Money and Banking

CHAPTER 3

Interest Rates and Financial Markets

Financial Markets

Financial instruments are traded in financial markets. The instruments are of two types. Equity instruments represent ownership in businesses, and are most often traded on organized stock exchanges. Debt instruments, or bonds, represent the borrowing of one economic agent from another. Organized exchanges where these instruments are traded are called bond markets.

Financial markets are critical for economic growth. The reason is that financial markets facilitate capital formation. Capital formation is important because the use of capital goods generally enhances human productivity. Hence, the availability and widespread use of capital goods is one of the prominent characteristics ...