Stocks vs Bonds Stocks represent ownership of companies. They represent participation in a company’s growth Bonds represent loans made to companies. Contractual loans are made between investors and institutions
A Closer Look: Bonds Form of debt Face value is returned to the investor at maturity; what about interest? Help the federal or state governments, or companies to generate revenue Default risk
A Closer Look: Stocks Voice in a company Investments have ambiguous returns Returns directly related to rising stock prices Higher returns, higher risk
Bond Rating Agencies Rating agencies are private companies that evaluate the bond’s financial health and ability to repay its obligations in a timely manner. Major agencies include Moody’s Investor Service, Standard and Poor’s Rating Services, and Fitch IBCA. Moody’s rates bonds from Aaa, the highest rating, to D, the lowest. Standard and Poor rates from AAA to C.
Classifications Investment Grade Bonds: Bonds rated higher than Baa on Moody’s or BBB on Standard and Poor’s. They possess the lowest risk of any available bond. The high rating reflects a company with good financial stability. Due to the low risk the yield (interest) is also lower. Intermediate Grade Bonds: Bonds with companies in a fair condition. They usually have low risk in a short term but become more risky with a longer maturity. The increase in risk costs the issuer a higher interest rate. The ratings are B, Ba for Moody’s and BB for Standard and Poor’s.
Junk Bonds Junk Bonds are the lowest rated bonds. They are rated at Caa/CCC or lower. These are the most speculative of bonds and therefore bear the highest risk for even a short term. Junk bonds tend to be associated with a company falling apart or one on its way to investment quality. The yields junk bonds pay are high at a high risk. “Junk Bonds” are most associated with the 1980’s when lots of mergers and acquisitions occurred. To finance those expenses companies would sell junk bonds to the public with very high interest such that some investors would buy their low-quality bonds.
What is a Mortgage? A mortgage is a conveyance of an interest in property as security for the repayment of borrowed money. A mortgage loan is a loan to finance the purchase of real estate, usually with specified payment periods and interests rates.
Mortgage Loans A mortgagor (borrower) gives the mortgagee (lender) a lien as collateral for the loan. A lien is a legal claim against an asset which is used to secure the loan. The property is normally real estate- land, houses, buildings, but it could also be large items such as ships or huge machinery. Loans always come with interest rates and these rates vary with the type of mortgage one gets.
Types of Loans There are many different types of mortgage loans: conventional, general, first, second, long term, open-end, close-end, etc… Most people are familiar with fixed-rate mortgages and they are normally 15 or 30 years in length. The longer the term, the higher the interest rate. Variable rate? Subprime mortgage loans …
Mortgage Requirements Getting a mortgage depends on: -credit history -income -the lender -purpose -the state -amount loaned To get a mortgage one must talk to a mortgage broker. Questions?