4.1: Financial Assets Flashcards
Why is there a financial sector?
Individuals, businesses, and governments borrow and save so they need institutions to help
Financial Sector
Network of institutions that link borrowers and lenders. Includes banks, mutual funds, pension funds, and other financial intermediates
Assets
Anything tangible or intangible that has value
Interest Rates
The amount a lender charged borrowers for borrowing money. It’s the “price” of the loan
Interest-bearing Assets
Assets that can earn interest over time. e.g. bonds
Personal finance
The way individuals and families budget, save, and spend
What does the word investment mean in Econ?
Business spending on tools and machinery
Liquidity
The ease with which an asset can be converted to a medium of exchange. In general, the higher the liquidity the lower rate of return
Bonds (securities)
Are loans, or IOUs, that represent debt that the gov., businesses , or individuals must repay to the lender.
The bond holder has no ownership of the company and is paid interest
To get more money, you could sell half of your company and issue shares of stock.
Stocks(equites)
Represent ownership of a corporation and the stockholder is often entitled to a portion of the profit paid out as dividends
What is the relationship of bonds and interest rates?
Bond prices and interest rates are inversely related
Do interest rates of bonds change?
No, the specific interest rates that is issued for a bond doesn’t change throughout the bond’s life
What can people with bonds do with the bonds?
They can sell it before they mature, if sold buyers would bid up the price since they would rather have a bond with a higher interest rate
What are the 3 functions money serves as?
A medium of exchange, a standard of value, store of value
A good Medium of Exchange must
Be accepted by people when buy and sell goods
Portable or easily carried
Be divisible so that larger and smaller transaction can be made
be uniform so that it’s the same value
A quarter is 25 cents no matter what
