McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Objective 1: Explain why you should establish an investment program  Establishing Investment Goals  Performing a Financial Checkup  Getting the Money Needed to Start an Investing Program  The Value of Long-Term Investing Programs TM 11-1

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Pay yourself first.  Take advantage of employer- sponsored retirement programs.  Participate in elective savings programs.  Make a special savings effort one or two months each year.  Take advantage of gifts, inheritances, and windfalls. Getting the Money Needed to Start an Investing Program TM 11-2

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Safety in any investment means minimal risk of loss.  Risk means a measure of uncertainty about the outcome.  Investments range from very safe to very risky.  The potential return on any investment should be directly related to the risk the investor assumes. Factors Affecting the Choice of Investments TM 11-3

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Inflation risk - during periods of high inflation your investment return may not keep pace with the inflation rate.  Interest rate risk – the value of bonds or preferred stock may increase or decrease because of changes in interest rates in the economy.  Business failure risk - affects stocks and corporate bonds.  Market risk - prices fluctuate because of behaviors of investors. Components of the Risk Factor TM 11-4

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Income - An investment will provide a predictable source of income.  Growth - means investment will increase in value. –Common stock usually offers the greatest potential for growth. –Mutual funds and real estate may also offer growth potential.  Liquidity –Ability to buy or sell an investment quickly without substantially affecting the investment’s value. Investment Growth and Liquidity TM 11-5

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Asset allocation is the process of spreading your assets among several different types of investments. Other factors to consider include: –The time factor –Your age –Your role in the investment process Objective 3: Identify the factors that can reduce investment risk. TM 11-6

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Objective 3: Identify the factors that can reduce investment risks. TM 11-7 Type of InvestmentSafetyRiskIncomeGrowthLiquidity Common stockAverage HighAverage Preferred stockAverage HighAverage Corporate bondsAverage HighLowAverage Governmental bondsHighLow High Mutual fundsAverage Real estateAverage Low FACTORS TO BE EVALUATED

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Most investors consider securities issued by the U.S. Treasury to be risk free. Backed by the full faith and credit of the U.S. government Securities include – Treasury Bills – Treasury Notes – Treasury Bonds – Treasury Inflation-Protected Securities (TIPS) U.S. Government Treasury Bills and Notes TM 11-8

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Municipal bonds - sometimes called munis.  Issued by a state or local government, including cities, counties, school districts, and special taxing districts.  Use funds for ongoing costs and to build major projects such as schools, airports, and bridges.  General obligation bonds are backed by the state or local government that issues them.  Revenue bonds are repaid from money generated by the project the funds finance, such as a toll bridge. State and Local Government Securities TM 11-9

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. Tax-exempt yield ___________________ Your tax rate Example: 0.06 Taxable equivalent yield = __________ = = 8.3% Taxable Equivalent Yield TM 11-10

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Corporation’s written pledge to repay a specified amount of money with interest.  Facts about corporate bonds: –The face value is the dollar amount that the bondholder will receive at the bond’s maturity date. –Bondholders receive interest payments every six months at the stated interest rate. –Typically a corporation issues debenture, mortgage, or convertible bonds. Characteristics of Corporate Bonds TM 11-11

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.  Call Feature of a Bond - Corporation can call in or buy back outstanding bonds from current bondholders before the maturity date.  Sinking fund – Corporations deposit money in this fund annually or semiannually and use the money to pay off the bondholders when the bond issue comes due.  Serial bonds – Bonds of a single issue that mature on different dates. Provisions For Repayment TM 11-12

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. For interest income. –Investors know the interest rate. –Interest will be paid to investors twice a year. Dollar appreciation of bond value. –May be able to sell the bond to someone else at a higher price if the interest rate on the bond is higher than the current interest rate. Bond face amount will be repaid at maturity. TM Objective 4: Recognize Why Investors Purchase Corporate Bonds

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. The following can be used to evaluate bond investments  The Internet  Newspapers  Bond Ratings  Bond Yield Calculations  Business Periodicals  Government Sources Objective 6: Evaluate bonds when making an investment decision TM 11-14

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. The Decision to Buy or Sell a Bond Bond Ratings  Moody’s Ratings range from Aaa (the highest) to C (the lowest)  Standard & Poor’s ratings range from AAA (the highest) to D (the lowest).  The first four categories are considered investment grade securities.