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1 Fall 2013, BUS-123 Introduction to Investments Frank Paiano – “Paco” Professor, Business, Professional & Technical Studies Introduction to Investments.

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Presentation on theme: "1 Fall 2013, BUS-123 Introduction to Investments Frank Paiano – “Paco” Professor, Business, Professional & Technical Studies Introduction to Investments."— Presentation transcript:

1 1 Fall 2013, BUS-123 Introduction to Investments Frank Paiano – “Paco” Professor, Business, Professional & Technical Studies Introduction to Investments Welcome, Everyone!

2 2 First – A Perspective “It is a gloomy moment in history. Never has the future seemed so dark and incalculable. The United States is beset with racial, industrial and commercial chaos, drifting we know not where. Of our troubles, no one can see the end.” Harper’s Magazine, 1847

3 3 C HAPTERS 1, 3, L ecture N otes A Brief History of Risk and Return (Chapter 1) Security Types (Chapter 3) Time Horizon & Short-term Investments (Lecture) What I have tried to do here is create what I believe should be the contents of the first chapter of an Introduction to Investments textbook. “In investing money, the amount of interest you want should depend upon on whether you want to eat well or sleep well” -- J. Kenfield Morley

4 4 What is an Investment? An investment is any vehicle into which resources can be placed with the expectation that it will generate positive income, or that its value will be preserved or increased, or both Investment returns (a.k.a. investment rewards)  Income – interest, dividends, rent  a.k.a. cash flows  Increased value / Decreased value  a.k.a. capital gains, capital appreciation (Yippee!)  a.k.a. capital losses (Boo! Hiss!) Investments come in all shapes, flavors and sizes

5 5 Types of Investments Securities  Investments that represent debt or ownership or the legal right to acquire or sell an ownership interest  (a.k.a. financial investments) Property  Real property (land, buildings) and personal property (precious metals, autos, art, collectibles, etc.)  (a.k.a. real estate, hard assets, tangible assets, commodities) Personal  Examples: Education and Training, Travel  College is often the best investment a person will ever make – Why? This class concentrates on securities

6 6 Types of Investments Primary Assets  Debt  Funds lent in exchange for interest income and the promised repayment of the loan at a given future date  Examples: Bonds, Short-term investments (savings accts, etc.)  Equity  Ownership in a business or a property  Examples: Stocks (corporations), Partnerships, Sole Proprietorships, Real Estate, Real Estate Investment Trusts Derivative Assets  Securities that derive their value from an underlying security or asset – normally highly speculative  Examples: Options, Futures (continued) Some in the industry do not classify derivatives as investments

7 7 Types of Investments Direct Investments  Your name is on the investment and you control the investment – can buy or sell as you wish  Examples: Real Estate, Stocks, Bonds Indirect Investments  Someone else is in control of the investment  You have limited control, or more likely, no control over the underlying investment  Examples: Mutual Funds, REIT, Limited Partnership* (continued) * You can buy or sell your shares in the mutual fund, REIT, or limited partnership, but you do not control the underlying investments

8 8 Types of Investments Domestic Investments  Based inside the United States International Investments (a.k.a. Foreign)  Based outside the United States Be careful of this subtle distinction  International (a.k.a. Foreign) ≠ Global (continued) Global = Domestic and International “The world is a very small place these days economically.” Sixty-five percent (by value) of the parts in the Ford Mustang come from the U.S. and Canada. Ninety percent of the parts in the Toyota Sienna – which is built in Indiana – come from the U.S. and Canada. Which is the more American car? (Forbes)

9 9 Types of Investments Budweiser Shell Oil Ben & Jerry’s Farmers Ins Arco Gerber Carnation Cup-a-Soup (continued) Domestic or Foreign? Fox Network Seagram’s Bayer Aspirin Vaseline Friskies Motel 6 Union Bank Volvo & Saab Foreign Domestic Domestic or Foreign? Foreign

10 10 (continued) The return of the stock markets in the developed world has been 9.2%. Types of Investments Top 18 countries according to per capita income (alphabetical order) Average annual return from 1973 to 2009 Which country had the best average annual return over the past quarter century? Global Investing

11 11 Types of Investments Short-term Investments  Up to a 1 year Intermediate-term Investments  2 to 5 years Long-term Investments  5 or more years (continued) These are general guidelines used throughout the industry I disagree with the general guidelines. Here are mine: Short-term – 1 to 2 years Intermediate – 3 to 5, maybe even 6 or even 7 years Long-term – 7 years or longer (10 to 30 years) Before you make an investment, you must know your time horizon!

