Download Assets and Investments

Things of worth or how to make more
money with money!

What is an asset?

What is an investment?

Big Three Asset Classes:



Stock is the
The stock of a corporation/company is partitioned
into shares that are started at the time of business
formation.
A share represents a
Ex.) Apple has 927,100,000 shares and to buy
one share, the current price is $397.77.
http://money.cnn.com/data/markets
Google Finance is a great website to
look at the price of company shares!
https://www.google.com/finance?cid=
22568




Stocks are traded (purchased and sold) on various exchanges around
the world.
The two primary American stock markets —
In order for a companies stock to be sold on an exchange, the
company must be public meaning the purchase of shares is open to
the everyday investor. (McDonalds)
Private companies may have stock but it is not for sale on an
exchange but traded between private individuals. (Subway)



Prices for shares are determined by
Generally, the price should reflect the value of the
company in terms of assets and earnings but that isn’t
always the case
Shares cannot be purchase directly by an investor.

- Shares can be purchased

Market Appreciation

Dividend
 Note: Some people take this money and spend it. Most smart
investors will use that money to buy more of the same stock.
 Note: Not all companies give out a dividend.
 Apple, for example, didn’t issue a dividend until after the death
of Steve Jobs
The following website was found on Google
finance and we are looking at Gap Company
stocks…
https://www.google.com/financeq=gap&ei=bXh5UeitHaGeiQKlRg

Value of the Stock Market
◦ Total Value of the US Stock Market
◦ Total Value of the Global Stock Market

$
$
Tracking the Stock Market
◦ Stocks are tracked according to an index
◦ A stock index is a statistical compilation of represented
stocks
◦ Famous Stock Indices include the Dow Jones Industrial
Average (DJIA), S&P 500, and Nasdaq Composite.
http://money.cnn.com/data/markets
 Dow Jones Industrial Average (DJIA) – tracks 30 of largest and
most influential companies in the US.
http://finance.yahoo.com/q/cp?s=%5EDJI
 S&P 500 – tracks the 500 leading publicly traded companies in
the US economy.
http://en.wikipedia.org/wiki/List_of_S%26P_500_companies
 Nasdaq Composite – Tracks the majority of stock traded on the
NASDAQ exchange (over 3000 stocks)
http://money.cnn.com/data/markets/nasdaq/

A bond is generally a loan to an entity (generally a
company or government) for a defined period of
time at a set interest rate
◦ Companies and governments issue bonds to fund their
day-to-day operations or to finance specific projects.
◦ When you buy a bond, you are loaning your money for a
certain period of time to the issuer, be it General Electric
or Uncle Sam.
◦ The holder of the bond purchases it for a set price and the
issuer pay the holder a set amount at a regular period
until the bond is paid in full
◦ In return, bond holders get back the loan amount plus
interest payments.
Treasuries
 U.S. Governments bonds sold by the treasury
department in order to pay for governmental
projects.
 The money paid out for a Treasury is essentially a
loan to the government. As with any loan,
repayment of principal is accompanied by a fixed
interest rate.
 These bonds are guaranteed by the ‘full faith and
credit’ of the U.S. government, meaning that they
are extremely low risk (since the government can
simply print money to pay back the loan).
 Treasuries make interest payments semi-annually
and the income that holders receive is only taxed at
the federal level.

Treasury Notes

Treasury Bills

Treasury Bonds
◦ A marketable U.S. government debt security with a fixed interest
rate and a maturity between one and 10 years. Treasury notes can
be bought either directly from the U.S. government or through a
bank.
◦ A short-term debt obligation backed by the U.S. government with
a maturity of less than one year. T-bills are sold in denominations
of $1,000 up to a maximum purchase of $5 million and commonly
have maturities of one month (four weeks), three months (13
weeks) or six months (26 weeks).
◦ A marketable, fixed-interest U.S. government debt security with a
maturity of more than 10 years. Treasury bonds make interest
payments semi-annually and the income that holders receive is
only taxed at the federal level.
 Municipal Bonds
 Municipal bonds are debt obligations issued by states,
cities, counties and other governmental entities, which use
the money to build schools, highways, sewer systems, and
many other projects.
 Corporate Bonds
 Corporate bonds are debt obligations, or IOUs, issued by
private and public corporations. They are typically issued
in multiples of $1,000 and/or $5,000. Companies use the
funds they raise from selling bonds for a variety of
purposes, from building facilities to purchasing equipment
to expanding their business.

