1. 11A Investing Basics and Evaluating Bonds #1
What does this chart tell you about investing?
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2. Why People Invest
To 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.

3. Objective 1 Explain Why You Should Establish an Investment Program
Establishing Investment Goals
Financial goals should be:
Specific
Measurable
Tailored to your financial needs
Aimed at what you want to accomplish
Financial goals should be the driving force behind your investment plan
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4. Establishing Investment Goals
What 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?
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5. Performing a Financial Checkup
Work to balance your budget
Do you regularly spend more than you make?
Pay off high interest credit card debt first
Obtain adequate insurance protection
Start an emergency fund you can access quickly
Three months of living expenses
Have access to other sources of cash for emergencies
Pre-approved line of credit
Cash advance on your credit card
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6. Surviving a Financial Crisis
Establish a larger than usual emergency fund
Know what you owe
Identify debts that must be paid
Reduce spending
Pay off credit cards
Apply for a line of credit at your bank, credit union, or financial institution
Notify credit card companies and lenders if you are unable to make payments
Monitor the value of your investment and retirement accounts
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7. Getting the Money Needed to Start an Investing Program
Pay yourself first
Take advantage of employer- sponsored retirement programs
Participate in elective savings programs
Make a special savings effort one or two months each year
Take advantage of gifts, inheritances, and windfalls
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8. The Value of Long-Term Investing Programs
Even small amounts invested regularly grow over a long period of time
If 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 risk
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9. Factors Affecting the Choice of Investments
Objective 2 Describe How Safety, Risk, Income, Growth, and Liquidity Affect Your Investment Decisions
Factors Affecting the Choice of Investments
Safety and risk
Risk = uncertainty about the outcome
Investment Safety = minimal risk of loss
Risk-Return Trade-Off
The potential return on any investment should be directly related to the risk the investor assumes
Speculative investments are high risk, made by those seeking a large profit in a short time
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10. Components of the Risk Factor
Inflation Risk  during periods of high inflation, your investment return may not keep pace with inflation; lose purchasing power
Interest Rate Risk  the value of bonds or preferred stock may increase or decrease with changes in interest rates
Business 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)
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11. Investment Income, Growth and Liquidity
A predictable source of income (dividends or interest)
Most conservative = passbook savings, CDs and government securities
Other choices:
Municipal and corporate bonds
Preferred stock
Utility stocks
Selected common stocks
Selected Mutual funds
Rental real estate
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12. Investment Income, Growth and Liquidity
Investment Growth
Growth in value (price appreciation)
Common stock usually offers the greatest potential for growth
Mutual funds and real estate offer growth potential
Investment Liquidity
2 Dimensions:
Ability to buy or sell investment quickly
Without substantially affecting the investment’s value
Bank accounts VERY liquid; CDs have penalties; stocks and bonds could lose money upon sale
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13. Traditional Investment Evaluation Factors
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14. Objective 3 Identify 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”)
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15. Portfolio Management & Asset Allocation
Other Factors to Consider:
Your Tolerance for Risk
At 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 Age
Growth vs. income (older people more conservative)
Recovery time if investments nosedive
One guideline: 110 – age = % of portfolio in stock
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16. Your Role in the Investment Process
Evaluate potential Investments
Monitor the value of your investments
Keep accurate records
Other factors
Seek help from personal financial planner
Consider the tax consequences of selling investments
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17. Objective 4 Understand Why Investors Purchase Government Bonds
Government 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 government
Three levels of government issues:
Federal
State
Local municipalities
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18. U.S. Treasury Bills, Notes and Bonds
Treasury Bills (T-Bills)
$100 minimum
4, 13, 26 and 52 weeks to maturity
Sold at a discount
Federal, but no state, tax on interest earned
“Reciprocal immunity” doctrine
Treasury Notes
$100 units
Typical maturities = 2, 3, 5, 7, and 10 years
Interest paid every six months
Higher rate than T-bills (Why?)
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19. U.S. Treasury Bills, Notes and Bonds
Treasury Bonds
Issued in minimum units of $100
30 year maturity dates
Interest rates higher than Treasury notes & bills
Interest paid every six months
Treasury Inflation-Protected Securities (TIPS)
Sold in minimum units of $100
Sold with 5, 10 or 20 year maturities
Principal changes with inflation (measured by CPI)
Pays interest twice a year at a fixed rate
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20. Federal Agency Debt Issues
Essentially risk free
Slightly higher interest rates than Treasury securities (Why?)
Minimum investment may be as high as $10,000 to $25,000
Maturities range from 1 – 30 years
Average maturity = 12 years
Issuing agencies sample:
Fannie Mae
Freddie Mac
GNMA
TVA
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21. State and Local Government Securities
Municipal Bonds (“Munis”)
Issued by a state or local government
Cities
Counties
School districts
Special taxing districts
Funds used for ongoing costs and to build major projects such as schools, airports, and bridges
General 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 bridge
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22. State and Local Government Securities
Municipal Bonds (“Munis”)
Key characteristics:
Interest exempt from federal taxes
Capital gains may NOT be tax exempt
Usually exempt from state and local taxes in state where issued
Exempt status determined by use of funds
Lower rate of return than on taxable bonds
Insured municipal bonds
Private insurance to reduce risk
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23. Taxable Equivalent Yield Formula
Used to compare tax-exempt and taxable bonds
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24. Wrap Up
Concept Check Why Develop Specific Investment Goals? Why Participate in Employer Retirement Savings Plan? How the TVoM Affects Investing.
Exhibit A Quick Test to Measure Investment Risk
Concept Check Four Components of Risk
Concept Check Taxable Equivalent Yields