12 12 Types of Investments Liquid Investments  Easily and quickly converted into cash  There is a ready market to purchase the investment and change of ownership happens quickly  Examples: Stocks, Bonds, Mutual Funds, REITs Illiquid Investments  May be difficult to convert into cash  Market for investment is small or change of ownership happens slowly or both  Examples: Real Estate, Partnerships, Collectibles (continued)

13 13 Risk & the Risk/Return Spectrum Risk is the chance that actual investment returns will differ from the expected returns  What is the typical definition of risk?  “The possibility of suffering harm or loss; danger”  In general, the higher the expectation of investment returns, the higher the risk level The Risk / Return Spectrum  Low-risk – 3% to 5%  Moderate-risk – 5% to 8%  High-risk – 8% to 12%  Speculative-risk – Greater than 12%  Speculation is often not considered investing  (I certainly do not consider it investing…) These are my guidelines

14 14 Let’s Try Some Examples… What type of investment is…  Bank of America passbook savings account  Nestlé Foods, Inc.  Southwestern College Propositions AA & R Bonds  Duplex in Spring Valley (rent one, live in other)  Qualcomm Corporation  Loan to Uncle Harry Security or Property? Debt or Equity? Direct or Indirect? Domestic or Foreign? Short, Inter, or Long Term? Low, Moderate, or High Risk? Liquid or Illiquid?

15 15 Measuring Investment Return Return is straight-forward to measure Total Dollar Return  The return on an investment measured in dollars that accounts for all cash flows and capital gains or losses Total Percent Return  The return on an investment measured as a percentage that accounts for all cash flows and capital gains or losses Measures of return allow us to compare investment alternatives

16 16 Measuring Investment Risk Risk is difficult to measure  There are many ways, all of them are imperfect  One popular measure is standard deviation Standard Deviation  Measures the volatility of an investment  In any given year, there is about a ⅔ chance that the return of an investment will be within one standard deviation of the historical average return (average return plus or minus one standard deviation)  The higher the standard deviation, the more volatile the investment  The greater the variance from the norm We will investigate standard deviation in detail later in this chapter

17 17 Investments Overview Equity Securities – a.k.a. Common Stocks Fixed-Income Securities – a.k.a. Bonds Short-term Investments – a.k.a. “Cash” Mutual Funds – a.k.a. Investment Companies Hybrid Securities – Preferred Stocks, Convertible Securities Others – Real Estate, Physical Assets Derivatives – Options, Futures Let us look at each in more detail

18 18 Investments Overview Equity Securities – a.k.a. Common Stocks  Represents ownership in a corporation  Investors receive…  Dividends – optional payments to shareholders  Capital Gains – shares increase in value  Limited Liability  Moderate-risk to high-risk to speculative-risk  “Volatility” – euphemism for “I lost a whole lotta’ money!”  Historically best returns over time  8% to 12% (I normally tell people 8% to 10%)  Should be considered a long-term investment Chapters 5 through 8, 17 (continued) 2008 Definition: “Stocks are equity investment instruments designed to lose value.”

19 19 Investments Overview Fixed-Income Securities – a.k.a. Bonds  Long-term loans to  Corporations (Corporate bonds)  State and local governments (Municipal bonds)  Federal government (Treasury bonds)  Bond investors lend their money to the bond issuers (corporation, state or local municipality, Treasury)  The bond investors then receive interest and a promise that the loan will be repaid when due  Historically much less riskier than stocks but…  Also less reward – 4-6% (govt/mun) to 6-8% (corp)  Good intermediate-term / long-term investment Chapters 9 & 10, 18 through 20 (continued) 2008 Definition: “Bonds are fixed-rate investment instruments designed to lose value.”

20 20 Investments Overview Short-term Investments  a.k.a. “Cash” “Short-term vehicles”  Normally up to 1 year (1 to 3 years)  Usually guaranteed (or pretty darned close)  Liquid (many let you simply write a check!)  Very low risk of losing principal  Hence, very low reward  2% to 5% over time (currently less than 1%)  “A place to park your money”  Also used for holding an “emergency fund” Lecture Notes, Chapters 3, 19 (continued) 2008 Definition: “Short-term investments are instruments designed to accept what remains of investors’ money after they have given up on stocks and bonds.”

