Financial Assets - AP Macroeconomics

A mutual fund pools money from investors to purchase securities. Provides diversification and professional management for investors.

Securitization is the process of converting assets into tradable securities. Transforms illiquid assets into marketable investment instruments.

Market risk is the primary risk of investing in stocks. Stock prices fluctuate with overall market conditions and sentiment.

A stock is a type of security representing ownership in a corporation. Shareholders have voting rights and claims on company profits.

An investment-grade bond has a low risk of default. Rated BBB or higher by agencies like Moody's and S&P.

$Bond , Price = \frac{C}{(1 + r)^1} + \frac{C}{(1 + r)^2} + ... + \frac{F}{(1 + r)^n}$. Sum of present values of all coupon payments plus principal.

A callable bond can be redeemed by the issuer before its maturity date. Gives issuer flexibility to refinance when rates decline.

Capital gain is the profit from selling an asset at a higher price than its purchase price. Realized when the selling price exceeds the original purchase cost.

Stocks typically offer dividends. Companies distribute profits to shareholders as dividend payments.

Diversification reduces investment risk. Spreading investments across assets reduces overall portfolio risk.

A bond is a fixed income instrument representing a loan to a borrower. The issuer promises to pay back principal plus interest over time.

$PV = \frac{FV}{(1 + r)^n}$. Discounts future value by the interest rate compounded over time.

To facilitate the exchange of financial assets. Markets connect buyers and sellers for efficient price discovery.

$FV = PV \times (1 + r)^n$. Compounds present value by the interest rate over time periods.

Dividend yield is the ratio of a company's annual dividend compared to its share price. Calculated as annual dividend per share divided by stock price.

Stocks represent ownership; bonds represent a loan. Equity holders own the company; bondholders are creditors.

An ETF is an Exchange Traded Fund, a collection of securities traded on an exchange. Combines diversification benefits with stock-like trading flexibility.

To facilitate the channeling of funds between lenders and borrowers. Banks and brokers connect savers with those needing capital.

An interest rate swap is a derivative contract where two parties exchange interest payments. Allows parties to manage exposure to interest rate fluctuations.

Market capitalization is the total market value of a company's outstanding shares. Calculated by multiplying share price by total outstanding shares.

Equity value = Total assets - Total liabilities. Basic accounting equation showing shareholders' residual claim.

A CDS is a derivative that provides protection against credit risk. Buyer pays premium to seller for protection against default events.

Primary markets issue new securities; secondary markets trade existing ones. IPOs occur in primary markets; subsequent trading in secondary markets.

A yield curve shows the interest rates of bonds with different maturities. Plots yield against maturity to show interest rate structure.

To hedge or speculate on the future price of an asset. Standardized contracts traded on exchanges with margin requirements.

To maintain stability and integrity in financial markets. Protects investors and ensures fair, transparent market operations.

Options are a common type of derivative. Options give the right to buy or sell at a specific price.

A stock exchange provides a platform for buying and selling securities. Matches buyers and sellers while ensuring fair pricing and settlement.

Financial assets derive value from contractual claims. Unlike physical assets, their worth comes from legal agreements or contracts.