4.1: Financial Assets

financial system

the set of institutions that connect savers with borrowers

financial intermediary

an institution that transforms the savings from individuals into financial assets (for the saver) and liabilities (for the borrower); the ___________ that people have the most experience with is a bank, which converts the savings and other deposits of many depositors into loans for borrowers.

asset

some item of value that is expected to provide the holder some future benefit; factories are an _____ because they can be used to produce goods that provide income to a firm in the future, and a bond is an _____ to a bondholder because it will provide income in the future.

liabilities

requirements to pay money in the future; a loan is a _________ for the person who takes out a loan, but an asset to the person who loaned money out.

real asset

(sometimes called a physical asset) a claim on a tangible object that gives the owner the right to use it as they wish. A house is a ____ _____ that its owner can sell or rent out, and a factory is a ____ _____ that a business can use to earn profits.

financial asset

a contractual claim to something of value; modern economies have four main types of ________ ______: bank deposits, stocks, bonds, and loans. In reality, there are many more types of ________ ______ (like derivatives, calls, puts, and so on), but you only need to know the basics of these four types for this course.

financial risk

when there is any uncertainty about the future value of an asset; for example, if you don't know how many lime smoothies you can buy with the money in your savings account next week, the value of your savings account has risk, because inflation can reduce its value.

bank deposits

(also called demand deposits) money kept in a bank, like checking accounts; we call these "demand deposits" because banks are usually required to provide access to the money in those accounts immediately on request (in other words, on demand).

liquidity

how easily an asset converts to cash without loss of purchasing power; a house might be a store of value, but it's not a very liquid asset because you can't immediately buy a bowl of ice cream with it very easily. Cash is the most liquid asset because you can use it immediately.

return

the profit made on an asset, usually expressed as a percentage; for example, a stock that is purchased for $100 and sold for $110 has a ______ of 10%.

bonds

_____ are a form of an IOUs (a promise to pay back some amount in the future); _____ have three key features: the ____’s par, the ___’s maturity, and the ____’s coupon payments.

stock

a slice of ownership in a company; if you own one share of a company that has a total of 100 shares, you own 1/100th of that company. ______ derive their value from their ability to appreciate and the payment of dividends.