Aim: Where to invest? Warm up: Current Events

Key Investment Questions How much do I have to invest? How long can the money be invested? Which type of investment is best for me? What is my tolerance for risk and gain/loss?

Basic Investment Considerations High Risk investments pay higher rates of return than low risk investments. The type of investment chosen depends on the goals of the investor. Consistent investing can yield large returns. Investors should avoid complex investments they do not understand. A 401(k) plan is a tax- deferred investment plan that acts as a personal pension fund for employees

Bonds as Financial Assets What is a bond? Bonds have three main components; the coupon, the maturity, and the par value. Bond prices are determined by supply and demand. The current yield on a bond is the annual interest rate divided by the purchase price. (ex, 3% interest divided by $12 per share =.25 yield.

Bond Ratings Most bonds are rated on the financial health of the issuer, the ability to make future coupon or principal payments, and the issuer’s past credit history. Bond ratings, ranging from D(lowest) to AAA(highest), indicate the quality of the bond. If a is in default, it means the issuer has not kept up with the interest of the par value payments. What characteristics do bonds and other investments have in common?

Financial Assets and Their Characteristics Certificates of Deposit are issued by financial institutions and are the most common form of investment available. Corporate bonds are issued by corporations and are usually used for long-term investment because they can be liquidated quickly. Municipal bonds are bonds issued by state and local governments and are regarded as a safe, tax-exempt investment.

Financial Assets and Their Characteristics Savings bonds are bonds are low-denomination, nontransferable bonds issued by the federal government and are very attractive because they have virtually no risk or default. Treasury notes and bonds are large long-term obligations issued by the federal government and are seen as the safest of all financial assets. Treasury bills are large short-term obligations issued by the federal government. Individual Retirement Accounts (IRA’s) are long- term, tax sheltered time deposits intended for retirement. Junk bond -a high yield bond) that is rated below investment grade at the time of purchase. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors.

Assessment Please make a Venn Diagram Using research from the internet, please compare and contrast the difference and similarities between government bonds and corporate bonds. Please explain which one you feel is a better investment and why.