•Investment: redirecting resources that you would consume now for the future. 

•Financial Assets: Claims on property and income of the borrower 

•Financial Intermediaries: An institution that channels funds from savers to borrowers.

•Three purposes for Financial Intermediaries 

-Share risk (diversification is the number one way risk is shared) which means spreading out your investment to reduce risk. 

-Providing information

- Liquidity: easily converted to cash 

      -(Returns: it is the money an investor receives above and beyond the sum of money that was initially invested)

     -*Higher the risk, higher the investment* 

•Bonds: are loans or IOUs that represent death that 

-generally low risk investments

•3 components

    1) coupon rate: it is the interest rate that a bond issuer will pay to a bond holder. 

    2) Maturity: time at which payment to a bond holder is due. 

    3) Par Value: the amount that an investor pays to purchase a bond and that will be repaid to an investor at maturity. 

•Yield: the annual rate of return on a bond if the bond were held to maturity. 

•The difference between bonds and stocks are bonds you loan and stocks you own. 

•Time value of money 

•Is a dollar today worth more than a dollar tomorrow? 

    -YES 

•Why? 

     -Opportunity cost and inflation 

     -this is the reason for charging and paying interest.

Let V= future value of money 

      P= present value of money 

      R= real interest rate( nominal rate- inflation rate)  expressed as a decimal 

      N= years

       K= number of times interest is credited per year 

• The simple interest formula 

   - v= (1+r)^n •p 

•The compound interest formula

    - v = (1+ r/k)^nk•p

•Monetary Equation of Exchange 

•MV= PQ

-M= money supply (m1 or m2) 

-V= moneys velocity (m1 or m2) 

-P= price level (PL on the AS/AD diagram) 

-Q= real GDP (sometimes labeled y on the AS/AD diagram)