7.2 Bonds and Other Financial Assets
Objectives
1. Describe the characteristics of bonds as financial assets
2. Identify different types of bonds
3. Describe the characteristics of other types of financial assets.
4. Explain four different types of financial asset markets.
How do borrowers raise money for investment? One of the most important ways is by selling bonds.
Bond – Certificates sold by a company or government to finance projects or expansion.
EX: War bonds during WWII
Bonds are basically IOUs that the government or companies must pay back to investors with a fixed amount of interest. They are generally considered low-risk investments.
Bonds have three basic components:
Coupon Rate – The interest rate that a bond issuer will pay to a bondholder.
Maturity – The time at which payment to a bondholder is due.
Par Value – The amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity.
Example: Suppose you buy a bond from a new company, Jeans Inc.
Coupon rate: 5%, paid to the bondholder annually
Maturity: 10 years
Par Value: $1,000
Advantages and Disadvantages
The person who buys a bond is called a “holder,” while the person who sells the bond is an “issuer.”
Bonds are desirable to the issuer because
1. The coupon rate on a bond does not go up or down so companies know exactly how much they will have to pay back.
2. Unlike stockholders, bondholders do not own a part of the company. So a company does not have to share its profits if it becomes wealthy.
Bonds are undesirable to the issuer because
1. A company must make interest payments on bonds, even during bad years.
Types of Bonds
Savings Bond – A low-denomination ($50 to $10,000) bond issued by the US government.
Municipal Bond – A bond issued by a state or local government to finance highways, libraries, parks and schools.
Corporate Bonds – A bond that a corporation issues to raise money to expand its business.
Junk Bonds – A lower-rated, potentially higher-paying bond.
Savings and municipal bonds are generally considered low-risk compared corporate bonds, whereas junk bonds are the riskiest.
Wednesday, April 29, 2009
Monday, April 27, 2009
7.1 Notes
7.1 Saving and Investing
Objectives
1. Understand how investing contributes to the free enterprise system.
2. Explain how the financial system brigs together savers and borrowers.
3. Describe how financial intermediaries link savers and borrowers.
4. Identify the trade-offs among risk, liquidity and return
If you go to school today, you give up your time now so that you will be prepared for a career in the future. If a firm builds a new plant, it spends money today for the sake of earning more money in the future. These actions represent investments.
Investment – The act of redirecting resources from being consumed today so that they may create benefits in the future.
Investment promotes economic growth
EX: You put money in bank, the bank lends it to a business, the business invests the money in a new plant, and the plant hires people and produces better products.
In order for investment to take place an economy must have a financial system.
Financial System – The system that allows the transfer of money between savers and borrowers.
Financial Intermediary – An institution that helps channel funds from savers to borrowers.
EX: Banks, saving & loan associations, credit unions, and mutual funds.
Mutual Fund – A fund that pools the savings of many individuals and invest this money in a variety of stocks, bonds and other assets.
Savers give their money to financial intermediaries, who give it to investors. Why don’t savers deal with investors directly? There are three reasons:
1. Diversification – Spreading out investments to reduce risk.
EX: Putting your money in a bank or a mutual fund allows you to pool your money with other people, which is then invested in a variety of places.
2. Financial intermediaries provide information to savers. For example, mutual fund managers are knowledgeable about how the stocks in their portfolios are performing.
Portfolio – A collection of financial assets.
Intermediaries also provide a prospectus to savers.
Prospectus – An investment report to potential investors.
And finally intermediaries provide liquidity.
3. Liquidity – The ease with which people can convert and asset into cash.
EX: You can sell your shares in a mutual fund easily but if you had invested in a piece of art, it might be hard to sell.
Investors must make choices between return on an investment, its risk and how liquid it is.
Return – The money an investor receives above and beyond the sum of money initially invested.
Objectives
1. Understand how investing contributes to the free enterprise system.
2. Explain how the financial system brigs together savers and borrowers.
3. Describe how financial intermediaries link savers and borrowers.
4. Identify the trade-offs among risk, liquidity and return
If you go to school today, you give up your time now so that you will be prepared for a career in the future. If a firm builds a new plant, it spends money today for the sake of earning more money in the future. These actions represent investments.
Investment – The act of redirecting resources from being consumed today so that they may create benefits in the future.
Investment promotes economic growth
EX: You put money in bank, the bank lends it to a business, the business invests the money in a new plant, and the plant hires people and produces better products.
In order for investment to take place an economy must have a financial system.
Financial System – The system that allows the transfer of money between savers and borrowers.
Financial Intermediary – An institution that helps channel funds from savers to borrowers.
EX: Banks, saving & loan associations, credit unions, and mutual funds.
Mutual Fund – A fund that pools the savings of many individuals and invest this money in a variety of stocks, bonds and other assets.
Savers give their money to financial intermediaries, who give it to investors. Why don’t savers deal with investors directly? There are three reasons:
1. Diversification – Spreading out investments to reduce risk.
EX: Putting your money in a bank or a mutual fund allows you to pool your money with other people, which is then invested in a variety of places.
2. Financial intermediaries provide information to savers. For example, mutual fund managers are knowledgeable about how the stocks in their portfolios are performing.
Portfolio – A collection of financial assets.
Intermediaries also provide a prospectus to savers.
Prospectus – An investment report to potential investors.
And finally intermediaries provide liquidity.
3. Liquidity – The ease with which people can convert and asset into cash.
EX: You can sell your shares in a mutual fund easily but if you had invested in a piece of art, it might be hard to sell.
Investors must make choices between return on an investment, its risk and how liquid it is.
Return – The money an investor receives above and beyond the sum of money initially invested.
Saturday, April 4, 2009
Topic 6.1 combining supply and demand
6.1: Combining Supply and Demand
Objectives
1. Explain how supply and demand create balance in the marketplace.
2. Compare a market in equilibrium with a market in disequilibrium.
3. Identify how the government sometimes intervenes in markets to control prices.
4. Analyze the effects of price ceilings and price floors.
Buyers always want to pay the lowest possible price, while sellers hope to sell at the highest possible price. With buyers and sellers at odds, how can a market system satisfy both groups? In a free market system, supply and demand work together. The result is a price that both sides can agree on.
Price of a slice of pizza ($) Quantity Demanded Quantity Supplied Result
.50 300 100 Shortage from
1.00 250 150 excess demand
1.50 200 200
Equilibrium
2.00 150 250 Surplus from excess
2.50 100 300 supply
3.00 50 350
Equilibrium – The point at which quantity demanded and quantity supplied are equal.
What is the equilibrium price in the example above?
Disequilibrium – describes any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded.
Excess Demand (Shortage )– When quantity demanded is more than quantity supplied.
Excess Supply (Surplus) – When quantity supplied is more than quantity demanded.
Excess Demand Excess Supply
Suppliers will raise or lower their prices to meet consumers’ wishes. And in the process, restore the market to equilibrium.
Government Intervention
The government can purposefully make a market in disequilibrium in two ways: price floors and price ceilings.
Price Ceiling – A maximum price that can be legally charged for a good or service.
EX: Rent control
Pros/Cons
Price Floor – a minimum price for a good or service.
EX: Minimum wage
Pros/Cons
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