: pool loans, sell shares in the loans. Stocks: selling shares of a company reduces the risk for a business owner. If the business does well you do too. An institution that transfers funds gathered from individuals into financial assets: mutual funds.