unit 4
current yield = annual interest / bond price (compares bonds)
asset - any source of value that can be converted to cash
appreciating asset - increases in value over time
depreciating asset - decreases in value over time
real assets - physical things like
real estate
art
antiques
metals / commodities (universal value and usually from earth)
intangible assets - intellectual property
financial assets - get their value from contractual claim or ownership claims
security - tradable financial asset
bonds (debt) - loan, benefits from interest,
stocks (equity) - equity / ownership in a corporation and represents a claim on part of the corporations assets and earnings, benefits from growth of company, profits paid in form of dividends, vote for board of directors
derivatives - betting on the future / predictions
mature companies tend to pay the most
start ups pay the least dividends
preferred stock - mix of a stock and bond
pays fixed dividend
ownership like stock
cannot vote for board of directors
mutual fund - actively managed my pro money managers
selects and trades
share price based on size of company AND availability of stocks, also based on the company
bonds - debt security
issuer (borrower)
coupon rate (interest rate)
par value (amount borrowed excluding interest)
maturity (time at which face value (total value) is repaid)
determined by supply and demand competition who consider Credit quality and duration
bond rating - measurement of creditworthiness (financial health) of bond issuers
lower rating → higher risk
conflict of interest - bond issuers pay the bond rating agencies to rate their debt
treasuries - full faith and credit of US gov, lowest level of risk, risk free rate
governments create baselines (lowest amount) for coupon rate
exchange traded funds (etfs)
represents an index (creates diversity)
DOW
S&P
QQQ
approximate of a particular country’s market
commodities
passively managed
contents of fund aren’t constantly being re-evaluated, bought, and sold
no expensive fees to pay pro money managers
cheaper then mutual funds
who sets tax rates - elected officials (so raising taxes lowers their change of revoting)
federal -
state - state legislature + governor
city - city council + mayor
municipal bonds - considered safe investments
warning: governments can declare bankruptcy to avoid repayment like detroit
tax exempt
commercial paper
bonds issued by corporations
cannot be issued by sole proprietorships / partnerships (general, limited, or limited liabilities)
demand deposits
cash and bank deposits held in saving accounts at a commercial bank
some pay interest
can be withdrawn on demand
most common financial asset
insured up to 250,000 by FDIC in US
money market acc
financial asset offered by commercial banks
diff then money market fund offered by investment banks
pay market interest rates
limits the num of transactions in a period of time (fed abandoned it but bank may still do it)
fincanical risk
credit risk - danger associated with lending money, when borrower cant pay the loan loaner will lose principal and interest, need to be able to price it correctly
liquidity risk - danger associated with not being able to sell securities or assets to cut losses, more liquid more risk
speculative risk - high risk high reward situations
foreign investment risk - variations in market operations, politcal volatitty, currency exchange flucuations
risk return relationship -
risk = outcome is uncertain, probabilties estimated
investors must demand higher rewards as compensation for taking higher risks
yield - income earned while continuing to hold on to an investment
refers to interest or dividends
functions of money
medium of exchange - accepted by all parties as payment for goods / service, currency
Measure of value - unit of account, measuring stick of relative worth of goods / services
store of value - purchasing power can be saved until needed
characteristis of money
portable
durable
divisible
scarce