4.1 Financial Assets

a. Define the principal attributes—liquidity, rate of return, and risk—associated with various classes of financial assets, including money. b. Explain the relationship between the price of previously issued bonds and interest rates.

• The most liquid forms of money are cash and demand deposits.
• Other financial assets people can hold in place of the most liquid forms of money include bonds (interest-bearing assets) and stocks (equity).
• The price of previously issued bonds and interest rates on bonds are inversely related.
• The opportunity cost of holding money is the interest that could have been earned from holding other financial assets such as bonds.
• Enduring understanding MEA-3: Money makes it possible to compare the value of goods and services, and interest rates provide a measure of the price of money that is borrowed or saved.