CHAPTER 12 SECTION 2 Part One

1
CHAPTER 12 SECTION 2Part One

• Investment Strategies
• And Financial Assets

2
Objectives

• Identify four important considerations
• The three characteristics of bonds
• The characteristics of major financial assets
• Four views of markets for financial assets
• Riskier projects must offer higher returns to
  be attractive.

3
Four Investment Considerations

• The relationship between risk and return
• Investors personal investment goals
• Investments to avoid
• Consistency of investing

4
Risk-Return Relationship

• This is one of the most important relationships
  in the market
• Risk is a situation where the outcome is not
  certain, but probabilities for each outcome can
  be estimated.
• Assets may go up or down, or their may be failure
  to pay, leaving the investor with a loss.
• As a result, investors demand a higher return to
  compensate for higher risk
• As an investor, you should consider the level of
  risk you're willing to tolerate.

5
Investment Objectives

• Another factor to consider is the reason for
  investing
• One can consider goals of assets that
• appreciate in value
• generate current income, or
• accumulate reserves that are highly liquid

6
Source of Income

• May help to determine which assets are purchased
• Payroll deduction planmoney into a 401k
• or government bonds (steady income)
• Bonusescorporate bonds, large denomination
  financial assets (occasional income)
• Each investor must consider their own
  circumstances and goals.

7
Simplicity

• Stay with what you know
• Knowing a few fundamentals can help you make good
  choices
• Two truisms are
• If it seems too complicated ,ignore it and
  choose something else
• If it seems too good to be true, it probably is.

8
Consistency

• Most successful investors invest consistently
  over long periods of time
• Many times the amount invested is not as
  important as the length of time or the frequency
• Save on a regular basis

9
401(k) Plans

• This is a tax deferred investment and savings
  plan that acts as a personal pension fund for
  employees
• Payroll deductions are invested in mutual funds
  or other investments authorized by the employer
• The plan lowers your taxable income because you
  dont pay taxes on contributions until you
  withdraw it
• An added benefit is that more than 80 of
  employers match an employees contributions
• from between 25 to 100

10

• Individual 401 plans vary widely from company to
  company.
• Returns are especially high when an employer
  provides matching funds.
• It is a popular plan because it provides a
  simple, consistent, and relatively safe way to
  save
• You can take it to another job
• You can borrow against it

11
Bonds as Financial Assets

• Bonds are long-term obligations that pay a
• stated rate of interest for a specified number
  of years

12
Bond Components

• A bond has three main components
• The coupon-the stated interest on the debt
• The maturity-the life of the bond
• The par value- the principal or the total
• amount initially borrowed

13
Bond Prices

• Investors consider changes in future interest
  rates, risk of default by the issuer, and other
  factors as well
• Supply and demand will then establish the final
  prices of the bonds.

14
Bond Yields

• In order to compare bonds investors compute the
  bonds current yield
• This is the annual interest divided by the
  purchase price
• The interest received and the price paid
  determine the yield
• Bond worth is determined by the credit rating of
  the issuer
• Investors pay more for bonds with great
• credit worth and less for one with a low
  credit
• rating

15
Bond Ratings

• Investors check the ratings of bonds through two
  major corporations
• Standard Poors and Moodys
• They rate bonds on a number of factors including
  the basic financial health of the issuer, the
  ability to make future coupon and principal
  payments and the issuers past credit history
• Bond ratings are scaled from AA, the highest
  investment grade down to D, the lowest
• (default)
• Ratings are widely publicized and investors
  can find the rating of any bond.