Bài giảng Personal Financial - Chapter 11A Investing Basics and Evaluating Bonds #1

11A Investing Basics and Evaluating Bonds #111-*What does this chart tell you about investing?Why People InvestTo achieve financial goals, such as the purchase of a new car, a down payment on a home, or paying for a child’s education.To increase current income.To gain wealth and a feeling of financial security.To have funds available during retirement years.Objective 1Explain Why You Should Establish an Investment Program Establishing Investment GoalsFinancial goals should be:Specific MeasurableTailored to your financial needs Aimed at what you want to accomplishFinancial goals should be the driving force behind your investment plan 11-*Establishing Investment GoalsWhat will you use the money for?How much money do you need to satisfy your investment goals?How will you obtain the money?How long will it take you to obtain the money?How much risk are you willing to assume in an investment program?What possible economic or personal conditions could alter your investment goals?Considering your economic circumstances, are your investment goals reasonable?Are you willing to make the sacrifices necessary to ensure that you meet your investment goals?What will the consequences be if you don’t reach your investment goals?11-*Performing a Financial CheckupWork to balance your budgetDo you regularly spend more than you make?Pay off high interest credit card debt firstObtain adequate insurance protectionStart an emergency fund you can access quicklyThree months of living expensesHave access to other sources of cash for emergenciesPre-approved line of credit Cash advance on your credit card11-*Surviving a Financial CrisisEstablish a larger than usual emergency fundKnow what you oweIdentify debts that must be paidReduce spendingPay off credit cardsApply for a line of credit at your bank, credit union, or financial institutionNotify credit card companies and lenders if you are unable to make paymentsMonitor the value of your investment and retirement accounts11-*Getting the Money Needed to Start an Investing ProgramPay yourself firstTake advantage of employer-sponsored retirement programsParticipate in elective savings programsMake a special savings effort one or two months each yearTake advantage of gifts, inheritances, and windfalls11-*The Value of Long-Term Investing ProgramsEven small amounts invested regularly grow over a long period of timeIf you begin saving $2,000 each year. depending on the rate of return, you could have over $1 million by the time you are age 65 (See Exhibit 11-1 on page 356)The higher the rate of return, the greater the investment risk11-*Objective 2Describe How Safety, Risk, Income, Growth, and Liquidity Affect Your Investment DecisionsFactors Affecting the Choice of InvestmentsSafety and riskRisk = uncertainty about the outcomeInvestment Safety = minimal risk of lossRisk-Return Trade-OffThe potential return on any investment should be directly related to the risk the investor assumesSpeculative investments are high risk, made by those seeking a large profit in a short time11-*Components of the Risk FactorInflation Risk  during periods of high inflation, your investment return may not keep pace with inflation; lose purchasing powerInterest Rate Risk  the value of bonds or preferred stock may increase or decrease with changes in interest ratesBusiness Failure Risk  affects stocks and corporate bonds (when business is not profitable)Market Risk  the risk of being in the market versus in a risk-free asset (stocks follow market cycle)11-*Investment Income, Growth and LiquidityInvestment Income A predictable source of income (dividends or interest)Most conservative = passbook savings, CDs and government securitiesOther choices:Municipal and corporate bondsPreferred stock Utility stocksSelected common stocksSelected Mutual fundsRental real estate11-*Investment Income, Growth and LiquidityInvestment Growth Growth in value (price appreciation)Common stock usually offers the greatest potential for growthMutual funds and real estate offer growth potentialInvestment Liquidity2 Dimensions:Ability to buy or sell investment quickly Without substantially affecting the investment’s valueBank accounts VERY liquid; CDs have penalties; stocks and bonds could lose money upon sale11-*Traditional Investment Evaluation Factors11-*Objective 3Identify the Factors That Can Reduce Investment Risk Asset Allocation = The process of spreading your assets among several different types of investments (choose % weightings in each)The ratio of stocks, bonds, cash assets, other securities in your portfolio (Conservative, Moderate, Aggressive portfolios with different asset weights: conservative portfolio = less stock)Most important determinant of overall investment success = Diversification (“eggs in different baskets”)11-*Portfolio Management & Asset Allocation Other Factors to Consider:Your Tolerance for RiskAt what point can you no longer sleep easily?See Your Investment Time Horizon When will you need the money?How long can your money continue to grow?Your AgeGrowth vs. income (older people more conservative)Recovery time if investments nosediveOne guideline: 110 – age = % of portfolio in stock 11-*Your Role in the Investment ProcessEvaluate potential InvestmentsMonitor the value of your investmentsKeep accurate recordsOther factorsSeek help from personal financial plannerConsider the tax consequences of selling investments11-*Objective 4Understand Why Investors Purchase Government BondsGovernment bonds = written pledge to:Repay a specified sum of money (face value) At maturity Along with periodic interest (coupon payments)Sold to fund the national debt and the ongoing costs of governmentThree levels of government issues:FederalStateLocal municipalities11-*U.S. Treasury Bills, Notes and BondsTreasury Bills (T-Bills)$100 minimum4, 13, 26 and 52 weeks to maturitySold at a discountFederal, but no state, tax on interest earned“Reciprocal immunity” doctrineTreasury Notes$100 unitsTypical maturities = 2, 3, 5, 7, and 10 yearsInterest paid every six monthsHigher rate than T-bills (Why?)Federal, but no state, tax on interest earned11-*U.S. Treasury Bills, Notes and Bonds Treasury BondsIssued in minimum units of $10030 year maturity datesInterest rates higher than Treasury notes & billsInterest paid every six months Treasury Inflation-Protected Securities (TIPS)Sold in minimum units of $100Sold with 5, 10 or 20 year maturitiesPrincipal changes with inflation (measured by CPI)Pays interest twice a year at a fixed rate11-*Federal Agency Debt IssuesEssentially risk freeSlightly higher interest rates than Treasury securities (Why?)Minimum investment may be as high as $10,000 to $25,000Maturities range from 1 – 30 years Average maturity = 12 yearsIssuing agencies sample:Fannie MaeFreddie MacGNMATVA11-*State and Local Government SecuritiesMunicipal Bonds (“Munis”)Issued by a state or local governmentCitiesCountiesSchool districtsSpecial taxing districtsFunds used for ongoing costs and to build major projects such as schools, airports, and bridgesGeneral Obligation Bonds Backed by the full faith, credit and taxing authority of the issuing state or local government Revenue Bonds Repaid from money generated by the project the funds finance, such as a toll bridge11-*State and Local Government SecuritiesMunicipal Bonds (“Munis”)Key characteristics: Interest exempt from federal taxesCapital gains may NOT be tax exemptUsually exempt from state and local taxes in state where issuedExempt status determined by use of fundsLower rate of return than on taxable bondsInsured municipal bondsPrivate insurance to reduce risk11-*Taxable Equivalent Yield FormulaUsed to compare tax-exempt and taxable bonds11-*Wrap UpConcept Check 11-1- Why Develop Specific Investment Goals? Why Participate in Employer Retirement Savings Plan? How the TVoM Affects Investing.Exhibit 11-2- A Quick Test to Measure Investment RiskConcept Check 11-2- Four Components of RiskConcept Check 11-4- Taxable Equivalent Yields