4.1 Types of Financial Assets

Loans

When $ is given to another party in exchange for repayment of the loan principal amount + interest

Bank Deposits

$ placed into a deposit account at a bank

• savings accounts

• checkings accounts

• other money market accounts

Stocks

• A share in ownership of a company

• includes claim of company’s earnings & assets

Mutual Fund - financial program that creates a portfolio (of financial assets) made up of different stocks& resells shares to individual investors

Mutual Fund

financial program that creates a portfolio (of financial assets) made up of different stocks& resells shares to individual investors

Bonds

• loan from a company or government used to fund operations

• Market value can change

• Investor does NOT have claim on borrower’s company (profits)

• Bond interest rate is called a yield or coupon rate

Financial Asset

a paper claim that entitles its buyer to future income from the seller

4 types: bonds, stocks, loans, bank deposits

Two Parts of a Financial System

Borrowers (households) & Lenders (banks)

Purpose of Financial Markets

1. Reduce transaction costs

2. reduce risks for lenders & borrowers

3. provide way to liquidity

Lender & Borrower in Bonds

Lenders are households

Borrowers are companies & governments

Bonds vs Stocks

in a bond, investors do NOT have a claim on the borrower’s company

Price of previously issues bonds VS current interest rates

the price (value) of previously issued bonds has an inverse relationship with current interest rates

• If interest rates increase on new bonds, previously issued bonds (w/ lower rate of return) become less valuable