Finance

Productive Capacity

The total ability of a country, business, or system to produce goods and services.

What is Finance?

The study of managing money, assets, and liabilities over time under uncertainty.

Examples of Financial Assets

• Stock

• Bond

• Cash

What is NOT a Financial Asset?

• House
• Gold
• Land

Zero-Sum Nature

A situation where one party's gain is another party's loss.

Example of Zero-Sum Nature

A loan is a liability for the borrower but an asset for the bank.

Aggregation and Assets

Assets for one party are a liability for another; someone always owes someone else.

Net Wealth

The value of assets minus liabilities.

Net Wealth of an Economy

The sum of all real assets.

What is a bond?

A way for people to lend money to a company or government; in return, the principal is repaid with interest.

Stock

A share of ownership in a corporation.

Money Market Debt

Short-term borrowing characterized by low risk and a maturity of less than 1 year.

What does maturity mean?

The length of time until a debt must be repaid.

Examples of Short Maturity Instruments

• Treasury bills
• Commercial paper

Capital Market Debt

Longer-term obligations maturing in over 1 year; typically offers higher returns.

What does yield mean?

The return earned on an investment, expressed as a percentage.

What does return mean?

The amount of money made on an investment.

How does maturity affect risk or return?

Longer maturities offer higher returns to compensate for greater price and interest rate risk, while shorter maturities offer lower returns with lower risk.

What is a Treasury Bill?

A short-term loan provided to the US government.

Common Stock

A security that represents ownership in a company.

Variable Returns

Returns that fluctuate based on the performance of the investee.

Derivative

A financial security with a value that is reliant upon or derived from an underlying asset or group of assets.

Options

Contracts that give investors the choice to buy or sell stock and other financial assets at a specific price.

Future

Contracts to buy or sell an asset at a predetermined price at a specified future date.

Primary Use of Derivatives

Hedging risk or speculating on price movement.

Hedging Risk

The practice of protecting oneself from potential price changes.

Alternative Investments

Includes assets like currencies and foreign exchange (FX) trading.

Cryptocurrency

Digital currencies or digital assets, such as Bitcoin.

Financial Portfolio

A collection of investment assets.

Asset Allocation

The process of dividing an investment portfolio across various asset categories.

Security Selection

The choice of specific securities to hold within each asset class.

Security Analysis

Evaluating an investment to determine whether it is a good candidate to buy or sell.

Risk-Return Trade-Off

The principle that potential return rises with an increase in risk.

Passive Strategy

An investment strategy that often utilizes low-cost index funds.