# Financial Assets & Investments: A summary

4 kinds of financial asset

Loans: Lender provides principal, a sum of money. Borrower pays back principal in chunks, plus an agreed % extra. The agreed % is the interest rate.
Bonds: Owning one entitles you to pay-outs of an agreed regular sum, which may vary according to pre-defined market circumstances. The bond can be sold. Their “yield” is the % of the total they pay out per unit time. They are valued by comparing the yield to interest rates. Thus, when interest rates rise, bond prices fall, and vice versa. Issued by companies & governments.
Equity: Ownership, e.g. shares
Derivatives: Financial products abstracting other finanical assets. There are thousands. e.g. CDOs & CDS. See Financial Crisis

Risk/Return: The higher the risk taken, the higher the return will need to be, for the risk to be valuable. For example, lending money to a startup will carry a higher interest rate than lending to the UK government.
Liquidity/Return: The lower the liquidity, the higher the expected return. If your money is going to be tied up for longer, the higher the return should be to justify the incurred risk & opportunity cost. The risk is that, during that time, the money will be needed but not available. For example, a bank offering mortgages is taking a risk that they will need the money before the end of the 30 year period, but won’t be able to access it. The opportunity cost is that, during the longer period, higher return investments might arise. For example, interest rates might rise while your money is tied up in a lower return investment.