UNIT 4 – PERSONAL FINANCE

TYPES OF INVESTMENTS

• Liquid Assets – Cash and cash equivalents– Checking accounts– Savings accounts– Traveler’s checks

TYPES OF INVESTMENTS

• Certificate of Deposit – A loan to a financial institution by an investor for a specified time period

TYPES OF INVESTMENTS

• Government Bonds – Loans to the government or a government firm– Coupon: stated interest on the bond– Maturity: the life of the bond– Par value : the principal or total amount initially

borrowed that must be repaid to the lender at maturity

– Current Yield: the annual interest divided by the purchase price

TYPES OF INVESTMENTS

Types of Government Bond

Bond Type Par Value Maturity Coupon

Savings Bonds $50k-$10k Usually long term Interest paid on redemption

Treasury Notes $1k-$5k 2-10 years Lowest return

Treasury Bonds $1k-$5k 10-30 years Lowest return

Treasury Bills >$10k 13, 26, or 52 weeks Interest paid on redemption

TYPES OF INVESTMENTS

• Bond Ratings– Higher Rating: Lower yield, but safer investment• Rating of a BBB – AAA

– Lower Rating: Higher yield, but a riskier investment• Rating from a BB – C• Also known as Junk Bonds

TYPES OF INVESTMENTS

• Mutual Funds: Funds in which investment professionals manage your money and decide on the investments.– Advantages:• Simplicity, professional management, diversification,

liquidity, usually low risk

– Disadvantages• Fees, your money is invested and managed by someone

else.

TYPES OF INVESTMENTS

• Stocks/Equities: Shares of ownership in a company

• Stock Exchanges: centralized places for trading financial products– Example: New York Stock Exchange

TYPES OF INVESTMENTS

• Index: an imaginary collection of stocks that is supposed to represent the stock market– Dow Jones Industrial Average• 30 of the most widely traded stocks

– NASDAQ Composite• Index representing all the stocks on the NASDAQ stock

exchange

– Standard and Poor’s 500• The 500 largest companies in the US stock market

TYPES OF INVESTMENTS

• Real Estate: purchasing and owning land/property

• Futures: an agreement to buy or sell at a specific date in the future at a predetermined price regardless of the market price

• Options: contracts that provide the RIGHT to purchase or sell commodities or financial assets at some point in the future at a price agreed upon today.

INVESTING

• Risk Management: As potential reward rises, risk increases– Time – The Shorter the time horizon, the less risky

the financial portfolio should be.– Diversification – The greater the variety of

investments, the less risky the portfolio is.