The
activity of finance is the application of a set of
techniques that individuals and organizations (entities)
use to manage their financial affairs, particularly
the differences between income and expenditure and
the risks of their investments.
An entity whose income exceeds its expenditure can
lend or invest the excess income. On the other hand,
an entity whose income is less than its expenditure
can raise capital by borrowing or selling equity claims,
decreasing its expenses, or increasing its income.
The lender can find a borrower, a financial intermediary,
such as a bank or buy notes or bonds in the bond market.
The lender receives interest, the borrower pays a
higher interest than the lender receives, and the
financial intermediary pockets the difference.
A bank aggregates the activities of many borrowers
and lenders. A bank accepts deposits from lenders,
on which it pays interest. The bank then lends these
deposits to borrowers. Banks allow borrowers and lenders
of different sizes to coordinate their activity. |
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