Financial Assets

Financial assets

We begin with a few basic definitions. An asset is any possession that has value in an exchange. Assets can be classified as tangible or intangible. The value of tangible asset depends on particular physical properties for example buildings, land, or machinery. Tangible assets may be classified further into reproducible assets such as machinery, or no reproducible assets such as land, a mine, or work of art.

Intangible assets, by contrast, represents legal claims to some further benefit. Their value bears no relation to the form, physical or otherwise, in which the claims are recorded. Financial assets, financial instruments, or securities are tangible assets. For these instruments, the typical future benefits come in the form of a claim to future cash. Example of financial assets includes the following:

·         A bond issued by the U.S Department of the treasury

·         A bond issued by the General Electric Corporation

·         A bond issued by the State Of California

·         A bond issued by the Government of France

·         A home mortgage loan

·         An automobile loan

·         Common stock issued by the Digital Equipment Corporation

·         Common stock issued by Honda Motor Company

In the case of bond issued by the U.S Department of the Treasury, the U.S government (issuer) agrees to pay the investors interest until the bond matures, then at the maturity date repay the amount borrowed. For the bonds issued by the General Electric Corporation and the state of California, just as with the bond issued by the U.S Department of the Treasury, the issuer agrees to pay the investors interest until the bond matures, and then at the maturity date repay the amount borrowed.

In the case of French Government bond, the cash payments are known if the French government does not default. However, the cash payments may be denominated no in U.S dollars but in Euros. Thus, while the cash payments are known in the terms of the number of Euros that will be received, from the perspective of U.S investors, the number of U.S dollars remains unknown. The number of U.S dollars depends on the exchange rate between Euros and the U.S dollar at the time the cash payments are received and converted into U.S dollars.  

For the automobile loan and the home mortgage loan, the issuer is the individual who borrowed funds. The investors are the entity, such as bank, that lent the funds to the individual. The loan agreement will include a schedule specifying how the borrower will repay the loan and how the interest will be paid.

The common stock of Digital Equipment Corporation entitles the investor to receive dividends distributed by the company. The investor in this case also holds a claim to a pro rata share of the net asset value of the company in case of liquidation.

The same applies to the cash payments of the common stock of Honda Motor Company, a Japanese corporation. In addition, because Honda makes dividend payments in Japanese yen, a U.S. investor is subject to uncertainty about the cash payments in terms of U.S dollars. The cash payments in U.S dollars depend on the exchange rate at the time of conversation between U.S dollars and the Japanese yen.