Slide 1Hypothetical SituationsAppropriate Place to Put Money?Typical Return of InvestmentInflation and Rate of Return(ROR)Inflation and Real RORGo Back to Savings AccountROR of InvestmentRisk of InvestmentNo Risk Investment?TIPS: How does this work?TIPSTIPS : ExampleSTRIPSSTRIPSSPOT Rate ExampleSTRIPSExampleSTRIPS : HistorySTRIPS : QuizQuestions ??SourceAkiyoshi SaitoHypothetical Situations•You worked for a company called Akiyoshi–President, Akiyoshi, did not pay you well•55 Years•Own $300,000 by cash•Have a bad heart condition by working with Aki for a long time–No tolerance to StressAppropriate Place to Put Money?•Savings Account•Professer Brooks portfolio•My Pocket •Stock Market•Treasury Bill•Municipal BondTypical Return of InvestmentMy Pocket-100%Municipal Bond5.5%Savings AccountSavings Account1.04%Treasury BoundTreasury Bound4.0%Stock MarketStock Market11.1%Inflation and Rate of Return(ROR)•What is the real ROR with Inflation??RORInflationInflation and Real RORRORRORInflationInflationReal RORReal RORGo Back to Savings AccountROI1.04%ROI1.04%Inflation3%Inflation3%Real ROR-1.96%Real ROR-1.96%IS SAVINGS ACCOUNTS REALLY APPROPRIATE FOR YOUR INVESTMENT?ROR of InvestmentMy Pocket-100%Municipal Bond2.5%Savings AccountSavings Account-1.96%Treasury BondTreasury Bond1.0%Stock MarketStock Market8.1%Risk of Investment•Variance of Market Price–Stock Price–Bond Price•Inflation Rate–Typically positive every yearNo Risk Investment?•TIPS Treasury Inflation-Protected Securities•STRIPS– Separate Trading of Registered Interest and Principal of SecuritiesTIPS: How does this work?•Consumer Price Index(CPI)•Face Value•Coupon RateTIPSCPI•CPI•IncreaseFace•Face Value •Increase Increase in Tax ExpenseROR•Fixed•No Risk of InflationTIPS : Example •Excel SheetSTRIPS•STRIPS are effectively zero coupon bonds–Separated in Coupon Strips and Principle Strips•Effectively zero coupon bonds?•Year to Maturity of STRIPS will be used to discount future cash flowSTRIPS •Can be purchased from Bank•Bank will use spot rate to price each of Zero coupon bounds, whose rate can be calculated by observed yields of Treasury bills and treasury Coupon securitiesSPOT Rate Example•Purchased 1.5 years, semiannual coupon of 8.5% and $100 par bound•Observed YTM of .5 and I year are 8% and 8.3% respectively without no coupon.•Price of 1.5 Maturity bill is $99.45STRIPShttp://ww w.google.com/search?q=treasury+strips&oe=utf-8&rls=orgExample•ExcelSTRIPS : History •Originally started by –Merrill Lynch and Salomon Bros in 1982– less liquid bounds and indirect obligation of US movement bounds•In 1985, US government announced STPRIPS program– All of 10 years and longer treasuries are qualifiedCausedTo address those ProblemsSTRIPS : Quiz•Face $100,000•Coupon rate 3%•YTM 4%•Annual Interstate Payment•Year to Maturity 10•How many Zero Coupon bonds can be created ?• What would be the rough projected price of Zero Coupon bounds for year 2 interest rate Payment?Questions ??•Thank you for listeningSource•http://www.money-rates.com/savings.htm•Foundation of Finance Market and
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