CHAPTER 12: INVESTING IN STOCKS AND BONDS. RISKS of Investing!. Business Financial Market Purchasing Power Interest Rate Liquidity Event. Returns from Investing. Current Return— income while you hold the security + Future Return or Capital Gain— gain on the sale of the investment
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Current Return—income while you hold the security
Future Return or Capital Gain— gain on the sale of the investment
= Total Return on the investment
Buy an 8%, $1,000 Treasury bond that matures in 20 years.
Scenario 1: Spend the income
0 5 10 15 20
Set on 1 P/YR
and END mode:
Scenario 2 return:Reinvest the income Use your calculator to find what you would end up with if you indeed earned an 8% compounded annual return:
After 20 years you receive return:
Interest on interest
0 5 10 15 20
If you want
you will most likely have to accept
The Risk-Return Relationship return:
3-yr Treasury Notes
U.S. Treasury Bills
(Net profits after taxes
– Preferred stock dividends paid)
Number of shares outstanding
Market price of the stock
Annual earnings per share
Tech — issued by companies in the technology sector.
Bond Issue Characteristics return:
Below Investment Grade
.075 x $1000 = $75
$75 2 = $37.50
$37.50 + $1000 = $1,037.50
1.01 x $1000 = $1,010
INTEREST RATES AND BOND PRICES MOVE IN OPPOSITE DIRECTIONS!!!
Scenario A months, or:
Interest rates RISE and comparable new bonds are now issued at 9%.
Scenario B months, or:
Interest rates FALL and comparable new bonds are now issued at 7%.
THE END! months, or