Financial Sector

  • Financial Sector Overview

    • Comprises institutions linking borrowers and lenders (e.g. banks, mutual funds, pension funds).
    • Assets: Tangible or intangible items with value.
    • Interest Rate: Cost charged by lenders to borrowers for loans.
    • Interest-bearing Assets: Assets that generate interest over time (e.g. bonds).

  • Personal Finance

    • Involves budgeting, saving, and spending by individuals/families.
    • Investment in economics refers to business spending on tools/machinery.
    • Low interest rates can boost investment.

  • Risks in Asset Buying

    • Market Risk: Loss from price fluctuations.
    • Default Risk: Failure of companies/individuals to meet payment obligations.
    • Inflation Risk: Decreased investment value due to inflation.

  • Liquidity

    • The ease of converting an asset into a medium of exchange.
    • Generally, higher liquidity equates to lower returns.

  • Bonds vs. Stocks

    • Bonds: Loans (IOUs) requiring repayment; bondholders receive interest but no ownership.
    • Stocks: Represent ownership in a corporation; stockholders can receive dividends.

  • Bond Prices and Interest Rates

    • Bonds issued at fixed interest rates ($1000 face value, 5% interest = $50 annually).
    • Interest rates inversely affect bond prices: as rates fall, existing bonds with higher rates become more valuable.