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Why Study Mon Banking, and Berar Cle canes aie federal funds rate by 5 of a percentage point. What effect might this have on the interest rate of an automobile loan when you finance your purchase of a sleek new sports car? Does it mean that a house will be more or less affordable in the future? Will it make it easier or harder for you to get a job next year? This book provides answers to these and other questions by examining how finan- cial markets (such as those for bonds, stocks, and foreign exchange) and financial insti- tutions (banks, insurance companies, mutual funds, and other institutions) work and by exploring the role of money in the economy. Financial markets and institutions not only affect your everyday life but also involve flows of trillions of dollars of funds throughout our economy, which in turn affect business profits, the production of goods and services, and even the economic well-being of countries other than the United States. What happens to financial markets, financial institutions, and money is of great concern to politicians and can even have a major impact on elections. The study of money, banking, and financial markets will reward you with an understanding of many exciting issues. In this chapter, we provide a road map of the book by outlining these issues and exploring why they are worth studying. Preview O n the evening news you have just heard that the Federal Reserve is raising the WHY STUDY FINANCIAL MARKETS? Part 2 of this book focuses on financial markets, markets in which funds are trans- ferred from people who have an excess of available funds to people who have a short- age. Financial markets such as bond and stock markets are crucial to promoting greater economic efficiency by channeling funds from people who do not have a productive use for them to those who do. Indeed, well-functioning financial markets are a key factor in producing high economic growth, and poorly performing financial markets are one reason that many countries in the world remain desperately poor. Activities in financial markets also have direct effects on personal wealth, the behavior of businesses and con- sumers, and the cyclical performance of the economy. The Bond Market and Interest Rates A security (also called a financial instrument) is a claim on the issuer's future income or assets (any financial claim or piece of property that is subject to ownership). A bond is a debt security that promises to make payments periodically for a specified period of 3 
