Section 4.1: Financial Assets

why do we have a financial sector

Individuals, businesses, and government borrow and save. They need institutions to help

fincancial sector

network of insitutions that link borrowers and lenders. Includes banks, mutural funds, pension funds, and other financial intermediaries.

assets

anything tangible or intaginble that has value

intrest rate

the amount a lender charges borrowers for borrowing money.

“the price of a loan”

intrest bearing assets

assets that can earn intrest over time

ex: bonds

personal finance

the way individuals and families budget, save, and spend

investment

Business spending on tools and machinery. Capital stock investment. Low interest rate increases investment

liquidity

the ease with which an asset can be converted to a medium of exchange (cash). The higher the liquidity, the lower the rate of return.

bonds (securities)

Loans or IOUs that represent debt that the government, business, or individual must repay the lender. The bond holder has no ownership of the company and is paid interest.

stocks (equities)

represent ownership of a corperation and the stockholder is often entitled to a portion of the profit paid out as dividents

risks to buying assets

market risks: loss of money due to market fluctuations

inflation risks: when the value of your investment(NOT MACRO ONE) shrinks due to inflation

default risk: when companies or individuals are unable to fufill their debt or payment obligations

a bond is offered at a

specific and non-changing intrest rate

people want bonds at

higher interest rates

bonds can be sold

before they mature

if you sold the original higher bond

buyers would bid up the price since they would rather have the higher

bond and interest rate are

inversly related