Types of assets and their characteristics: Money has overall a low expected return and doesn’t have much risk(although there is the inflation risk) because money is liquid, the time for maturity is very short (cpdt in M2, small time deposits are not very liquid and have a longer time to mature). Bonds: financial securities promise to pay bondholders specific amount on specific dates. Bonds offer a higher expected return than money but return is riskier.(bond is liquids because it is sold easily from an investor with low transaction costs (not always in bad economies) …times to maturity vary(90days to 30years) Stocks: ownership in a company pay periodic dividends to the shareholders (not guaranteed) ….price of stocks rise and fall everyday …overall return: dividends + increase/decrease in capital gain/loss in the value of the stock. Stocks are risky , maturity date is often infinite. For small companies that do not issue stocks, difficult to sell ownership(illiquid) because there isn’t marketable …return to owners is in the form of profits earned + opportunity that they may sell the company one day. For homeowners, housing is the largest asset. Returns: benefits in terms of shelter/change in the value of the house over time. Housing is very illiquid*hard to sell…Housing ownership allows to borrow money against a portion of the value of their house(home equity loans) Consumer durables are not very liquid and have no specified time for maturity. Asset demands: Trade-off among the four characteristics that make an asset desirable: high expected return, safety (low-risk)
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