Wednesday

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run
Chapter 26 of 36 Saving, Investment, and the Financial System
Section 3 of 25
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In the broadest sense, the financial system
· moves limited resources of the economy
· from lender-savers, people who spend less than they earn
· to borrower-spenders, people who spend more than they earn
Savers save for various reasons, including put a child through college or for retirement.
Borrowers borrow for various reasons, including buy a house or start a business.
Savers supply their money to the financial system expecting later they will get it back with interest.
Borrowers demand money from the financial system knowing they will later be required to pay it back with interest.
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The financial system consists of various financial institutions that coordinate money flow between savers and borrowers.
Financial institutions are grouped into two categories:
1 · financial markets, direct finance, including the bond market and the stock market
2 · financial intermediaries, indirect finance: including banks and mutual funds
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1 - Financial markets
· are the institutions through which a person who wants to save
· can directly supply funds to a person who wants to borrow
The two most important financial markets are
A · the bond market
B · the stock market
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A . The bond market.
When Intel Corporation wants to borrow to finance construction of a new factory it can borrow directly from the public rather than from a bank.
It does this by selling bonds.
A bond is a certificate of indebtedness, an IOU, it specifies:
· the day when the loan amount, the principal, will be repaid, this is called the maturity date
· the rate of interest paid periodically until the loan maturity date
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For example, buyers of a bond
· loan their money to Intel
· in exchange for the promise from Intel
· of periodic interest payments
· and repayment of the amount borrowed on the maturity date
The bond buyer can either hold the bond until maturity or sell the bond to someone else prior to maturity.
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Millions of bonds are sold and bought in the U.S. economy.
When corporations, the federal government, or state and local governments need to borrow to finance purchase of a new factory, a new jet fighter, or a new school they usually do so by selling bonds.
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What happens if a company that has borrowed by selling bonds goes bankrupt and doesn’t pay back the principal?
Grok:
When a company that has issued bonds goes bankrupt and fails to repay the principal, the bondholders enter the bankruptcy process where a court oversees the distribution of the company's remaining assets according to a strict priority order.
>Secured bondholders – are those who when buying a bond agree to receive a lower interest rate payment for the right for first claim on specific assets pledged as collateral if the bond-selling company goes bankrupt<
Secured bondholders typically recover the most, while unsecured corporate bondholders (the majority) rank as general creditors and historically recover around 40-60% on average — through asset sales, cash settlements, new bonds, or equity in a restructured company under Chapter 11 reorganization.
The process can take months or years, with legal fees reducing recoveries.
Outcomes vary widely by case.
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lenders and borrowers in the bond market
saiken ichiba ni kashite to karite
債券市場に貸し手と借り手