Quiz 18: Saving, Investment, and the Financial System


Bondholder: Bond holder is a person who buys bond a company or government. Bondholder is a lender and bond issuer is a borrower. Generally, bond holders receive interest and principal amount after maturity. Stockholder: Stockholder is a person who buys share of a company. They receive share of profit of the company. Person N borrowed $5,000 from Person M at 7 percent rate of interest to invest in ice-cream truck. Similarly, Person N borrowed Person D and promised him to give a third of her profit. Thus, Person D is stockholder and Person M is a bondholder. Hence, the option 'd' is correct.

Financial system is a network of financial institutions, borrowers and lenders who come together to lend and borrow funds at a certain exchange rate. The role of financial systems is to help match one person's saving with another person's investment. The two markets that are part of the financial system are the bond market and stock market. Bond market: It is the market through which large corporations, the federal government, or state and local governments borrow. Stock market: It is the market through which corporations sells ownership shares. The two financial intermediaries are banks, which take in deposits and use the deposits to make loans, and mutual funds, which sell shares to the public and use the proceeds to buy a portfolio of financial assets.

Private and public saving: In an economy, government collects more tax revenue and spends very less. Since the government spends less than its revenue, the public saving would be positive. At the same time, households of the country consume more than their disposable income; hence, this leads to a negative private saving. Thus, the option 'd ' is correct.