MYPF 9/22/2017 Bonds and Mutual Funds Chapter 11

Discuss the features, types, and earnings on corporate bonds. Evaluating Bonds GOALS Discuss the features, types, and earnings on corporate bonds. Describe the different types of government bonds. Chapter 13

Corporate Bonds Bonds are loans (debt) that must be repaid at maturity. Bondholders (those who invest in bonds) receive interest twice a year. When the bond matures on its maturity date, it is repaid. Bond maturities typically range from 1 to 30 years. Chapter 13

Face Value Face value is the amount the bondholder will be repaid at maturity. Face value is also referred to as par value because the face value is the dollar amount printed on the certificate. Chapter 13

Features of Corporate Bonds Corporate bonds are sold on the open market through brokers, just like stocks. Bonds are known as “fixed-income investments.” Fixed-income investments pay a specified amount of interest on a regular schedule. A bond’s interest does not go up and down. Chapter 13

Types of Corporate Bonds Debentures Secured bond Convertible bonds Chapter 13

Debenture A debenture is a corporate bond that is based on the general creditworthiness of the company. The issuer does not pledge any specific assets to assure repayment of the loan. Debentures are considered unsecured bonds. Chapter 13

Secured Bond A secured bond, also called a mortgage bond, is backed by specific assets which serve as security to assure repayment of the debt. If the corporation fails to repay the loan as agreed, the bondholder may claim the property used as security for the debt. The asset most often used for security is real estate, a building, or some other type of property. Chapter 13

Convertible Bond A convertible bond is a corporate bond that can be converted to shares of common stock. If the bondholder converts to common stock, the bond is no longer due and payable at maturity. Convertible bonds can be exchanged for a certain number of common shares at a specific price per share. Chapter 13

Earnings on Corporate Bonds All corporate bonds are issued with a stated face value and fixed contract rate. There is no compounding. Half the annual amount of simple interest is paid every six months. While the interest rate on your bond is fixed, the market price (what you could sell it for) can change. Chapter 13

Government Bonds Municipal bonds Savings bonds Treasury securities Agency bonds Chapter 13

Municipal Bonds A bond issued by state and local governments is called a municipal bond. Municipal bonds are also known as “munis.” Municipal bonds generally pay a lower interest rate than corporate bonds. However, the interest is exempt from federal taxes (and often state and local taxes as well), so the effective rate is higher than the stated rate. Chapter 13

Savings Bonds You can buy U.S. savings bonds three ways: From commercial banks Through payroll deduction plans Directly from a Federal Reserve Bank You can buy up to $20,000 worth of these bonds a year. Chapter 13

Treasury Securities Treasury securities are virtually risk-free, since they have the backing of the U.S. government. They are taxable at the federal level but are exempt from state and local taxes and are usually not callable. Chapter 13

Agency Bonds When you purchase an agency bond, you are loaning money to federal agencies. Federal agencies that issue bonds include: Federal Home Loan Mortgage Corporation (Freddie Mac) Federal National Mortgage Association (Fannie Mae) Federal Housing Administration (FHA) Student Loan Marketing Association (Sallie Mae) Chapter 13

Lesson 14.1 Investing in Mutual Funds GOALS Discuss mutual funds as an investment strategy. Explain how to buy and sell mutual funds. Chapter 14

Evaluating Mutual Funds A mutual fund is a professionally managed group of investments bought using a pool of money from many investors. Individuals buy shares in the mutual fund. The fund managers use this pooled money to buy stocks, bonds, and other securities. The kinds of securities they buy depend on the fund’s stated investment objectives. Chapter 14

Advantages of Mutual Funds Professionally managed Liquid Diversified Require only a small minimum investment Chapter 14

Mutual Fund Risk Growth funds Income funds Growth and income funds Money market funds Global funds Index funds Chapter 14

Growth Funds A growth fund is a mutual fund whose investment goal is to buy stocks that will increase in value over time. Chapter 14

