Finance Assets and Money Flashcards
Anything that can be used to buy goods and services
Money
Accumulation of saving through the purchase of assets that occurs over time
Wealth
Intangible assets, such as savings accounts and securities, that are acquired for some promised future return
Financial Assets
Loans, bonds, loan-backed securities, stocks, Direct Deposits (Checking Account), etc.
Types of Financial Assets
A debt evidenced by a “note,” which specifies the principal amount, interest rate, and date of repayment.
Loan
A formal contract to repay borrowed money with interest at fixed intervals (pretty much the same as a loan only used by big institutions, like the government and big business).
Bond
A share of ownership in a corporation
Stock
A financial intermediary that provides liquid assets in the form of bank deposits to lends and uses those funds to finance the illiquid investment spending needs of borrowers.
Bank
The ease with which an asset can be converted into cash
Liquidity
A system for buying and selling shares of companies
Stock Market
the market in which bonds issued by firms and governments are traded
Bond Market
An amount owed by a business or an individual
Liability
Interest Rate
Opportunity Cost of Holding Money
Inverse Relationship - if interest rates increase, the value of previously issued bonds decreases and if the interest rate decreases, the value of previously issued bonds increases
Relationship between Bonds and Interest Rate
The interest rate as usually reported without a correction for the effects of inflation
Nominal Interest Rate
nominal interest rate - inflation rate
Real Interest Rate
Nominal Interest Rate = Real Interest Rate + Inflation Rate
Fisher Effect
A future rate of inflation that consumers and firms build into current decision making.
Expected Inflation
The component of inflation that is a surprise.
Unexpected Inflation
An interest that’s able to change based on rate set by the central bank
Flexible Interest Rates (also known as floating or variable interest rates)
Medium of Exchange, Unit of Account, Store of Value
3 Functions of Money
Anything that’s used to determine value during the exchange of goods and services
Medium of Exchange
A means for comparing the values of goods and services
Unit of Account
Something that keeps its value if it’s stored rather than used.
Store of Value
Objects that have value in themselves and that’re also used as money (e.g. Gold)
Commodity Money
The quantity of money available in the economy
Money Supply
Monetary Base: Currency and Bank Reserves
M0
Currency in circulation, demand deposits, savings accounts.
M1
M1 + small denomination time deposits (CDs) + money market deposit accounts
M2
An interest rate that doesn’t change
Fixed Interest Rate
Money that has value because the government has ordered that it is an acceptable means to pay.
Fiat Money
