S av i n g ,

I nve s t m e n t
and
Financial
System
Saving income not spent, or deferred consumption

distribute money in the expectation of

some benefit in the future; purchase of
Investment new capital

the group of institutions in the economy

Financial that help to match one person’s saving
with another person’s investment
System
 Saving

Investment

Financial
System
Financial Markets financial institutions through which
savers can directly provide funds to borrowers

Stock
Foreign market
exchan Bond
-ge market
market
Insura-
nce
Financial Commo
-dity
market Market market

Future Money
market Derivat market
-ives
market
The Bond Market
The

Bond

Market
The A bond

Bond Certificate of
indebtedness
Date of maturity

Market
The obligations of
The time at which the
borrower to the holder of
loan will be paid
the bond
3 Characteristics of a Bond
Term Credit risk Tax treatment

The probability that the The way the tax laws

The length of time until borrower will fail to pay treat the interest earned
the bond matures some of the interest or on the bond
Short, long, perpetuity principal: default
Municipal bond
The longer the term, the The higher the default,
higher the interest rate the higher the interest

Junk bond
The Stock Market

 Definition
Characteristic of Stock
The Stock Market

All of the shares that represents ownership in a firm.

Stock
A claim to the profits that the firm makes.
 A part owner of a firm.

Stock-holders enjoy the benefits

of profits.
Stock
Stock-holders receive the rest
after a firm pay for
bondholders.

Offer higher risk,potentially

higher return
Similarities Between Bonds And Stocks
Bonds and preferred stocks are sensitive to changes in
interest rate.

Both derivatives offer no voting rights in the firm.

Both are types of investment which can earn you

money.

Both are both securities and may be traded on the

public exchange.

Both securities provide very limited range for capital

appreciation because they have a set payment.
Stock Bond
A claim to partial A certificate of
ownership in a firm indebtedness

A part owner A creditor

Enjoy the benefits of Get only the interest on

these profits their bonds
Be paid after the Be paid what they are
bondholders when due when the company
the company runs runs into financial
into financial difficulty
difficulty
Offer both higher risk Offer both lower risk
and potentially higher and return
return
Financial
Intermediaries

Definition

Financial Intermediaries
Financial intermediaries financial institutions through
which savers can indirectly provide funds to borrowers

Intermediary: reflects the role of

these institutions in standing
between savers and borrowers

Include Banks and Mutual Funds

 • Take in deposits
Primary from savers
job • Make loans to
borrowers

Banks Second
• Create a special
asset that people
important can use as a
role medium of
exchange
Banks
 Banks Deposit Loan
interest interest
rate (%) rate (%)

Interest rate
Vietcombank 6,5 7,2 -> 8

Techcombank 6,5 7,49

Agribank

Viettinbank
6,8

6,8
6 -> 9

7 -> 9
of banks in
BIDV

Sacombank
6,9

6,9
7

7,49 -> 8,5

12/2018
Dong A Bank 7,2 9

TP Bank 7,4 8,6

SCB 7,5 6,5

 The chart shows both the Deposit and Loan Interest Rate in
Vietnam from 2000 to 2017
16

14

12
Interest rate

10
Deposit interest rate

8 Loan interest rate

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year
Some important identities

GDP
Y = C + I + G + NX

CLOSED ECONOMIC

Y=C+I+G

Y–C–G=I

S=I
Some important identities
We have: (Y – C – G = I) is the total income in the economy that remains after
paying for consumption and government purchase = national saving

S=Y–C–G
Or
S = (Y – T – C) + (T – G)
(Y – T – C): Private saving (the income that households have left after
paying for taxs and comsuption)
(T – G): Public saving (the tax revenue that the government has left after
paying for its spending)

As a result, a national saving equals private saving plus public saving

Snation = Sprivate + Spublic
The Market for Loanable Funds the market in which
those who want to save supply funds and those who want to borrow to
invest demand funds
Supply and Demand
for Loanable Funds
Saving is the source of the supply of loanable funds
Investment is the source of the
demand for loanable funds
 The figure shows the interest rate that balances the supply
and demand for loanable funds

Interest Supply
rate If IR < EL then QS < QD
=> Shortage of loanable funds
5%
If IR > EL then QS > QD
=> Surplus of loanable funds
Demand

$1,200 Loanable Funds

Note: The interest rate will be the real (in billions of dollars)
interest rate from here to the rest of the
chapter
Policy 1: Saving Incentives
1.Tax incentives for
Interest Supply, S1 saving increase the
S2
rate supply of loanable
funds…

Tax law encourages

5%
greater saving
4%
2….which
reduces the
=> lower interest rates
equilibrium Demand and greater investment
interest rate…

$1,200 $1,600 Loanable Funds

3….and raises the (in billions of dollards)
equilibrium quantity of
loanable funds.
Policy 2: Investment Incentives
1.An investment
Supply tax credit increases
Interest the demand for
rate loanable funds…

2…which 6% Tax law encourages

raises the greater investment
equilibrium 5%
interest
rate…
D2 => higher interest rates
Demand D1 and greater saving

$1,200 $1,400 Loanable Funds

3… and raises the (in billions of dollards)
equilibrium quantity of
loanable funds.
Summary The financial system is made up of many types of financial
institutions. All of these institutions act to direct the resources
from the households that want to save to the households that
want to borrow.
In a closed economy, national saving must equal investment
Snation = Sprivate + Spublic

The interest rate is determined by the supply and demand for

loanable funds. Saving is the source of supply and investment
is the source of demand.
Please enter name and your code here

ok
 Super Mario
power point edition
1. Credit risk refers to a bond’s

a. Probability of default
b. Price-earnings ratio
c. Dividend
d. Tax treatment
e. Term to maturity
2. A financial intermediary is a middleperson
between
a. Buyer and seller
b. Husband and wife
c. Borrowers and lenders
d. Labour unions and firms
Game over

reset
3. Investment is

a. The purchase of goods and services

b. The purchase of capital equipment and structures
c. When we place our saving in tha bank
d. The purchase of stock and bond
Generating world
4. If Vietnamese citizens become less
concenrned with the future and save less
at every each real interest rate,

a. IR will fall and I falls

b. IR will fall and I rises
c. IR will rise and I falls
d. IR will rise and I rises
Game over

reset
5. If GDP = €1,000, consumption = €600,
taxes = €100, government purchases =
€200, how much is saving and investment?

a. saving = €300, investment = €300

b. saving = €200, investment = €100
c. saving = €100, investment = €200
d. saving = €0, investment = €0
e. saving = €200, investment = €200
 Give your
brief Why when the IR < EL would lead to the
shortage of loanable fund? When the IR >
explaination EL would lead to the surplus?
Generating world
 Indicate
whether the
When a business firm sells a bond, it has
sentence or 
obtained equity finance.
statement is
true or false.  In a closed economy, saving is what remains
after consumption expenditures and
Give your brief government purchases.
explanation.
Generating route
 Indicate
whether the
sentence or
statement is  Price of bonds are positively associated with
true or false. the interest rate.

Give your brief

explanation.
Game complete!!