Financial assets, such as certificates, bonds, stocks, and bank deposits, represent the monetary value of a physical item through a contractual agreement. They have no fundamental value until converted into cash and can be used to determine personal wealth. Valuation can change depending on the asset and when it is valued.
A financial asset is an intangible representation of the monetary value of a physical item. It gets its monetary value from a contractual agreement of what it represents. While a real asset, such as land, has physical value, a financial asset is a document that has no fundamental value in itself until it is converted into cash. Common types of financial assets include certificates, bonds, stocks, and bank deposits.
One of the most common types of financial assets is a certificate of deposit (CD). A CD is an agreement between an investor and a bank in which the investor agrees to keep a fixed amount of money on deposit with the bank in exchange for a guaranteed interest rate. The bank may offer a higher amount of interest payment since the money will remain intact for a certain period of time. If the investor withdraws the CD before the end of the contract terms, he will lose interest payments and be subject to financial penalties.
Another type of financial asset is a bond. Bonds are often sold by corporations or governments to investors to help finance short-term projects. They are a type of legal document that details the amount of money an investor lent to a borrower and the time it must be repaid. A bond represents the amount of interest that is guaranteed to be returned to the investor along with the original amount of the loan.
Stocks are one of the only financial assets that do not have an agreed upon expiration date. Investing in stocks means that the investor has partial ownership of a company and participates in the company’s profits and losses. He or she can hold the shares for any length of time or decide to sell them to another investor.
Money that is deposited in a bank account also counts as a financial asset, rather than a real asset. When cash is deposited into a bank account, proof of funds is a bank statement that summarizes the value of the account. The deposited cash is not considered a physical asset because the bank uses the money to finance its business and agrees to return it when the account holder decides to withdraw it.
The valuation of financial assets is the process of determining the amount of cash into which the assets can be converted. This process is often used to find out a person’s personal wealth for legal reasons, such as their ability to pay a debt. The value of a financial asset can change drastically depending on when it is valued. For example, the value of the shares can change daily depending on the company’s earnings.
A financial asset is usually given a maturity date on a contractual claim. If it remains intact and uncashable by that date, its value will generally increase. Cashing in on an asset before its due date can ultimately cost a person financial penalties because it violates the terms of the agreement.
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