Final answer:
Equity is the ownership interest in assets, such as the value a homeowner has in a property after settling any related bank loans, or a shareholder's interest in a corporation.
Step-by-step explanation:
Equity, in terms of financial assets, refers to the ownership interest in assets. This involves the monetary value that a homeowner has in their property after selling the house and repaying any outstanding bank loans that were used to purchase the house. For instance, if you bought a house for $200,000 with a down payment of $20,000 and a bank loan of $180,000, and over time the value of the house rises to $250,000 while the remaining loan balance is $100,000, your equity would be $150,000 ($250,000 market value minus $100,000 loan balance).
Equity can be understood as the owner's claim on the assets of a corporation as well, which may include dividends distributed to shareholders. It is distinct from a debt instrument like a bond or CD, which is a lending arrangement with a guaranteed rate of return, the coupon rate. Unlike liquid assets, which can be readily converted to cash, or financial investments like diversification into various stocks, equity represents a longer-term interest in the value of an asset.