Most bonds are bought and sold, and resold
over-the-counter.
◦ The OTC market consists of hundreds of financial
institutions and brokerages that buy and sell
over the phone or via computer networks.


Most people purchase bonds through mutual
funds.
Value of the Bond Market
 Total Value of the US Bond Market $37 trillion
 Total Value of the Global Bond Market
$93 trillion



Cash Equivalents are investments that are highly
liquid meaning they can be converted to cash with
very little trouble.
Examples: U.S. government Treasury bills, bank
certificates of deposit, bankers' acceptances,
corporate commercial paper and other money
market instruments.
Typically, cash equivalents have low interest rates.
A 1% interest rate on a cash equivalent is
AMAZINGLY high







This assignment is to help you gain a better understanding of
stocks and bonds
Using the internet, look up the stocks that are included in the
DJIA, the S&P 500, and the Nasdaq Composite (Note: you can
NOT use the one listed in the example)
Pick three from each and list the close price of the day, any
dividend, when it is paid, the YTD appreciation, 5 year
appreciation
Do some research on bonds. Besides the US Government, local
government and companies, who else can issue bonds?
Is Flagstaff issuing or holding any bonds currently?
What is the current yield on the 10 year T-Note? How does this
yield compare to the yield from 5 years ago? What does that
mean for the US government?
Go to a bank’s website (BoA, Wells Fargo, Citi, Ally, Compass,
etc) and look up their rates of cash equivalents. You should
compare CD’s, Savings and Money Markets from at least 3
banks.

Vocab Terms
◦ Principle
 The amount of money lent or owed
◦ Accumulated Principle
 The current balance. Generally, it is a combination of
principle and the accrued interest
◦ Interest Rate
 A percentage of money owed to a lender/investor for the
privilege of borrowing money
◦ Compounding Interest
 Interest paid on principle plus previously paid interest
◦ Annuity
 A stream of payments over a period of time. The payments
generally collect interest during that time.


Interest paid once a year, at the end of the year
Formula:
t





A  P(r )
A = Accumulated Principle
P = principle
r = rate (in decimal) Note: You need to add 1 to the rate
t = time (in years)
Example
◦ Harper lends Rocco $4,000 and the agree that Rocco pay
Harper 5% interest for the next 5 years when Rocco will
pay the whole amount back. Using the formula, Rocco
realizes that
, and he will
have to pay that amount in 5 years.
A  4000(1.05)5  $5,105.13






Let’s look at that scenario again
Year 1: Rocco has the $4,000 and when the end of the
year comes, he owes $200 in interest. Harper isn’t
taking payment until after 5 years, so that interest is
ADDED to Rocco’s balance. He now owes $4,200
Year 2: This year, Rocco owes the 5% on the $4,200,
not the original principle! So he owes $210 and his
balance is now $4,410
Year 3: He owes $220.50 with a new balance of
$4,630.50
Year 4: He owes $231.53 with a new balance of
$4,862.03
Year 5: In the last year, he owes $243.10 with a new
balance of $5,105.13



What is happening with Rocco’s balance? It is
increasing as time goes on.
Why? Because as the interest is added to his
balance, he needs to pay interest on the interest he
has already paid
What happens if Harper wasn’t happy with being
paid interest at the end of the year but wanted to
be paid every month?


A small part of the interest paid at multiple times a
year with interest being paid on the principle plus
previously paid interest
nt
Formula:
 r
A  P 1  
 n
 n = the number of times compounded a year

Example: Harper lends Rocco $4,000 for 5 years at
5% interest compounding monthly. How much
does Rocco owe after 5 years?
Rocco owes $5,133.43
5*12
 .05 
A  4000 1 

 12 
 $5,133.43


Compounding Interest can be used to determine
how much you want to invest
Example: Harper wants to save some money in
Billy Bob’s Bodacious Bank which is offering a CD at
1.25% compounding quarterly for 10 years. She
would like to have $10,000 at the end of the
period of time. How much does she need to
invest?
10*4
 .0125 
 10, 000  P  1 

4 


P = $8,826.69
Solve for P



Compounding interest is great IF you want to
invest an amount then forget about it. What
happens if you would like to make regular
payments into a savings?
This is called an annuity as it is a stream of
payments that are collecting interest from the time
they are paid in. (Note, there is an investment
vehicle called an Annuity. We are not discussing
that in this class)
n

1

i
1 


Formula: A  C 



i


 C = contributions
 i = interest rate in the contribution time period
 n = number of contributions