Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985



Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Why is it important for people who own stocks and bonds to diversify their holdings? What type of financial institution makes diversification easier?

To determine

Why diversification of holdings is recommended and which institution does it for the public.


The main role of the financial system is to provide a matching between the savings of the one who have excess money to the demand of the one who makes the investment. Thus, the savings of someone will be matched with another person's investment under the financial system. There are two markets that are part of the financial system and they are Stock markets and the Bond markets.

The stock is the share of the firm and the stock provides the share of the ownership right to the one who holds it. The large corporates use this sale of shares in order to raise the investment capital. The stocks provide the stockholders the share of the firm's profit and thus, they are known as the shareholders of the firm. The Bonds on the other hand is the certificate of indebtedness which guarantees the repayment of the loan amount after the maturity of the Bond and the payment of interest on the loan amount. The large corporations, federal government or other state or local governments use to borrow with the help of the Bonds...

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