Financial Assets- claims on property and income of the borrower
Financial Intermediaries - institution that channels funds from savers to borrowers
Three purposes for financial intermediaries
-share risk
- Diversification - spreading out investment to reduce risk
- Provide information - someone who can provide information of a companies' stocks
- Liquity- easy returns of cash - money investors receive above and beyond the sum of money initially investment. (The higher the risk the higher the investment)
Three Components of Bonds
bonds: are loans or RIUs that represent debt that the government or a corporation must repay to an investor. Generally low risk investment
- Coupon rate - interest rate that a bond issuer will pay to a bond holder
- Maturity - a time at which payments to a bond holder is due
- Par value - the amount that an investor pays to purchase a bond and that will be repaid to an investor at maturity.
Yield- annual rate of return of a bond if the bond were held to maturity
Bonds- you loan stocks you own
Time value of Money
- a dollar today is worth more than a dollar tomorrow because of opportunity cost and inflation.
^ reason for charging and paying interest
Let V= future value of $
P = present value of $
r = real interest rate
n= years
k= number of times interest is credited per year
Simple Formula: v=(1+r)^n * P
Compound Formula: v =(1+r/k)^nk * P
I really like this post on Chinnies blog because the definitions are very organized. Our notes are very similar but after reading her I became more familiar with bonds. I also learned something which I did not have in my notes and that is how the time value of money relates to charging and paying interest. Now I understand why we have to pay interest and why it is a certain amount.
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