21 21 Investments Overview Short-term Investments – Examples  Deposit accounts at financial institutions  Passbook savings accounts at banks, share accounts at credit unions  Series EE or I savings bonds  U.S. Treasury bills (T-bills)  Certificates of Deposit (CDs)  Money market accounts  Money market mutual funds  Commercial paper (Corporate IOUs)  Banker’s acceptance notes (Bank IOUs) (continued) More about short- term investments later in this presentation… Lecture Notes, Chapters 3, 19

22 22 Mutual Funds  a.k.a. Investment companies  A company that pools investors’ money and invests in a diversified portfolio of securities  Investors get…  Diversification  Mutual fund can purchase hundreds of securities  Professional money management  Very popular form of investment  Range from low-risk to speculative-risk Chapter 4 (continued) Investments Overview 2008 Definition: “Yeah, them too.”

23 23 STOCKS BONDS“CASH” Approximately 50% of American households own mutual funds. Or used to … Investments Overview (continued) a “mutual” fund a.k.a. investment company Stock mutual funds Bond mutual funds Money market mutual funds Balanced mutual funds Professional Money Management Diversification

24 24 Hybrid Investments  Preferred Stock  Represents ownership in corporation, but…  Dividends are not considered optional  Convertible Securities  A bond or preferred stock that can be converted into common stock  Hybrid investments are designed to offer the stability of fixed-income investments (bonds) with the opportunity for capital growth of equity investments (stocks) Chapters 3 and 18 (continued) Some in the industry categorize these with stocks, some categorize them with bonds Investments Overview

25 25 Other Popular Investment Vehicles  Real estate  Examples: residential, commercial, raw land, Real Estate Investment Trusts (REITs)  Tangible assets  Examples: precious metals, jewels, art, collectibles  Tax-advantaged investments  Examples: oil and gas limited partnerships, low- income housing projects If there is sufficient time and interest, we will look at some or all of these, especially real estate and tangible assets. By the way, none of these were spared in 2008, either. (continued) Investments Overview Lecture Notes

26 26 Derivative Assets  Speculative securities that derive their value from an underlying security or asset  Options – a.k.a. Options Contracts  Calls and puts  Futures – a.k.a. Futures Contracts  Commodities  Stock indexes  Many in the financial world (myself included) do not categorize these as investments Chapters 14 and 15 (continued) Investments (???) Overview The derivative speculators did not feel so all alone in 2008. Usually, they are the only ones who are proud to have only lost 30%.

27 27 Our Emphases in this Course Equities – a.k.a. Stocks  You are an owner Fixed-Income Securities – a.k.a. Bonds  You are a loaner Short-term Securities – a.k.a. “Cash”  Your principal is safe (often guaranteed) Mutual Funds – a.k.a. Investment Companies  Your investments are managed on your behalf For the vast majority of investors, these are the most popular and most important financial investment options

28 28 Investments: What are ___? Investment companies that pool investors' money and invest in a diversified portfolio of securities. Investors get diversification and professional money management. A. short-term securities B. common stocks C. bonds D. mutual funds The correct answer is (D). Investment company is the legal term; mutual fund is the popular term.

29 29 Investments: What are ___? Represent ownership in a corporation. Investors receive dividends and capital gains (or capital losses). A. hybrid securities B. common stocks C. bonds D. short-term securities The correct answer is (B). When people use the term “stocks,” they are talking about common stocks.

30 30 Investments: What are ___? Investments with very little risk, and correspondingly, very little return. Often used as a place to "park your money" or for an emergency fund of 3 to 6 months income. A. hybrid securities B. common stocks C. bonds D. short-term securities The correct answer is (D). Low risk, low return.

31 31 Investments: What are ___? Fixed-income securities that represent loans to corporations, municipalities (state & local governments & agencies), and the Federal government. Investors receive interest and a promise to repay the loan. A. hybrid securities B. common stocks C. bonds D. short-term securities The correct answer is (C). Bonds are “fixed-income” investments.

32 32 Investments: What are ___? Securities designed to offer the stability of fixed-income investments with the opportunity for capital growth of equity investments. Examples include preferred stock and convertible bonds. A. derivatives B. common stocks C. bonds D. hybrid securities The correct answer is (D). The best (?) of both worlds.

33 33 Investments: What are ___? Speculative securities that derive their value from an underlying security or asset. Examples include options contracts and futures contracts. A. derivatives B. hybrid securities C. bonds D. short-term securities The correct answer is (A). You can make a lot of money; you can lose a lot of money.

