INVESTMENTS

What is an investment?  Investment – putting resources aside for later  Savings Account>Bank>Business>Jobs, Plants, Economy  Promotes growth in a free economy

Why the middle men? Reasons we use banks 1 – Share Risk – ½ of all companies fail, so instead of investing all of your money in one company, the bank uses your money to invest in multiple companies – This is called diversification  There are three types of risk Credit Risk – borrowers may not pay you back Liquidity Risk – May not be able to “cash in” the investment quick enough Time Risk – You may have to pass up better opportunities

Why the Middle Man Take Two. 2 – Providing Info– Banks reduce the costs in time and money that lenders/borrowers would pay if they had to search for information about investment opportunities on their own. Portfolio – a collection of financial assets. 3 – Providing Liquidity – You can easily sell your investment to get to your money

Investment Trade-offs  Return and Liquidity – the more liquidity, the less of a return.  Liquidity – Ease of access to your $  A savings account vs. a C.D. Savings accounts are very liquid, but have very low interest rates CD’s are less liquid but you will receive a higher return  Return and Risk – The higher the risk, the higher the POTENTIAL for return  Return – what you get back on your investment  Investing in a friend’s business vs. a savings account

BONDS Pierce Brosnan

Bonds  Bond – a certificate sold by a company or the gov’t to finance projects or expansion.  Starting in 1942 with war bonds to help finance the war. This gave your money to the gov’t and then you would be repaid with interest after the war.  Three pieces of a Bond 1. Coupon rate – the interest rate (annually) the bond issuer will pay to the bond holder yearly. 2. Maturity – The time it takes to reach full value 1. Different bonds have different rates (10, 20 or 30 years) 3. Par Value – (Principal) – how much you pay and get back

Example  You get a savings bond with the following criteria  Coupon Rate – 5%  Maturity – 10 years  Par value – 1,000

How to decide which bond to buy?  Bond Ratings – Bonds are rated from highest (AAA) to lowest (D). They are ranked on the issuers ability to make the interest payments and whether they will be able to pay you par when it matures.  AAA Bonds - As of October 2009 there were only four AAA bonds. They were…  Automatic Data Processing (NYSE:ADP)  Johnson & Johnson (NYSE:JNJ)  Microsoft (NASDAQ:MSFT)  ExxonMobil (NYSE:XOM)  D bonds may be risky or has a poor history

Types of Bonds  Government Bonds  Savings Bonds – issued by gov’t, used to pay for public projects (buildings, roads, dams) No risk. They can always repay you. $50 bond costs $25  Treasury Bonds, Bills and Notes – Bought from the Gov’t Bonds – years Bills – 2-10 years Notes – 3, 6, 12 months  Municipal Bonds Bought from local government Supports the community. Why can they always repay?

Types of Bonds  Corporate Bonds – From a company  Corporate Bonds –Issued to help business expand Issued in large amounts (1k,5k,10k) Must make profits to repay bond Much riskier (lower bond rating, greater return)  Junk Bonds – D rated Corp. Bonds Very Risky Higher reward If they fail, you are SOL