4.1 Financial Assets

Define Liquidity (flash card question)

• The ease of which an asset can be converted into ready cash without affecting the market price

• Money is more liquid than a house. A house takes lots time to sell

• Other liquid assets are bonds and stocks. They are easy to buy and sell

• If you didn't know all those, you need to check this box.

The interest rate and price of a bond are ______ related.

The opportunity cost of holding money is the _____ that could have been earned from holding other financial assets such as bonds.

Match the following

• Price of bond increases

• Price of bond increases

• Interest rate increases

• interest rate increases

• Price of bond decreases

• interest rate decreases

• Interest rate decreases

• Price of bond decreases

Match the following

• You buy a treasury bill from the US government that pays out 3% interest per year

• Rate of Return Definition

• Your exposure to potential financial loss

• Low Risk Definition

• You buy an asset for $100 that provides you with 3% interest per year.

• Risk Definition

• The net gain or loss of an investment over a specified period of time.

• Rate of Return Example

• You buy a bond for $100 that promises to give you 20% interest. The business goes bankrupt.

• High Risk Example

Match the following Liquidity Terms

• can be traded in the bond market, but in order to be spent, they must be sold in exchange for money

• Share of Stock

• In order for the underlying value of the stock to be spent, it must be sold in exchange for money.

• Bonds

• Most liquid form of financial asset because it is our medium of exchange

• Money

Examples of Bonds include

• Bonds

• Bills

• Notes

• Commercial Paper

Match the following Rate of Returns

• earn interest. pay interest directly proportional to default risk

• Stocks

• earns no interest unless it’s in a savings account.

• Money

• earn dividends and/or capital gains

• Bonds

Match the following Risk Terms

• Risk varies according to reliability of issuer

• Bonds

• Low risk - inflation is biggest risk

• Stocks

• Risk varies according to the financial condition of the issuer

• Money