Bond, Mutual Fund, Risk What is?
A bond is like an IOU for a loan you’ve made to an institution like the government or a corporation • When you purchase a bond you are lending money to the issuer, corporation, government, or government agency What is a Bond?
The issuer promises to pay you a specific rate of interest known as the “coupon rate” • You are paid the interest on a predetermined schedule for the life of the bond • The issuer also promises to repay the face value when the bond matures
Face value is known as “the principal” or the “par value” • Bonds are also known as fixed-income investments because the investor knows the rate of interest and the interest payment schedule in advance of purchase
Corporate Bonds – major sources of corporate borrowing • Municipal Bonds – Millions of bonds have been issued by state and local governments Types of Bonds
Agency Bonds – some government sponsored but privately owned corporation (Fannie Mae/Freddie Mac), and certain federal government agencies issues bonds to raise funds either to make loan money available or to pay off new projects • U.S. Treasury Bonds – backed by the full faith and credit of the U. S. government. When the government spends more that it collects in taxes and other revenues, it issues Treasury notes, bills, and bonds to borrow the money to pay the difference
Variables to consider when purchasing bonds • Maturity • Redemption features • Credit quality • Interest rate • Price • Yield and tax status Research
Default: Failure to pay principal or interest when due. Defaults can also occur for failure to meet non-payment obligations, such as reporting requirements, or when a material problem occurs for the issuer, such as a bankruptcy. • Fixed-Income Investments: Pay interest on a set schedule. Fixed-Income Investments include corporate, municipal, agency, and U.S. Treasury bonds. • High-Yield Bonds: To attract investors, the issuers of these bonds pay a higher rate of interest than investment grade bonds with the same maturity. They are rated below investment grade bonds and are also called “Junk Bonds.” Vocabulary Terms
Issuer: An entity which issues and is obligated to pay principal and interest on a debt security. • Interest rate: Compensation paid or to be paid for the use of money. Interest is generally expressed as a percentage rate. (Also referred to as coupon rate) • Investment Grade Bonds: Bonds that are sold by a very reliable issuer, the government, a large corporation, or a government agency that is most likely to repay the loan and the interest as promised Vocabulary Terms
IOU: Means exactly as it sounds, “I Owe You.” It is an acknowledgement of a debt. • Maturity: The date when the principal amount of a security is payable • Par value: The principal amount of a bond or note due at maturity.( also referred to as face value) • Prepayment: The unscheduled partial or complete payment of the principal amount outstanding on a mortgage or other debt before it is due. • Principal: The face amount of a bond, payable at maturity (also referred to as face or par value) • Trade date: The date when the purchase or sale of a bond is transacted Vocabulary Terms
About Bonds • Choosing Bonds • An Interest in Bonds Activity Sheet
A mutual fund is a collection of stocks, bonds, and other securities owned by a group of investors and managed by a professional investment advisory firm • The investment firm collects money from investors, pools it and invests it What is a Mutual Fund?
The mutual fund manager, working with a team of analysts, decides which stocks and securities to include in the fund, often investing in 100 or more securities
Mutual funds fit the needs of people with a variety or risk tolerance • All mutual funds have investment objectives, for example, value funds only invest in stocks the fund’ managers believe are undervalued • Some funds take the fund’s objective even further by only investing in companies the manager believe are “socially responsible”
Bonds: An IOU that a company or government sells when it borrows money. Bonds are called fixed-income investments because they pay a fixed amount of interest to the bondholder for the use of his/her money. • Closed-end funds: Like open-end mutual funds, these are collections of securities managed by a professional investment advisor. Unlike open-end mutual funds, their shares are traded on a stock exchange like ordinary stock. Vocabulary Terms
Exchange-Traded Funds: Funds whose shares, like closed-end funds, are traded on a stock exchange. These invest in stocks or bonds that closely follow an index. • Index: A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is essentially an imaginary portfolio of securities representing a particular market or a portion of it. For example, the Standard & Poor's 500 is one of the world's best known indexes and is the most commonly used benchmark for the stock market. Vocabulary Terms
Mutual funds: An investment instrument developed and managed by a company that pools members’ money—often millions of dollars—to invest in a variety of stocks and bonds. Investment professionals who research companies and buy or sell stocks actively manage the funds based on what they think is best for the fund’s shareholders. • Open-end funds: Funds that usually sell as many shares as investors want to buy. Sometimes open-end funds stop selling shares to new investors when they grow too large to be managed effectively. Investors, who want to sell shares of their open-end funds, sell them back to the mutual fund Vocabulary Terms
What are Mutual Funds • Reading and Interpreting Information on Mutual Funds Activity Sheets
Every investment carries risk, the chance of losing all or part of an investment • Each investor must determine his/her risk tolerance-is he/she a conservative, moderate, or speculative investor? • A number of factors including age and financial stability are important elements in determining a person’s risk tolerance What is Risk?
A stock’s beta number, a measure of a stock’s volatility, is one way investors can estimate the level of a stock’s risk
Beta Number: A calculation that helps measure the level of risk in investing in a stock. • Price/Earnings Ratio (also P/E Ratio): The ratio of the stock’s price per share to its earnings per share. • Risk: The chance of losing all or part of the value of an investment. • Conservative—fixed income and preferred stocks are considered conservative. Vocabulary Terms
Moderate—include growth stocks—particularly young companies with great potential. • Speculative—stocks that are highly unpredictable. For example, many dot/com stocks are highly speculative, with incredible highs and devastating lows Vocabulary Terms
Risk Tolerance: An investor’s ability to accept loss of some or all of the money he or she has invested, based on a number of factors including age, financial stability, amount of time before the invested funds are needed for other purposes, etc. • Volatile/Volatility: The potential unpredictability or instability of a stock. A volatile stock is a risky stock—one that can go very high, or very low Vocabulary Terms
Conservative, Moderate, or Speculative? • To Risk or Not to Risk? Activity Sheet