Financial Assets, Money, Financial Transactions, And Financial Institutions

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Chapte Financial Assets, Money, r

Financial Transactions, and Financial Institutions

Money and Capital Markets Financial Institutions and Instruments in a Global Marketplace Eighth Edition

Peter S. Rose

McGraw Hill / Irwin

Slides by Yee-Tien (Ted) Fu

The Creation of Financial Assets A financial asset is …  a claim against the income or wealth of a business firm, household, or unit of government,  represented usually by a certificate, receipt, computer record file, or other legal document,  and usually created by or related to the lending of money.

Characteristics of Financial Assets 

Financial assets are required because they promise future returns to their owners and serve as a store of value (purchasing power).

Characteristics of Financial Assets 

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They do not depreciate like physical goods, and their physical condition or form is usually not relevant in determining their market value. Their cost of transportation and storage is low, such that they have little or no value as a commodity. Financial assets are fungible – they can easily be changed in form and substituted for other assets.

Different Kinds of Financial Assets Any financial asset that is generally accepted in payment for the purchases of goods and services is a form of money. Examples include currency and checking accounts.  Equities represent ownership shares in a business firm and are claims against the firm’s profits and proceeds from the sale of its assets. Common stock and preferred stock are equities. 

Different Kinds of Financial Assets Debt securities entitle their holders to a priority claim over the holders of equities to the assets and income of an economic unit. They are either negotiable or nonnegotiable. Examples include bonds, notes, accounts payable, and savings deposits.  Derivatives have a market value that is tied to or influenced by the value or return on a financial asset. Examples include futures contracts, options, and swaps. 

Classification of Financial Institutions 

Depository institutions derive the bulk of their loanable funds from deposit accounts sold to the public. 

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Commercial banks, savings and loan associations, savings banks, credit unions.

Contractual institutions attract funds by offering legal contracts to protect the saver against risk. 

Insurance companies, pension funds.

Classification of Financial Institutions 

Investment institutions sell shares to the public and invest the proceeds in stocks, bonds, and other assets. 

Investment companies, money market funds, real estate investment trusts.