Download Investment Strategies and Financial Assets

Investment Strategies and Financial Assets
Basic Considerations
Risk-Return –
•The market is unpredictable therefore the outcome is not
certain.
•Investors demand a higher return for a higher risk.
Investment Objectives –
•What is your ultimate goal in investing?
•Examples include college, vacation, unemployment, retirement,
etc.
•Different investments require one to analyze their own
circumstances and investment goals
Simplicity –
•Invest in what you know by following the basics…KISS!
Consistency –
•Invest over long periods of time
•Examples include a 401K Plan (tax-deferred investment and
savings plan)
Financial Assets - Bonds
Bonds are long-term obligations that pay rate of interest
over a number of years
•Coupon – interest
•Maturity – length of the bond
•Par Value – principal or total amount borrowed
Bond prices vary depending on interest rates, risk, and
supply and demand
Bond Yields – annual interest divided by the purchase price
•Determined by the interest paid and the purchase price
•Bonds are NOT insured and the risk varies from company
to company
•Bonds are rated based on financial health, ability to pay
interest and principal, and credit history (Standard &
Poor’s and Moody’s)
•Investors use these rating to determine what type of
bonds to purchase
Characteristics of Financial Assets
Certificates of Deposit (CD’s) –
•Low cost and attractive to small investors
•Can be purchased to fit the investor
•FDIC insured
Corporate Bonds –
•Cost depends on supply and demand
•Huge source of corporate funds
•Investors must consider the risk and length of
the bond
Municipal Bonds –
•Issued by state and local governments
•Usually very safe and attractive
•Usually tax-exempt
•Pay a lower interest rate
Characteristics of Financial Assets
 Government Savings Bonds
• Low-denomination, nontransferable bonds
usually purchased at a discounted rate
• Interest is built into redemption price
• Easy to obtain, very low risk, and usually longterm
 Treasury Notes & Bonds
• Funds borrowed for periods longer than one year
• Treasury Notes – 2 to 10 year maturity
• Treasury Bonds – 10 to 30 year maturity
• Backed by the faith and credit of the U.S.
government
Characteristics of Financial Assets
 Treasury Bills
• Short-term obligation (13, 26, or 52 weeks)
• Known as a T-bill
• Sold at a discount to allow the interest to be
built into the maturity value
 Individual Retirement Accounts (IRAs)
• Long-term, nontransferable, tax-sheltered
deposits
• Money deposited is protected from annual
income tax – can be liquidated early with a
penalty
• Roth IRA – post tax contributions
Markets for Financial Assets
 Capital Markets
• Where money is loaned for more than one year
• Examples: CD’s, Government Bonds, IRAs
 Money Markets
• Where money is loaned for less than one year
• Examples: Mutual funds and money market
accounts
 Primary Markets
• Only the original issuer can repurchase or
redeem a financial asset
Markets for Financial Assets
Secondary Markets
• A financial asset can be sold to someone
else
• Assets can be resold to new owners
• Liquidation of assets is much quicker