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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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