C12S2: Investment Strategies and Financial Assets Main Idea: To invest wisely, investors must identify their goals and analyze the risk and return

C12S2: Investment Strategies and Financial Assets

Main Idea: To invest wisely, investors must identify

their goals and analyze the risk and return involved.


Key Terms: Risk Maturity Par value Tax exempt Current yield Money market Primary market Secondary market


Basic Investment Considerations: The Risk-Return Relationship

The higher the risk, the higher the potential return (money) on your investment


Basic Investment Considerations: Investment Objectives

Why you are saving affects how you save Where the money comes from will also change

the behavior of saving Consider your circumstances before investing


Basic Investment Considerations: Simplicity

You don’t have to know everything to invest Stick to what you know

Consistency If you keep investing, you will have better luck


Basic Investment Considerations: 401(k) Plans

Works as a retirement plan Employees authorize payroll

deductions which go into mutual funds


Bonds as Financial Assets Used to borrow funds for long periods Bond Components:

Coupon Maturity Par value

Bond Prices Must consider the life of the business before

buying a bond


Bonds Ratings Credit system rates companies for bonds

and how likely it is that they will pay off Classifications: Page 322, fig. 12.5


Financial Assets and Their Characteristics Certificates of Deposit

Loans to financial institutions Penalties for early withdrawal Simple, safe investment

Corporate Bonds Prices vary, risks vary Junk bonds have low ratings, high rewards Usually long-term investments


Financial Assets and Their Characteristics Municipal Bonds

Called ‘munis’ Issued by state and local governments Tax-exempt way to invest money

Federal Savings Bonds Bought at half their face value Interest is added to the value until it reaches the

date it can be redeemed Very safe investment, but slow and small returns


Financial Assets and Their Characteristics Treasury Notes and Bonds

Issued when the gov’t borrows money for over a year

Notes: Maturity 2-10 years Bonds: Maturity 10-30 years Safest investments

Treasury Bills T-Bills pay after a number of weeks

IRAs Employees can set these up to help with retirement


Markets for Financial Assets Capital Markets

Money is loaned for more than one year

Money Market Money is loaned for less

than one year

Figure 12.6Financial Assets and Their MarketsFigure 12.6Financial Assets and Their Markets


Markets for Financial Assets Primary Markets

Nontransferable investments

Secondary Markets Existing assets can be

resold to new owners

Figure 12.6Financial Assets and Their MarketsFigure 12.6Financial Assets and Their Markets

Documents

C12S2: Investment Strategies and Financial Assets Main Idea: To invest wisely, investors must identify their goals and analyze the risk and return