34 34 What are Reasonable Expectations? What are reasonable long-term expectations of returns from the following investments? A. stocks B. bonds C. short-term securities D. mutual funds E. hybrid securities F. derivatives Now, let us look at investment returns and risks in detail… 8% - 12% 4% - 8% 2% - 5% ? ? ? (Better to say 8%-10%) -

35 35 Investment Return – Revisited Over the long term, equities (stocks) have produced the best returns  Equities – Stocks  8% to 12% (I usually tell people 8% to 10%)  Fixed-income Securities – Bonds  Treasury & Municipal Bonds – 4% to 6%  Corporate Bonds – 6% to 8%  Short-term Investments – “Cash”  2% to 5%  Mutual funds will more or less (often less) reflect the underlying assets that they invest in

36 36 Growth of $1 Investment 1925 – 2009

37 37 Growth of $1 Investment 1801 – 2009

38 38 Investment Risk – Revisited It is no accident that stocks and bonds have produced better returns than short-term investments (a.k.a. “cash”)  Otherwise, why would investors assume the higher risks of stocks and bonds? Why wouldn’t they just assume the… Risk-free Rate of Return  The return on guaranteed short-term investments  Specifically, the return on U. S. Treasury Bills Risk Premium  The reward for bearing risk; the extra return on a risky asset over the risk-free rate of return

39 39 Investment Risk Premiums

40 40 Investment Risk – Revisited Risk versus Reward; Risk versus Return  Investment return is very straight-forward  How much did you start with and how much did you end with? That is your return!  But measuring how much risk you took to receive that return is much more difficult Each year, the investment community measures the average annual return and the amount of variance from the average return  Using statistics, the resulting measures of risk are called variance and standard deviation (continued)

41 41 Variance and Standard Deviation  We will leave the calculations for your statistics class  Suffice to say the higher the variance and standard deviation, the riskier the investment  i.e. The higher the variance and standard deviation, the more the investment return will deviate from the average annual return (continued) These are just fancy, schmancy terms for, “You Can Lose Yer Money!” Investment Risk – Revisited ? ? ? ? ? ? ? ? ? ? ? ?

42 42 Distribution of Annual Returns on Common Stocks: 1926 to 2012 Does this distribution resemble anything you are familiar with?

43 43 The Normal Distribution – The “Bell curve” Investment returns over time tend to mirror a normal distribution

44 44 Historical Returns, Standard Deviations, and Frequency Distributions: 1926-2009 The greater the standard deviation, the wider the distribution of returns and the riskier the investment

45 45 Another View of Risk versus Return Average Annual Return versus Annual Return Standard Deviation

46 46 A Global View of Risk versus Return The standard deviation of the developing world was 15.2% with a 9.2% average annual return. Now we can complete the global picture regarding risk versus return. Who had the best risk- adjusted return? Sweden may have had the best average annual return, but you had to accept almost 60% more risk to get that return.

47 47 So, Does You’se Got’s It Yet? You’se Wants High Returns? You’se Gonna’ Gets High Risk ! You’se Gonna’ Lose Some Money, Maybe All’s Yer Money! If’n Anybodies Tells You’se Different, De’re Lying! So when (not if) you see an advertisement for a “12% Safe Rate of Return,” you will know that the chances of losing your money are pretty high. When you see claims such as 300% or even 3000% (and you will if you are involved in investing for any length of time), sit on your hands and grab your wallet! P.S. By the way, they are also breaking the law. Examples: Wade Cook, WizeTrade, Day Trading Coach, Optionetics, etc.

48 48 But Isn’t Somebody Doing It? Yes, it is true  Some people make tremendous rates of return But those people are not Investors  They are Traders (a.k.a. Speculators) Being a Trader can be very profitable  But it is also very stressful and very perilous  And you are up against the best in the world Story: John Gutfreund versus John Meriweather John Bogle: http://www.forbes.com/2009/01/09/intelligentinvestingbogle.htmlhttp://www.forbes.com/2009/01/09/intelligentinvestingbogle.html

49 49 So What is a Realistic Rate of Return For Me? After you have taken this course, you will have a strong knowledge of the most popular types of investments  Stocks, Bonds, “Cash,” Mutual Funds, etc.  You will also know what levels of returns and what levels of risks you should reasonably expect to receive And if you are a patient, long-term investor, I believe it is realistic to expect 8% to 10%  I am certainly working on it myself! Of course, as we will reiterate time and time again, there are no guarantees!

