Introduction to Finance: Markets, Investments, and Financial Management, Fourteenth Edition

Part 1. INSTITUTIONS AND MARKETS

INTRODUCTION

Ask someone what he or she thinks "finance" is about. You'll probably get a variety of responses: "It deals with money." "It is what my bank does." "The New York Stock Exchange has something to do with it." "It's how businesses and people get the money they need—you know, borrowing and stuff like that." And they'll all be correct!

Finance is a broad field. It involves national and international systems of banking and financing business. It also deals with the process you go through to get a car loan and what a business does when planning for its future needs.

It is important to understand that while the U.S. financial system is quite complex, it generally operates very efficiently. However, on occasion imbalances can result in economic, real estate, and stock market "bubbles," which when burst cause havoc on the workings of the financial system. The decade of the 2000s began with the bursting of the "tech" or technology bubble and the "dot.com" bubble. Then in mid-2006, the real estate bubble in the form of excessive housing prices burst. This was followed by the peaking of stock prices in 2007 followed by a steep decline that continued into early 2009. Economic activity began slowing in 2007 and progressed into an economic recession beginning in mid-2008, which was accompanied by double-digit unemployment rates. The result was the 2007–09 financial crisis that produced the most financial distress on the U.S. financial system since the ...