 All investments share three common features:  They require that investors pay some price determined in the market to acquire them.  They give their owners the chance to receive future payments.  The future payments are typically risky. 1 ©2013 McGraw-Hill Ryerson Ltd.Chapter 14, LO2

 Stocks are ownership shares in a corporation  Risk: bankruptcy  limited liability rule limits the risks  Financial gains from stocks:  capital gains and dividends 2 ©2013 McGraw-Hill Ryerson Ltd.Chapter 14, LO2

 Debt contracts that are most often issued by governments and corporations  Initial investor is free to sell the bond at any time to another investor who gains the right to receive remaining payments as well as the final value of the bond  Primary risk a bondholder faces is the possibility that the corporation or government that issued the bond will default on (fail to make) the bond’s promised payments 3 ©2013 McGraw-Hill Ryerson Ltd.Chapter 14, LO2

 A mutual fund is a company that maintains a professionally managed portfolio, or collection, of stocks or bonds  Funds can be 1. Actively managed, or, 2. Passively managed, e.g. index funds 4 ©2013 McGraw-Hill Ryerson Ltd.Chapter 14, LO2

5 Fund company Assets under management, billions of dollars RBC Asset Management Inc IGM Financial Inc T.D. Asset Management59.0 CIBC Asset Management51.9 Fidelity Investment of Canada Ltd.42.4 BMO Investment Inc.38.8 CI Fund Management51.9 AGF Funds27.8 Scotia Securities22.6 Dundee Corporation23.6 ©2013 McGraw-Hill Ryerson Ltd.Chapter 14, LO2

 Gain or loss can be stated as a percentage rate of return  For example, person buys an investment for $100 today and sells it in one year for $125, then the rate of return is 25 percent ($25/$100)  An investor who buys a house for $300,000 and rents it out for $3,000 per month would obtain a 12 percent per year rate of return ($3000X12)/($ ) 6 ©2013 McGraw-Hill Ryerson Ltd.Chapter 14, LO2

 An investment’s rate of return is inversely related to its price  For example, if a house costs $100,000 and rent is $24000 per year, then will earn a 24 percent per year rate of return  If the purchase price of the house rises to $200,000, then earn only a 12 percent per year rate of return 7 ©2013 McGraw-Hill Ryerson Ltd.Chapter 14, LO2

 Happens when investors try to profit from situations where two identical or nearly identical assets have different rates of return 8 ©2013 McGraw-Hill Ryerson Ltd.Chapter 14, LO2