Introduction to Finance

LO 8.6
Describe default risk and default risk premiums and discuss how these premiums 
are observed and measured.
W H E R E W E H A V E B E E N . . .
In Chapter 7 you learned about the savings and investment process as it takes place in the 
United States. The gross domestic product (GDP) and capital formation were discussed. GDP 
is composed of personal consumption expenditures, government purchases, gross private 
domestic investment, and the net export of goods and services. The historical role of savings 
and how fi nancial assets and liabilities are created was covered. You should now also have a 
basic understanding of the federal government’s source of receipts and where expenditures 
are allocated. You should also understand the major sources of savings, how the major fi nan-
cial institutions direct funds from savings into investment, and factors that aff ect savings.
W H E R E W E A R E G O I N G . . .
Chapter 9 focuses on the time value of money. By saving and investing, money can “grow” 
over time through the compounding of interest. We fi rst cover simple interest and then turn 
to compounding of current investments (determining future values) and discounting of future 
cash receipts (fi nding present values). You will also be introduced to annuities, which are 
investments that involve constant periodic payments or receipts of cash. Chapter 10 focuses 
on the characteristics and valuations of bonds and stocks. In Chapter 11 you will learn about 
the characteristics and operation of primary and secondary securities markets. Part 2 concludes 

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8.1 Supply and Demand for Loanable Funds
191
with Chapter 12, which focuses on helping you learn and understand concepts relating to 
fi nancial returns and risks associated with investing in stocks and bonds.