50 50 But Is 9% or 10% Good Enough? It turns out the answer to this question is, “YES!”  If you start early …  If you are patient and consistent …  If you do not get cocky or greedy …  If you do not chase after every “Next Big Thing” that comes along …  And most importantly, you don’t PANIC when the market swoons!  As it inevitably will do from time to time The trick is to take advantage of the Time Value of Money  a.k.a. Compound Annual Return

51 51 The Time Value of Money The amount to which a sum you invest now will increase based on a specified rate of return and time period  Calculating amounts into the future is called compounding – a.k.a. the future value of money  Future value can be computed for a single amount – a.k.a. a lump sum or principal  Future value can also be determined for a series of deposits – a.k.a. stream of investments, “annuity” We will also learn how to move from the future back to the present (a.k.a. discounting, the present value of money) when we learn how to assign valuations to stocks and bonds

52 52 The Time Value of Money (continued) Let us do some future value exercises… One last comment on risk versus return

53 53 Psst! Here is One of Paiano’s Secret Tips… Avoid Large Losses! Where would you put $100? Now, before we embark on the process of identifying and familiarizing ourselves with the longer-term, higher-yielding investments, let us learn how and where to “park our money” using short-term investments. Year 1Year 2 Investment A 85% -50% Investment B 10% 9% $185 $110 $92.50 $120

54 54 Uh, Wait a Sec. One More Time… The greater the variance and standard deviation of the average annual returns of an investment, ______________. A. the greater the risk (a.k.a. the more volatile) B. the lesser the risk (a.k.a. the less volatile) C. there is no correlation (a.k.a. no relationship) D. standard what? (I always hated statistics…) The correct answer is (A). Don’t you dare get this one wrong on the exam!

55 55 Short-term Investments Review  a.k.a. “Cash” “Short-term vehicles”  Normally up to 1 year (1 to 3 years)  Usually guaranteed (or pretty darn close)  Liquid  Very low risk of losing principal…  Hence, very low reward  2% to 5% over time  Currently close to zero  Some are paying zero!  “A place to park your money”  Also used for holding an “emergency fund”

56 56 Interest on Short-term Investments Stated rate of interest  Most common form of interest  Example: Nominal rate on a savings account Discount basis  Method of earning interest on a security by purchasing it at a price below its redemption value; the difference is the interest earned  The interest “accrues” on the investment  Treasury bills, corporate paper  Example: Purchase a security now for $4,800 that will be redeemed for $5,000 in nine months. Interest would be $200.

57 57 Risks of Short-term Investments Risk of default (a.k.a. capital losses)  None or almost none  Your principal is safe, often guaranteed Risk of losing purchasing power  High! Short-term investments barely keep up with inflation Risk of lost opportunity cost  High! Unless your time horizon is very short, there are several investment alternatives, almost all of which will give you a better rate of return Repeat after me: “There is no such thing as a risk-free investment.”

58 58 Types of Short-term Investments Deposit accounts  Passbook savings account  Share account at credit unions  Negotiable Order of Withdrawal (NOW) account  Checking accounts that pay interest  Money Market Deposit Account (MMDA)  Limited check writing privileges Deposit accounts are offered by banks and credit unions. They are often called demand accounts since the funds are available upon demand. They provide the highest level of liquidity and are usually guaranteed up to $250,000 by the government or a government agency.

59 59 Types of Short-term Investments Series EE Savings Bonds  Discount method of payment  a.k.a. Accrual-type security  Example: $100 bond cost $50  Do not pay income tax on interest until redeemed  Free from state and local income taxes  Free from federal income taxes if used for higher education  Popular gift for newborns (continued)

60 60 Series HH Savings Bonds  Issued at face value and pay interest twice a year  Being phased out – can no longer purchase Series I Savings Bonds  Also issued at face value  Inflation indexed!  Guaranteed to outpace inflation (but not by much)  Pay accrued interest at bond’s maturity of 30 years  Again, free from taxes if used for higher education  Maximum purchase of $30,000 per year (continued) The Series I bonds are becoming more popular with those concerned about inflation Types of Short-term Investments

61 61 Types of Short-term Investments Treasury Bills  Obligations of the United States Treasury  Sold at a discount, redeemed at face value  Varying short-term maturities  Typically one-, three- and six-month maturities  Generally regarded as the safest of all investments – a.k.a. “risk-free return”  Used as the benchmark for all other investments  Free from state and local income tax  Can be purchased directly from the Treasury  www.treasurydirect.gov (continued)

62 62 Types of Short-term Investments Certificates of Deposit (a.k.a. CDs)  Savings instruments in which funds must remain on deposit for a specified period  Periods range from 7 days to several years  Penalty for early withdrawal  Insured to same $250,000 per investor  Brokered CDs  Sold by brokerage firms; normally offer higher yields  Can be sold prior to maturity without incurring a penalty (continued) Careful! CDs will usually rollover automatically if you do not redeem them. You can specify that your CD proceeds be automatically rolled into your checking or savings account.

