4.1 Financial Assets

What are financial assets?

Financial assets are instruments that represent a claim on future income or wealth. The three main types are money, stocks, and bonds. They differ in liquidity, risk, and return — money is the most liquid but earns no interest, while stocks and bonds offer potential returns with more risk.

Bonds: borrowing with a promise

A bond is a loan from a buyer to an issuer (government or corporation), promising repayment of the face value plus periodic interest (coupon) payments. Bond prices and interest rates move inversely: when market interest rates rise, existing bond prices fall, since new bonds offer better returns.

Stocks and liquidity

A stock (equity) represents partial ownership in a company, giving holders a claim on profits (dividends) and voting rights, but no guaranteed return. Liquidity measures how easily an asset converts to cash without losing value — money is perfectly liquid, while stocks/bonds and real estate are less liquid.

Key terms

Financial asset

An instrument representing a claim on future income or wealth, such as money, stocks, or bonds.

Bond

A loan from buyer to issuer, promising repayment of face value plus periodic interest payments.

Stock (equity)

A share of ownership in a company; return depends on profits and dividends, with no guarantee.

Liquidity

How easily an asset can be converted to cash without losing value; money is the most liquid asset.

Bond price–interest rate relationship

Inverse relationship: when interest rates rise, existing bond prices fall, and vice versa.

Try an AP-style question

When interest rates rise, the price of existing bonds…

1. falls
2. rises
3. stays the same
4. doubles