Unformatted text preview:

INVESTMENTS1) Basic Financial Rulesa) Risk and Returni) Investing is all about: Future Expectations(1) No one knows the future with certainty(2) Liquidity: The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets Ability to convert an asset into cash quickly. Also known as “marketability”. (3) Default Risk: Probability firm will be unable to meet contractual obligations.(4) Interest Rate Risk: Probability interest rates will move against you. b) Time: i) As an investment characteristic: Fixed Maturity – Bonds, CDs. ii) Length of time to invest: How long? When? Investment Horizon. Retirement? 40-50 year2) Investinga) Equity Securities: Stock/ Ownershipi) Returns: Capital Gains, Dividendsb) Debt Securities: Lending money-----Certificate of Deposits---Highly Liquid, Bonds, and Treasuries. i) Returns: Capital Gains, Interestc) Capital Gains: Difference between selling price and what it cost you. d) Transaction Costs: Costs incurred in Buying + Sellingi) All Costs reduce returns/capital gains. 3) Investmentsa) Generally Speaking:i) Stock prices move in the Same Direction. Up together or down together.ii) Debt security prices move in the same direction. iii) Stocks and Bonds move in opposite direction.(1) **Stock price↑ Bonds↓b) In the Specifics: look at Generali) Investments:(1) Move in: Whatever Directions they do(2) Move up or down: In various amounts(a) $100,000 today-----other amount tomorrow 4) Debt Securities a) Interest rate you receive depends on:i) Market interest rates when purchasedii) Size (amount) investediii) Maturity/ length of investmentiv) Default Risk-Creditv) Certificate of Deposit: Specific Dollar Amount deposited for a specific time: Choose how long---6months, 12 months etc.(1) Longer---Less liquidity, higher interest. Further, the riskier=more return(2) Fixed Rate: interest rate is constant for: Security’s life/until maturity. Know exactly how much (3) Variable Rate changes with interest rate in the economy (a) Varies with an index at a preset time(b) Must know what is happening in the economy(4) Early withdrawal Penalty(5) Trade off: liquidity vs. Risk of return(6) Tips: 1. Don’t allow: Automatic – roll –overs 2. Compare offer Rates (APYS): Can vary considerably 3. Give instructions. Be aware. Maybe you need money now? Tuition, accident etc. Maybe change length of time 4. Laddering5) Bond Types-long term debta) Corporate Bondsi) Face Price: $amount the firm borrows.ii) IBM issues bond:-Face Value= $1000@7%APY. 30 yr bond. $1000 + 40= 1040. $80/yr in int. 2x per year. iii) Retirement: Enough Bonds will add up every 6 monthsiv) Liquidity=Relative(1) You can trade in between(a) Hold until maturity----know exactly what you will get. v) Amount to be repaid: At Maturityvi) Tradable: Can be publicly traded between investors.b) Treasury Securities: Bonds/notes/bills: issued by US gov’t. (Longest shortest maturities. c) US Savings Bond: **CAN’T TRADEi) Savings bonds not the same as treasuriesd) **A bond’s ‘face price’ NOT always its ‘purchase price’e) Treasury bonds are very liquid, corp. bonds---not so muchi) ↑>$100,000 CDs, not FDIC insured. Make sure bank is solvent. 6) Money Market Deposit Accounts (MMDA)a) ‘Money Mkts’: Trading in short-term securities-------Low Risk. Mature in < 1yeari) High liquidityLower RiskLower Returnii) Pays a Variable Interest Rateiii) Minimum balance usually required(1) Opportunity Cost(2) Penalty: If Balance falls below minimum. iv) May have limited check writingb) Depository Accounts (usually FDIC insured)c) ****MMMF(Mutual funds) & MMDA (Depository Accounts): Differenti) MMDA=FDIC insured up to $100,000ii) MMMF=Reasonably safe but not backed by gov’t (1) Can lose money: subject to loss. 7) Indexesa) An Index: A group of specified securities: Stocks + bondsi) Typically, diversified around some characteristic.ii) More Data points make measures: *More meaningfulb) Indexes help investors:i) Gauge general market conditionsii) Compare their returns to an index: Benchmark to measure performance. iii) Look at past behavior: Of represented securitiesiv) Attempt to: Forecast stock market behavior.8) Index Examplesa) CPI—Consumer Price Index: A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. (inflation+deflation)b) Bond Indexes: method of measuring the value of a section of the bond market. It is computed from the prices of selected bonds (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.c) Well Known Stock Indexes:i) DOW(DJIA): 30 Huge US firms: all industries(1) High % of mkt value, industry breath, qualityii) S&P 500: 500 largest US firms – leading firms in leading industries (NYSE & AMEX)(1) Broader measure than the DJIAiii) NASDAQ 100: 100 firms on NASDAQ exchange(1) Leans toward technical & high growth firmsd) MSCI: Morgan Stanley Country Indexese) Comparing numeric levels of two indexes is: MEANINGLESS i) Often used as benchmarks to measure an individual’s performance against market. ii) Can you beat the appropriate index?---- Must be measured over same time periodiii) Performance is NOT just about returns: also about risks(1) Higher Risk; Higher returns but risk of not getting them. 9) Returns and Debt Securitiesa) Interest Payments: b) Assuming no default: the exact return is known on fixed-interest security if held to maturityc) U.S treasuriesi) Very low default Risk: low return. ii) Very High Liquidity: Saferd) Corporate Bonds: Risk level is rated higher interesti) Higher Risk bond must offer: Higher returnsii) Corporate bonds are RISKIER than U.S bondse) If sold before maturityi) Bond selling price impacted by: maturity and interest ratesf) U.S savings bonds: Fixed Rate of int. Over fixed period. Non-negotiable. Can’t Tradei) Safe; Risk free10) Common Stocks Outstandinga) General Market Conditionsi) Bull


View Full Document

FSU FIN 3140 - INVESTMENTS

Download INVESTMENTS
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view INVESTMENTS and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view INVESTMENTS 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?