Financial Sector and Interest Rates Review

These flashcards cover key concepts regarding the financial sector, types of assets, interest rates, and the relationship between bond prices and interest rates.

Financial Sector

Network of institutions that link borrowers and lenders, including banks, mutual funds, and pension funds.

Assets

Anything tangible or intangible that has value.

Interest Rate

Cost of borrowing money, charged by lenders.

Interest-bearing Assets

Assets that earn interest over time, such as bonds.

Liquidity

The ease with which an asset can be converted to a medium of exchange. Higher liquidity typically means lower interest rates.

Nominal Interest Rate

The percentage increase in money that the borrower pays, not adjusted for inflation.

Real Interest Rate

The percentage increase in purchasing power that a borrower pays, adjusted for inflation.

Bonds

Loans or IOUs that represent debt that must be repaid to the lender.

Stocks

Ownership of a corporation, entitling the stockholder to a portion of its profits.

Inverse Relationship of Bond Price and Interest Rates

When interest rates rise, bond prices fall; when interest rates fall, bond prices rise.