63 63 Types of Short-term Investments Commercial Paper  Short-term, unsecured promissory notes (IOUs) issued by corporations with very high credit standings  90-day, 180-day and 270-day maturities  Maximum maturity is 270 days  By keeping the maturity less than one year, commercial paper does not need to be registered with the Securities and Exchange Commission  Usually sold in multiples of $100,000  Hence, commercial paper is usually purchased by institutional investors (exp: money market mutual funds) (continued)

64 64 Types of Short-term Investments Banker’s Acceptance Notes  Short-term, low-risk investment vehicles arising from bank guarantees of business transactions  Sold at a discount from their face value and generally provide yields slightly below those of CDs and commercial paper  Typically 30-day to 90-day maturities  As with commercial paper, usually the minimum denomination is $100,000 (continued)

65 65 Types of Short-term Investments Money Market Mutual Funds  A mutual fund that pools the capital of a large number of investors and uses it to invest exclusively in short-term securities  Virtually all brokerage firms and mutual fund companies offer them  Money Market Mutual Funds are not guaranteed  Unlike Money Market Deposit Accounts from a bank or credit union  Still considered virtually risk-free  If there is ever a default, other companies step in and bail out the investors (with blessing from govt)  Virtually all offer check-writing privileges and direct transfer to and from checking accounts (continued)

66 66 Choice of Short-term Investments So, which short-term investment is for me?  Commercial paper and banker’s acceptance notes are usually only suitable for institutional investors  Savings bonds make cute gifts for newborns  Many investors purchase Treasury bills directly from the Treasury (www.treasurydirect.gov)  Certificates of Deposit are okay for those that are sure that they will not need the money until maturity  Money Market Mutual Funds and Deposit Accounts are the preferred choice by most investors  Especially since every bank, credit union, brokerage firm and mutual fund company offers them  But most non-investors still use a passbook savings account from a bank (they have not taken this course yet)

67 67 The Emergency Fund Debate Should you have an Emergency Fund?  Many financial experts recommend that households create an emergency fund of three, six or even nine months of income I simply do not agree with the concept of an emergency fund of three to nine months of living expenses. As long as you have access to cash (via a line of credit, for example) there is no good reason to keep $25,000 to $50,000 or more in a savings account earning 0.1%. Instead, use the money to pay down high interest debt, especially credit card debt. P.S. You are adequately insured, right? Exceptions: salespeople, the self-employed, and those who get laid off often

68 68 Short-term Investments: What are _? A mutual fund that pools the capital of a large number of investors and uses it to invest exclusively in short-term securities. A. commercial paper B. money market mutual funds C. passbook savings accounts D. Certificates of Deposit (CDs) The correct answer is (B). Money market mutual funds and their counterparts at banks and credit unions have rates close to CDs without the early withdrawal penalty.

69 69 Short-term Investments: What are _? Savings instruments in which funds must remain on deposit for a specified period. There is normally a penalty for early withdrawal. A. commercial paper B. money market mutual funds C. passbook savings accounts D. Certificates of Deposit (CDs) The correct answer is (D). If interest rates are going down, you can lock in a good rate. But you better hope you do not need the money until the CD matures!

70 70 Short-term Investments: What are _? Short-term, unsecured promissory notes (IOUs) issued by corporations with very high credit standing, normally sold in $100,000 denominations. A. commercial paper B. money market mutual funds C. passbook savings accounts D. Certificates of Deposit (CDs) The correct answer is (A). Commercial paper and their cousins, banker’s acceptance notes, are normally only purchased by institutional investors such as money market mutual funds.

71 71 Short-term Investments: What are _? A guaranteed demand account at a bank or credit union that normally pays little interest but will often be offered with a toaster or waffle iron which makes it all worthwhile. A. commercial paper B. money market mutual funds C. passbook savings accounts D. Certificates of Deposit (CDs) The correct answer is (C). No comment.

72 72 Coming Up Next: Chapter 4, Mutual Funds C HAPTERS 1, 3, L ecture N otes A Brief History of Risk and Return (Chapter 1) Security Types (Chapter 3) Time Horizon & Short-term Investments (Lecture)


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