1. Investing in Financial Assets

2. Your homework over the weekend was to ask three people of different ages and genders if they save and the reasons they do. What were some of the results?

3. An IOU that you draft and give to a friend in payment of a debt is an example of a financial asset. Why is this so?

4. Savings vs. Investments
Safe
Easy
Low Return
Used for Short-term goals
Investments:
Involves Risk
Volatile in short time periods
Offers potential growth
Used for mid-term and long term goals

5. Pretest and Advertising Activity

6. Risk Lagoon
Why do you think the fishing spot on Planet Orange was called Risk Lagoon?
How would you describe the potential return on Risk Lagoon- high or low?
Who had a positive return on their investment at Planet Orange?
Who do you think is better off time and money-wise, Donia or Bubba?
Ted not only failed to catch a fish, he lost the money he had invested! How much did Ted lose?

7. BONDS!
Bonds are long-term obligations that pay a stated rate of interest for a specified number of years
It is the money that the issuer is BOUND, or OBLIGATED to repat

8. Bonds as Financial Assets
1) 3 Bond components:
Coupon- stated interest on the debt
Maturity- life of the bond
Par value- aka “principal”, or the amount repaid to the lender at maturity. Dollar value
A corporation sells a 6 percent, 20-year, $1,000 par value bond that pays interest semi-annually.
How much does the holder receive semi-annually?
Hint: .06(1000)/2

9. Bonds as Financial Assets
2) Bond Prices
Investors consider changes in future interest rates, the risk the company will default, and other factors
Supply and demand determine final price
Ex. Investors views the bond as a financial asset that will pay $30 twice a year for 20 years, plus a final par value payment of $1,000
Investors can offer $950, $1,000, $1,100 or any other amount for this future payment stream

10. Bonds as Financial Assets
3) Bond Yields- annual interest divided by purchase price (used to compare bonds)
**Note: because the creditworthiness of corps. differ, not ALL bonds (6%, 20-year, $1,000 will cost the same)
Bonds are not insured
Ex. Investor pays $950 for bond, current yield would be $60 divided by $950, or 6.32%
If investor paid $1,100 for bond, the current yield would be $60 divided by $1,100. or 5.45%

11. Bonds as financial assets
4) Bond Ratings- use letters to check the quality of bonds
Standards and Poor
Moody’s
Bonds with high ratings sell at higher prices than do bonds with lower ratings
6%, 20-year, $1,000 par value bond with a AAA rating may sell for $1,100
6%, 20-year, $1,000 par value bond with a BBB rating may sell for $950 (BUT it has a higher current yield of 6.32)
Riskier investments require higher returns to compensate for the risk

12. How do bond ratings affect the price of bonds?
Would you buy when interest rates are high or low? Why?

13. More Math Practice
A $10,000 corporate bond issued by Products Inc