Work through the list without notes. If you cannot do a statement, follow its link, then come back. Guide = study guide; Practice = practice questions.
Understanding
- I can describe money, bonds and stocks, and explain the difference between a loan (bond) and ownership (stock). (Guide: “What a financial asset is”)
- I can define liquidity, rate of return and risk in my own words. (Guide: “The three attributes”; Practice Q6(a))
- I can explain why cash and demand deposits are the most liquid assets, and rank other assets by liquidity. (Practice Q1, Q6(b))
- I can explain why higher expected returns usually come with higher risk. (Guide: “The three attributes”; Practice Q6(c)–(d))
Calculation
- I can calculate the price of a one-year bond from its payment at maturity and the market interest rate. (Guide: Worked example 1; Practice Q3, Q7(a))
- I can calculate a bondholder’s capital gain or loss when market rates change. (Guide: Worked example 1(d); Practice Q7(b))
- I can calculate the yearly opportunity cost of holding money, including when deposits pay some interest. (Guide: Worked example 2; Practice Q5)
Reasoning
- I can explain, step by step, why the price of a previously issued bond falls when market interest rates rise. (Guide: “Bond prices and interest rates”; Practice Q2, Q7(c))
- I can explain why a lower bond price means a higher rate of return for a new buyer. (Practice Q2, Q7(d))
- I can explain why people hold less money when interest rates rise, using the idea of opportunity cost. (Guide: Worked example 2; Practice Q4, Q5(c))
- I can choose a suitable asset for a given purpose and justify it with liquidity, return and risk. (Practice Q6)
All ticked? Move on to Topic 4.2, Nominal v. Real Interest Rates, or return to the course roadmap.