Archive for the ‘asset’ Tag

Two sorts of asset – and two sorts of income

Assets

There are two sorts of asset:

  • assets denominated in money; and
  • assets denominated by title.

A bond, a bank balance, or a pile of cash is an asset denominated in money; a house, or a share in a company, is an asset denominated by title. It is somewhat confusing that shares have a nominal money value, but this is really just a different way of expressing a fraction.  A £1 share of a company with issued capital of £1million is a one-millionth share of the company, entitling whoever owns it to a millionth of the company’s profit and a millionth of the proceeds if it is broken up and sold, after all the other creditors have been paid. But a bond entitles you to the redemption value of the bond, at maturity, and its annual coupon until then: all specified in advance, and denominated in dollars, pounds or whatever.

Assets denominated in money, therefore, are vulnerable to inflation; whereas assets denominated by title increase in value in line with inflation.  Actually, their real value changes with real effects, but their nominal value changes with inflation and the change in their real value.

Income

Closely related, but not the same, is the distinction between the two sorts of income:

  • Unconditional income
  • Conditional income

The interest, or coupon, paid on bonds is unconditional; whereas the dividend paid on a share is conditional. Salaries are unconditional; bonuses are conditional. Annuities are unconditional; profits are conditional.

We usually rely on a mixture of both sorts of asset and income. But the more we can all rely on unconditional income the more flexibly the economy behaves.