1. Financial Assets and Their Markets
11.2

2. Risk Variety of Investment options Many financial assets in the market
Some investments carry small risks
Others carry possibility of large risk but large returns

3. Stocks A share of stock is a partial ownership in a company
Stock usually comes in two classes
Class A – usually called common stock or voting stock
Class B- a different version of common stock, often for management of a business

4. Voting rights
Usually, class A shares have more voting power than class B shares
Voting for all things in a business
Some companies give more power to class be shares
Class division might also affect pay schedule

5. Stock Price and why do people own stock?
Price of stock is determined by the supply of the stock and the demand for the stock
People own stock:
To make decisions in the company’s future
To make money when they sell the stock
To make money from dividends

6. Stock dividends
Company’s that have/sell stock have a choice for yearly profits:
Invest back into company
Pay out profits to shareholders
Some stocks, often called “blue chips”, consistently paid dividends to their shareholders. Companies like Google almost never do. Why do you think that is?

7. Bonds
Governments and businesses issue bonds when they need to borrow funds for long periods.
Bonds come in different types and are different from a savings bound you might receive from your grandmother.

8. Components of a Bond
Bond – is a formal long-term contract that requires repayment of borrowed money and interest on the borrowed funds at a regular interval.
3 Components
1. Coupon Rate – or the stated interest of the debt
2. Maturity – or the life of the bond
3. Par Value – the principal or the total amount initially borrowed that must be repaid to the lender at maturity

9. Suppose Suppose a corporation sells a bond at
Coupon Rate: 6%, paid semiannually
Maturity: 20 Years
Par Value: $1,000
How much does the investor who buys the bond on the open market get per year from their purchase of the bond?
What happens at the end of the maturity date?

10. (2x’s/year) or .06 x $1000 / 2 = $30 (two times per year)
Corporation retires the $1000
What price will an investor pay on the bond market for this particular bond?

11. Bond Market Investors consider the following when purchasing a bond:
1. Future Interest Rates
2. Risk the company will default
3. Supply and Demand

12. Yields In order to compare bonds, investors compute the bond’s yield
Yield: bond’s interest / by the purchase price
If an investor paid $950 then the current yield would be $60 / $950 = 6.32%
If an investor paid $1100 for the bond, the current yield would be $60 / 1,100 = 5.45 %
Interest received and price paid are what ACTUALLY determine the amount of the interest paid to the investor. All of which is based on the market or the law of supply and demand.

13. Bond Ratings
Because the credit worthiness, or financial health, of a corporation and governments differ, all 6%, 20 year, $1,000 bonds will not cost the same.
Investors have a way of checking the quality of bonds.
2 corporations publish bond ratings
1. Standard’s and Poor’s
2. Moody’s

14. Bond Table

15. Explanation AAA = highest investment grade D = default
Bonds with higher ratings sell at higher prices than do bonds with lower ratings
Higher the risk the higher the yield

16. Economic Meltdown and the Other Culprit (the Rating Agencies)

17. Corporate Junk Bonds
Exceptionally risky bonds with lower S&P rating of BB or lower
Moody’s rating of Ba or lower
Carry a high rate of return for the higher possibility of default
Usually long term investments
Advantage is that they can be easily sold off
Disadvantage is that the IRS see it as taxable income

18. Municipal Bonds
“Munis” – are bonds issued by state and local governments.
States issue bonds to finance highways, state buildings, and some public works.
Cities issue bonds to pay for stadiums, or libraries, or parks and other civic improvements.
Advantages: Safe investments, cities don’t go out of business, also, cities have the ability to tax, also munis are tax exempt (federal and sometimes state)
Disadvantages: Lower rates of interest

19. Government Savings Bonds
Savings Bond: are low denomination non transferable bonds issued by the U.S. government.
Also called EE Bonds.
Available in denominations of $50 to $10,000 denominations
$5,000 will get you $10,000 dollars but it will take 30 years to get your money.
Interest is built into the redemption price.

20. Treasury Notes and Bonds
When the government takes loans out for more than 1 year it issues treasury notes or bonds
T notes – U.S. government obligations with maturities of years
T bonds – have maturity date ranging from 10 to 30 years.
Denominations of $1,000
Bought directly from the U.S. Treasury
Investor accounts are computerized so interest is calculated directly into the account. (rather than mailing out checks)
T Bills – is a short-term obligation with a maturity of 4,13, or 26 weeks and a minimum denomination of $1,000

21. CDs
Loans to banks
Banks and borrowers depend on having these funds for a certain amount of time.
Impose penalties if people cash them in early
Attractive because they don’t cost much
Investors can choose the length of maturity
FDIC insured

22. Mutual Funds Per investopedia.com:
an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.
Traded on the open market by their ticker, like a stock
Mr. Wicker invests in FSITX, FSIVX, FSTVX