Introduction to Finance

DISCUSSION QUESTION 3
How “eff ective” have the president and Congress been as “policy makers” in passing laws 
and setting fi scal policy for the benefi t of the people during the past few years?
LEARNING ACTIVITY
Go to the Bloomberg Businessweek website, http://www.bloomberg.com/businessweek, 
and identify a major business development relating to the fi nancial environment.
1.5
Financial Markets: Characteristics 
and Types
Financial markets facilitate the raising of fi nancial capital by government entities and business 
fi rms. Government entities can issue or sell debt securities to fi nance the building of roads and 
bridges or to provide added services to the people. Business fi rms can issue debt securities, 
and corporations can sell equity securities or stocks to raise funds to invest in and grow their 
businesses. Financial markets also facilitate the transfer of previously issued debt and equity 
securities from existing to new investors.
Money and Capital Markets
Money markets 
are where debt securities with maturities of one year or less are issued and 
traded. These markets are generally characterized by high liquidity whereby 
money market 
money markets 
where debt 
securities of one year or less are 
issued or traded
People Are the Financial System
The main participant in the fi nancial system is not the large insti-
tution or corporation . . . it’s you and others like you. House-
holds, families, and individuals provide up to 80 percent of the 
savings fl ows in the U.S. economy in any year. There are three 
main sources of savings: personal savings, business savings (that 
is, retained earnings), and government surpluses. Personal savings 
far outweigh the other two sources combined as a source of savings 
fl ows in the United States.
Another way to look at this is to consider this question: 
where do fi nancial institutions get the funds they invest and loan? 
Banks get their funds mainly from individuals’ checking and 
savings accounts and certifi cates of deposit (CDs). Pension funds 
obtain their cash from the savings of working people. Insurance 
fi rms accumulate funds to invest from policyholders’ payments of 
premiums for their life, health, car, and home insurance. Mutual 
funds obtain investable cash by selling their shares to investors 
like you who want to accumulate savings and returns on savings 
to fund a future goal such as retirement, a new car, a house down 
payment, or children’s college expenses.