Financial markets can be defined as institutions which allow an individual to save their assets by directly supplying financing to a business or person who needs to borrow funds. Mankiw (2015) affirms that stock markets and bond markets are the most significant financial markets in the economy.
Bond Market
Bond markets are the eminent type of financial market; through which members are facilitated with the issuance and trading opportunities in the field of bonds as well as debt securities. Phenomenally, bonds are specific certificates which assert the indebtedness and highlight the commitments of the borrower to the owner of subject bond certificate; and therefore bond becomes an IOU (Investor-owned utility). (Mankiw, 2015) A bond market primarily consists of government as well as corporate-debt securities and assists in the process of transmission and allocation of assets from issuers or establishments to investors. Such financing facilities, in turn, fulfill the demands of assets for ongoing business operations, business development and expansion and governmental plans.
Stock Market
The stock market is also known as equity market; through stock market public limited corporations and business issue and trade their common and preferred shares. Such issuance and trade take place either through exchanges or counter market. Shares are the instruments which represent ownership of owner in a corporation and therefore, the shareholder establishes a claim to the net profits of a corporation. Stock market plays a most significant role in the development of the free-market economy as it provides companies with admittance to assets through the exchange of partial proprietorship to the shareholder.
FINANCIAL INTERMEDIARIES AND THEIR FUNCTION IN THE ECONOMY
Financial intermediaries are widely known as the basic financial institutions which implicitly offer financings and business funds to different lenders. Such institutions serve as a third party between contractual procedures of investors and borrowers, therefore, called intermediaries. Mutual funds and banks are two most crucial institutions in this regard; however, no one can deny the imperativeness of insurance companies and pension funds as well. Financial institutions are vital to an economy as they connect the different economic agents with excessive funds and looking forward to lending to those with a lack of financing and seeking borrowings. Through this systematic process, indirect finances carry out the requirements of borrowers and lenders by offering beneficial saving and investing prospects.
FEDERAL GOVERNMENT BUDGET DEFICIT AND THE NATIONAL DEBT AND EFFECT OF BUDGET DEFICIT ON THE ECONOMY
Budget deficits take place when the spending surpluses the received revenues for a financial year. Such phenomenon is widely known as deficit spending. On the other hand, the national deficit can be defined as the accumulated deficit for each year. The effect of budget deficit on a country’s economic prosperity is theoretically explicated by employing the impact of the deficit on the circulation of money into a particular economy. Palpably, the more that government’s expenses surpass the income the more money will flow throughout the economy which in turn paves the way for augmented employment and increase overall productivity. (McCandles, 1991)
CONSUMERS AND RISK-AVERSION
According to study; consumers that do not have a tendency to cope with uncertainties are known as risk-averse. Such consumers do not have tolerance for risk because they want to evade the possible perilous outcomes. Take the instance of a situation in which a consumer could spend 10 dollars for a ticket lottery that features a probability to win 1000 dollars. However, if the consumer is extra cautious and would rather not let go his 10 dollars considering the possibility of not winning the lottery. Risk-averse consumers can manage the hazards with the help of some specific strategies; which include the purchasing of different insurances as they offer peace of mind to the consumers and assure indemnity in case of any predetermined harm. Another approach that used in this regard is the scaffolding of a greater risk in multiple, relatively smaller and unconnected risks. The subject technique asserts the need of not putting all the eggs in one basket. Another method is the diversification that could be attained through buying stocks and instruments of different corporations instead of investing all the assets in a single entity or project.
A DOLLAR RECEIVED TODAY IS WORTH MORE THAN A DOLLAR RECEIVED TOMORROW
The implication of the articulation that states, “A dollar received today is worth more than a dollar received tomorrow” suggests that interest that earned throughout one day is worth more than a dollar received tomorrow. Consequently, the interest makes one dollar more valuable in present.
PRESENT VALUE AND THE FUTURE VALUE OF MONEY AND SIGNIFICANCE OF THESE CONCEPTS TO ECONOMICS
Future value of money is implied to measure the worth of one or more than one cash flows at the end of a predetermined financial period. On the other hand present value of money estimates the underlying worth of one or more than one cash flows that are subject to be received in future will be worth at present; this measurement is denoted as t=0. These concepts carry a considerable imperativeness in economic because time is money in literary terms. Affirmatively, the money value one has today will not be the same in coming or far future. Determining time value of money through calculating future and the present value of money can give a distinct comparison among the values of different investments which yield returns at different times.
DEPOSITED $1,000 IN AN ACCOUNT PAYING 6% INTEREST COMPOUNDED ANNUALLY, HOW LONG WOULD IT TAKE TO DOUBLE?
In the above-mentioned case, it would take about seventeen years to have doubled the balance. The calculation is given below where P stands for Principal, T= time, A= new balance and r= determines the interest rate.
SUMMARY OF IMPORTANT POINTS
- Financial institutions provide an opportunity to develop a direct supply of funds between lenders and borrowers.
- Bond markets and stock markets are the most prominent and important financial markets.
- Financial intermediaries are third parties who establish an indirect trading and issuance of funds between lenders and borrowers.
- Banks and mutual funds are the important financial intermediaries in an economic system.
- Government debts are also called national debts.
- Several of consumers are risk-averse because they do not like the possible perils and risk involved in an action.
- Through the concept of time value of money a dollar today worth more than a dollar yesterday because of investment implications and interests.
- The present value (PV) of a future sum of money is an amount of money in the present that would be required through prevailing rate of interest to create a provided future amount.
- The future value (FV) of a present sum of money can be defined as the amount in future that a sum of money at present will produce through prevailing interest rates
References
McCandless, G. T., & Wallace, N. (2008). Introduction To Dynamic Macroeconomic Theory: An
Overlapping Generations Approach. Cambridge, MA: Harvard University Press.
Mankiw, N. G. (2016). Macroeconomics. New York, NY: Worth Publ.
Impact of fiscal deficit on the economy. (2017, April 10).
https://www.projectguru.in/publications/fiscal-deficit-impact-in-an-economy/
Matters, B. N. (2014, August 03). The present value most important concept in finance.
http://helenair.com/business/present-value-most-important-concept-in-
finance/article_c72970e4-1a96-11e4-95f8-001a4bcf887a.html
