Investing There are benefits & risks to savings & investment Investment: act of redirecting resources from being consumed today so that they may create benefits in the future Invest in stocks, education, capital, etc.

The Financial System In order for investment to take place, an economy must have a financial system The network of structures & mechanisms that allows the transfer of money between savers & borrowers

Financial Intermediaries Institutions that help channel funds from savers to borrowers Banks, savings & loan associations, credit unions, & finance companies: Take deposits from savers & lend out some of these funds to businesses & individuals. Mutual funds: pool savings of many individuals & invest in a variety of stocks, bonds, & financial assets. Hedge funds: private investment organization that employs risky strategies that often make huge profits for investors (usually wealthy) Life insurance: provide financial protection for family of beneficiaries, lend out portion of premiums they collect Pension funds: Income that retirees receive after certain age or working # of years. Employers contribute to fund or withhold % of employees wages or both. Pension fund managers invest deposits

“The risk/return tradeoff could easily be called the ‘ability-to-sleep-at-night test.’ While some people can handle the equivalent of financial skydiving without batting an eye, others are terrified to climb the financial ladder without a secure harness. Deciding what amount of risk you can take while remaining comfortable with your investments is very important….”

6.6 Bonds & Other Financial Assets

Bonds Bonds are sold by governments or corporations to finance projects Bonds are basically loans or IOUs that represent debt that the seller, or issuer, must repay to an investor. They typically pay the investor a fixed amount of interest at regular intervals for a specific amount of time Low risk, but low rate of return

3 Components of Bonds Coupon Rate: interest rate that a bond issuer will pay to a bondholder Maturity: the time at which payment to a bondholder is due Varies but usually 10, 20, or 30 years Par Value: assigned by the issuer, is the amount to be paid to the bondholder at maturity Aka face value or principal

You buy a bond for $1000 Coupon rate: 5%, paid to the bondholder annually Maturity: 10 years Par value: $1000

You buy a bond for $1000… Coupon rate: 5%, paid to the bondholder annually Maturity: 10 years Par value: $1000 You will receive a payment of $50 each year for 10 years, or a total of $500 in interest. The bond issuer will then pay you the par value of the bond, or $1000.