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Three Things to consider when investing

1. Rate of Return

-expected rate of return

2. Safety

-how safe is your investment

3. Liquidity

-how quickly can you convert your investment to cash

Rule of 72:

Divide 72 by rate of Interest= # of years it will take $ to double

Bank Investment Options

1) Savings Account

-under .25% interest

advantages:

-very liquid: easy to get your money

-safe- insured by FDIC

disadvantages:

-low interest rate

2) Certificate of Deposit (C.D.)

-sum of money deposited for a set period of time (ex. 6 months)

-depositor receives full value when the CD matures

Advantages:

-safe

-higher rate of interest than savings accounts 1-2.5%

Disadvantages:

-money is tied up for a long period of time

-penalties for early withdrawal

3) Bonds:

debt obligations of corporations or the government

-sold to the public to raise funds for expansions, war, etc....

Advantages:

-higher interest rates than savings accounts (3-6%)

-safe

-interest is not subject to taxes

Disadvantages:

-long period to reach maturity (usually at least 6 yrs)

Bond Components:

Coupon rate: stated interest on the debt

Maturity: life of the bond

Par value: the principal or the total amount initially borrowed that must be repaid to the lender at maturity

Types of Bonds

Corporate bonds: debt obligation of corporations.

Municipal bonds:bonds issued by state and local governments.

State: finance highways, state building

Cities: pay for stadiums, librairies, parks

Interest rates are similar to Government Bonds

Government Savings bonds: low denomination, non-transferable bonds issued by the U.S. government

$50-10,000 purchased at half of their value

Longer the duration the higher the rate of return

Treasury notes: matures in 2-10

Treasury Bonds: matures in 10 to 30 years

-return rate:

2 year:1% 5 year: 2.5% 10 year: 3.7%

30 year: 4.6%

T-Bill: matures 4,13, or 26 weeks

-return rate about .2%

Other Investment Options

Mutual Funds: a large collection of stocks

Why do people buy mutual funds?

-professionally managed

-your investment are diversified

-very easy to make find out about account status

-you can obtain your money very quickly if needed

Factors to consider when choosing an investment

1. Safety

-how safe is your investment is it worth the risk

2. Rate of return

-will the rate of return meet your needs

3. Liquidity

-how quick can you get your investment

-is it a short term or long term investment?

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