ECON 102 Chapter Notes - Chapter 8: Dow Jones Industrial Average, Loanable Funds, Financial System

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Financial system: the group of institutions in the economy that help to match one person"s savings with another person"s investment. This chapter examines how the financial system works. Financial institutions can be grouped into two categories: Financial markets: financial institutions through which savers can directly provide funds to borrowers. Bond: a certificate of indebtedness that specifies the obligation of the borrower to the holder of the bond. Debt finance: the sale of a bond to raise money. Stock: represents ownership in a firm and is, therefore, a claim to its profits. Equity finance: the sale of a stock to raise money. The prices at which shares trade on stock exchanges are determined by the supply and demand for the stock. Stock index: is an average of a group of stock prices. Because stock prices reflect expected profitability, stock indexes are watched closely as possible indicators of future economic conditions.

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