Savings and Investment

Imagine that you are the president of Blue Skies Airlines, Inc. and you have decided that Blue Skies should buy a new Boeing 777. The plane will cost $125 million and change. There is one small problem though. Blue Skies only has a few million dollars in its bank account, and those funds are needed to pay fuel bills and the salaries of its employees.

When you mention the word "investment" most people think of Wall Street and the stock market, not capital investment in new plant and equipment by firms. These are two distinct uses of the same word. When someone buys 100 shares of Nike Corporation they are making a financial investment. When Nike Corp. builds a new factory or warehouse, it is making a capital investment.

We have already mentioned bonds, and that they are marketable securities that are purchased by financial intermediaries like mutual funds and pension funds as well as by individuals. We are all aware of U.S. Government bonds, but we also know that you cannot buy stock in Uncle Sam! Clearly, bonds must be different from stocks, though both are investments. Now let’s be specific about what a bond is and how the bond market works.