Economics Chapter 9

Leverage ratio

The ratio of debt to equity , D/E

Market for loanable funds

Occurs when suppliers of loanable funds (savers) trade with demanders of loanable funds (borrowers). Trading in the market for loanable funds determines the equilibrium interest rate.

Stock

Or share is a certificate of ownership in a corporation.

Collateral

Something of value that by agreement becomes the property of the lender if borrower defaults.

Financial Intermeries

Such as banks, bond markets, and stock markets reduce the costs of moving savings from savers to borrowers and investors.

Arbitrage

The buying and selling of equally risky assets, ensures that equally risky assets earn equal returns.

Crowding Out

The decrease in private consumption and investment that occurs when government borrows more.

Initial Public Offering (IPO)

The first time a corporation sells stock to the public in order to raise capital.

Bond

A sophisticated IOU that documents who owes how much and when payment must be made.

Insolvent

An insolvent firm has liabilities that exceed its assets.

Saving

Is Income that is not spent on consumption goods.

Time preference

Is the desire to have goods and services sooner rather than later (all else being equal)

Investment

Is the purchase of new capital goods.

Owner equity

Is the value of the asset minus the debt, E = V- D