Income Funds An income fund is a mutual fund whose investment goal is to produce current income in the form of interest or dividends. Chapter 14

Growth and Income Funds A growth and income fund is a mutual fund whose investment goal is to earn returns from both dividends and capital gains. A balanced fund is a mutual fund that seeks both growth and income but attempts to minimize risk by investing in a mixture of stocks and bonds rather than stocks alone. Chapter 14

Money Market Funds A money market fund is a mutual fund that invests in safe, liquid securities, such as Treasury Bills and bonds that mature in less than a year. Chapter 14

Global Funds A global fund is a mutual fund that purchases international stocks and bonds as well as U.S. securities. Chapter 14

Higher risk/higher return potential Lower risk/lower return potential Money Market Funds Income Funds Growth and Growth Funds Lower risk/lower return potential Chapter 14

Buying And Selling Mutual Funds To choose the mutual fund that is right for you, you must know your own investment objectives and risk tolerance. Do you want income from your investments now, or can you wait for capital gains in the future? Do you need a tax-free or tax-deferred investment to reduce your current income taxes? Are you comfortable with risking your investment for a chance at big returns, or do you prefer a safe but lower return? Chapter 14

Lesson 14.2 Investing in Real Estate and Other Choices GOALS Explain real estate investing, both direct and indirect. Describe other investments, including metals, gems, collectibles, and financial instruments. Chapter 14

Real Estate Investing When you invest in real estate, you are buying land and any buildings on it. Advantage Investing in real estate is considered a good way to combat inflation, because it usually increases in value over the years at rates equal to or higher than inflation. Disadvantages Real estate is one of the least liquid investments you can make, since a property can take months or even years to sell. Some real estate investments are speculative and can result in a substantial loss. Chapter 14

Vacant Land Vacant land, or unimproved property, is usually considered a speculative investment. Investors hold the property expecting it to go up substantially in value over time. Other people purchase a vacant lot with plans for building a house on it later, either when they can afford it or at retirement. Because it is considered speculative, banks are often unwilling to make loans on vacant land. Chapter 14

Single-Family Houses In addition to owning your own home, you might wish to purchase a single-family house and rent it to others. You may find banks reluctant to grant you a mortgage loan to buy a house as rental property. As a condition for a loan, you may have to make a larger down payment or pay a higher interest rate. When a renter takes possession of your house, you still have responsibilities. Chapter 14

Rental Properties A duplex is a building with two separate living quarters. A triplex (three units) and a quad (four units) are buildings with three or four individual housing units. An apartment complex is a group of many apartments with common facilities such as recreation areas, clubhouses, and parking lots. A condominium, or condo, is an individually owned unit in an apartment-style complex with shared ownership of common areas. Chapter 14

Recreation and Retirement Property Many people buy second homes for vacations or for their retirement years. Often, the owners rent these properties out to others to generate income during the times when they are not using them. Recreation property includes beach and mountain cabins and even vacant land near vacation sites such as rivers, lakes, or an ocean. Chapter 14

Metals, Gems, and Collectibles Investments in this category are often speculative. In some cases, the enjoyment of having the investment will far exceed any resale value. Although not inexpensive, precious metals, gems, and collectibles are easy to purchase. However, they can be very difficult to sell in a hurry and do not provide any current income. Chapter 14

Precious Metals Precious metals are tangible metals that have known and universal value around the world. Gold, silver, and platinum are examples of precious metals. Investments in precious metals are very risky because prices can swing widely over time. Chapter 14

Gems and Jewelry Gems are natural, precious stones, such as diamonds, rubies, sapphires, and emeralds. Their prices are high and subject to drastic change. Chapter 14

Collectibles Collections of valuable or rare items, such as antiques, art, baseball cards, stamps, and comic books, are called collectibles. They are valuable because they are old, no longer produced, unusual, irreplaceable, or of historic importance. Coins are the most commonly collected items. Collectibles can be hard to sell and may not increase in value. Chapter 14