📚

All Subjects

 > 

🤑 

AP Macro

 > 

💰

Unit 4

4.1 Financial Assets 💰

2 min readseptember 23, 2020

Jeanne Stansak


The financial sector is the part of the economy made up of institutions that bring together lenders and borrowers. This includes institutions like banks.

Key Vocabulary

  • Liquidity💧 The ease with which a financial asset can be accessed and converted into cash. Cash is the most liquid asset. It can most quickly and easily be converted into other assets. Other assets are not as liquid as cash. For example, if you have invested money into a certificate of deposit (CD), in order to maintain a higher interest rate, you have to keep your money in there for six (6) months. This causes a decrease in access to this money should you need it. Items like real estate, fine art, and other collectible have low liquidity because it takes a while to get your investment out of them.
  • Rate of Return—Net gain or loss of an investment over a specified time period. People prefer investments that have a higher rate of return. Many times, this involves looking at the various interest rates on various investments.
  • Risk—Chance that an outcome or an investment's actual gains differ from the expected outcome. Different people have different levels of risk they are willing to take on when it comes to investments. Typically, someone closer to retirement would not be as willing to enter into a higher risk investment than a person that is 15 years away from retirement.
  • Bond—An interest-bearing asset often issued by businesses or the government. Sometimes they are referred to as securities.
  • Stock—A security that gives you ownership in a company.

Bonds and Interest Rates

Bond prices and interest rates have an inverse relationship. People prefer higher interest rates because they are given a greater rate of return. Most bonds pay a fixed rate of interest so as interest rates fall, they become more desirable which will push their price up. The opposite is true if interest rates are on a rise. Consumers are less interested in the fixed-rate interest rates that come with a bond, so they demand less of them, decreasing the price of the bonds.

Was this guide helpful?

🔍 Are you ready for college apps?
Take this quiz and find out!
Start Quiz
FREE AP macro Survival Pack + Cram Chart PDF
Sign up now for instant access to 2 amazing downloads to help you get a 5
Browse Study Guides By Unit
📝
Exam Skills: MCQ/FRQ
💸
Unit 1: Basic Economic Concepts
📈
Unit 2: Economic Indicators and the Business Cycle
💲
Unit 3: National Income and Price Determination
⚖️
Unit 5: Long-Run Consequences of Stabilization Policies
🏗
Unit 6: Open Economy-International Trade and Finance
Join us on Discord
Thousands of students are studying with us for the AP Macroeconomics exam.
join now
💪🏽 Are you ready for the AP Macro exam?
Take this quiz for a progress check on what you’ve learned this year and get a personalized study plan to grab that 5!
START QUIZ
Hours Logo
Studying with Hours = the ultimate focus mode
Start a free study session
📱 Stressed or struggling and need to talk to someone?
Talk to a trained counselor for free. It's 100% anonymous.
Text FIVEABLE to 741741 to get started.
© 2021 Fiveable, Inc.