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Chapter 29

The Financial System

Book Version 3
By Boundless
Boundless Economics
Economics
by Boundless
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Section 1
Introducing the Financial System
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Institutions, Markets, and Intermediaries

A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities.

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Role in Matching Savings and Investment Spending

Savings are income after-consumption and investment is what is facilitated by saving.

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Role in Providing a Market for Loanable Funds

The loanable funds market is a conceptual market where savers (suppliers) and borrowers (demanders) are able to establish a market clearing.

Section 2
Tools of Finance
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Present Value and the Time Value of Money

The time value of money is the principle that a certain amount of money today has a different buying power (value) than in the future.

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Measuring and Managing Risk

Risk is pervasive in the economy and is an essential component in the derivation of an asset's investment return.

The Value of Diversification

The compensation adjustment for holding an asset of a given risk profile can be further enhanced through asset diversification.

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The Relationship Between Risk and Return and the Security Market Line

The security market line is useful to determine if an asset being considered for a portfolio offers a reasonable expected return for risk.

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