Walter's finance blog: Financial contracts of everyday's life

Saturday, August 05, 2006

What are the financial contracts we can find in our everyday life. There are basically two kinds:

Contracts to borrow money

Mortgages to buy a house. You borrow an important amount of money and repay it on a long period of time. You pay interest regularly. Your house being collateral of the mortgage, the interest rate is not far from the central bank guiding interest because there is not much risk for the bank or insurance lending you the money. If you cannot repay anymore, they sell your house.
Small Credits to finance quick money needs to buy a television or other consumer products. You usually don't provide guaranty or collateral for that and thus your interest rate is quite high since the business is risky and on a global base the bank has to collect money that covers some of its clients not being able to reimburse at all.
...

Contracts to invest money

Your saving account which pays you interest
Any financial contract (stocks, bonds, options, ...) you could trade yourself and where you can gain on the value change of the contract or the income generated by it (interest payment of a bond, dividend payment of stocks, ...).
Investment funds that do the precise choosing of financial contract for you according to your investment profile.
...