Investment, Credit, and Interest BBI2O

Recap: types of investments Investment options vary according to risk and return  Risk: how “safe” is your investment – is it likely to decrease in value?  Return: what rate of return can you expect – what will the yield of the investment be? Generally speaking, higher risk investments offer the highest potential returns, whereas low risk investment offer lower returns

Low risk investments Canada Savings Bond  A Canada Savings Bond (CSB) is a loan made by an individual to the government of Canada  On the maturity date, the government will repay the principal plus interest. Corporate Bonds  Businesses sometimes need money to increase production, expand operations, or introduce new products  Businesses sell securities— corporate bonds and shares of stock—to raise the necessary funds  A bond is a promise to repay borrowed money on a certain future date along with interest.

Low risk investments T-Bills:  Government of Canada Treasury Bills are investments fully guaranteed by the Government of Canada  Your principal and rate of interest are guaranteed  They are offered for terms of 1 month to 1 year. Interest is paid at maturity  The minimum investment for a T-Bill having a term of three months to one year is $5000. The minimum investment for a T-Bill having a term of one or two months is $25000.

Low risk investments GICs  Guaranteed Investment Certificates are usually issued by a financial corporation like a trust company or a bank, which actually borrows the money from you in the same way that it borrows from you when you put your money in a savings account  They use the funds to meet their own needs and pay out interest before paying you back in full on a set date  You usually keep a GIC until maturity, but some issuers will redeem their own certificates before maturity for a little less than their full value

Stocks When an individual buys stocks, they become part owner or a shareholder in the company Shareholders share the risks and rewards of the company. Common Stock  Common stock represents general ownership in a corporation, carries voting privileges, and includes a right to share in its profits  However, there are no fixed dividend rates  Common stock is always liquid—it can be bought or sold at any time on the open market Preferred Stock  preferred stock has advantages over common stock due to the payment of fixed rate dividends  Shareholders have no voting privileges, and stock prices tend to be more stable  This type of stock is also liquid  Blue chip companies such as Weston and Imperial Oil are characterized by a long record of regular dividend payments, stable growth, and active trading.

Bulls and Bears A bull market occurs when the demand and price for most stocks is high When demand and price for most stocks is low, it is a bear market. How would you characterize this first week of our stock market game?

Other investments Mutual Funds  pools of money from many investors that are set up and managed by an investment company to buy and sell securities from other corporations Real Estate  land and anything attached to it  besides buying a home as a form of investment in real estate, some people buy income property Collectibles  items of personal interest to a collector  may increase in value over time due to the scarcity of the item or the demand in the market.

Borrowing Money Credit Cards Loans Mortages

Loans Term Loan:  Make fixed monthly payments over a set period of time  May be fixed rate (interest rate set in advance for entire term of loan) or variable rate (rate changes based on prime lending rate) Demand Loans are more flexible (borrower can make payment or pay back in full at any time, lender can also call in the loan at any time) Getting a approval for a loan, and getting a favourable rate, are dependent on credit rating and collateral

Mortgage Basically a loan where property is pledged as collateral i.e. you buy a $300,000 house – you put $50,000 down and get a mortgage for the remaining $250,000. Over the term of the mortgage (usually 20 years+) you make regular fixed payments to the bank, gradually increasing your equity in the house and reducing the bank’s.

Interest Whether you are borrowing (credit card, loan, etc.) or investing (bonds, t- bills, etc.) interest applies

Simple Interest Simple Interest = P x R x T I = the total interest P = the principal (the amount borrowed) R = the interest rate (as a decimal) T = the time in years

Simple Interest If you borrow $10,000 at 5% for 5 years Interest = 10,000 x 0.05 x 5 = $2,500 So you would end up paying back $12,500 in total

Compound Interest Compound interest is calculated on the original principal plus all the interest that has been accumulated for that period Compound interest is just like a series of simple interests, where the interest occurred is added to the original principal, which is then considered as a principal for the next month or year  in simple interest the principal amount is always fixed but in compound interest the principal changes as the interest for subsequent months is added to it

Compound Interest A = P (1 + i) n  A = the total amount to be repaid (principal + interest)  P = the principal  i = the interest rate (as a decimal)  n = the number of periods

Compound Interest If you borrow $10,000 at 5% compounded annually for 5 years Amount Owed = 10,000 ( ) 5 = 10,000 (1.05) 5 = 10,000 x 1.28 = 12,800 The total interest paid was $2 800

Which is better? If you’re investing, compound interest will pay your more Loans could be simple or compound… compound is better since the interest is calculated on the remaining principle each period (and is therefore lower each time) Mortgages are pretty much always compound

Which is better? If I’m investing, is it better to compound interest more often, or less often?  i.e. which will pay more, an investment that is compound weekly or one that is compounded monthly? If I’m paying off a mortgage, is it better to make weekly payments or monthly payments?