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Download What’s Investing? Investing makes your money grow Investing capitalizes on economic growth Investing involves some level of risk Investing rewards patience

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  • Whats Investing?Investing makes your money growInvesting capitalizes on economic growthInvesting involves some level of riskInvesting rewards patienceInvesting outpaces inflation

  • Investment ObjectivesSafety of principalYou don't want to lose your initial investmentIncomeThe regular payment of money that is earned from the investmentGrowthAn increase in the value of your investmentLiquidityThe ability to turn your investment into cash very quickly

  • Characteristics of an InvestmentRiskThe uncertainty about the rate of return that youll earn from an investmentReturnThe money made from an investment, including the income and capital gainLiquidityThe ease and ability of selling your investment in the marketplace without losing moneyTermHow long you are planning to hold onto your investment

  • Risk FactorsInflation riskInterest rate riskDefault risk or business riskLiquidity riskReinvestment risk

  • Risk-Return SpectrumCommon stockBlue Chip common stock Preferred stockCorporate bondsGovernment bondsShort-term government T-billsRiskSafety

  • Risk and Stages of Life: A Typical ScaleLife StageRisk ToleranceEarly careerHighMiddle careerHighLate careerModerateEarly RetirementModerateLate RetirementLow

  • The Capital MarketsCapitalMarketsBanks,InvestmentDealers,etc.Company needs money to expandPeople have money to investPeople get return on investment through capital appreciation and from interest or dividendsMoney raised through capital markets. Company grows, creates new jobsCompany pays interestor dividends out of profits

  • A Typical Business CycleRising stock prices Rising interest ratesEXPANSIONStock prices highInterest rates highPEAKCONTRACTIONCONTRACTIONEXPANSIONTROUGHStock prices are lowInterest rates lowFalling stock pricesFalling interest rates

  • SEMINAR 8

    1. Risk2. Return3. Time horizon4. Inflation5. Liquidity6. Taxation7. Market timing

    8-5

    SEVEN THINGS TO CONSIDER WHEN SETTING YOUR INVESTMENT OBJECTIVES

  • Treasury Bill CalculationAssume that you buy a 30 day Treasury bill at $99.672. It matures to $100 in 30 days. The difference is your interest.

    Yield calculation

    100 - 99.672 x 365 = __________ or __________%99.67230

    What is the cost of this T-Bill if it is denominated in $10,000? $__________

  • BondsBondsSecured by assets (Except for government)DebenturesNo fixed assets pledgedBased on creditworthinessMostly corporate issuers

  • An Example of a BondLast interest payment and repayment of principal

  • BOND PRICES Go UpINTEREST RATES Go DownWHEN INTEREST RATES FALL BOND PRICES RISE

  • BOND PRICES Go DownINTEREST RATES Go UpWHEN INTEREST RATES RISE BOND PRICES FALL

  • TYPICAL BOND YIELD CURVEShort and long term Government bonds%Years to Maturity

  • MaturityBond Price Fluctuation$ $ $$ $ $$$$THE FURTHER AWAY A BONDS MATURITY DATE, THE MORE VOLATILE ITS PRICETime

  • Bond price fluctuations let you make money beyond fixed interest - by selling your bonds for more than you paid for them.PICKING YOUR BONDS ANDPREFERRED SHARES

  • A BOND QUOTE

    Govt or corporation offering debt

    The interest the bond pays

    Date bond comes due and principal repaid

    What it costs to buy the bond now

    This is yield to maturity: the combination of interest and capital gain (or loss) you will get assuming you keep bond to maturity

    Dollar change from the previous day

    Issuer

    Coupon

    Maturity

    Price

    Yield

    $ Chg

    Saskatchewan

    7.50

    19 DEC 05

    111.784

    5.639

    + 0.610

  • Interest RateInterest RateWHAT HAPPENS TO YOUR $1000 BONDS PRICE WHEN INTEREST RATES CHANGE

  • The yield assuming the bond will be called in before maturity.YIELD TO CALL

  • Exercise #1:From the bond table find the price of a 10% coupon, if rates are 8%: $________

    The $10,000 bond would cost $________.

    The yield to maturity (8% in this case) is a combination of the capital loss on the bond and the higher coupon rate. The capital loss results from the purchaser paying a premium of $________ for the bond and receiving back only the face value of $________ at maturity.

  • Rate of ReturnThe total annual return for an investor buying the bond for $11,359 is:

    Interest$1,000.00per yearLess amortized capital loss$135.90per yearAverage annual net proceeds$864.10per year on a $11,359 investment

  • Approximate Yield to Maturityinterest per year +/- the capital gain or loss per yearpurchase price + maturity valuex 1002

    $1,000 - $135.90$11,359 + $10,000x 1002

    864.1010,679.50= .809 = 8.09%

  • Exercise #2:From the bond table find the price of a 10 year bond with a 10% coupon if market rates are 12%: $________

    The $10,000 bond in our example would cost $________.

    The yield to maturity is ________%.

    The capital ________ (gain or loss) results from the purchaser paying a ________ (premium or discount) of $________ and receiving back the face value of $________ at maturity.

  • Approximate Yield to Maturitycapital gain/year = $114.70interest/year = $1,000approximate yield to maturity (YTM) =$1,000 + $114.70 = 1,114.70 = .1182 = 11.82%$8,853 + $10,000 9,426.50 2

  • Extendible Retractable Convertible

    Floating rate Callable Sinking fund feature Currency featureBOND FEATURES

  • WHO BENEFITS FROM BOND FEATURES

  • Bond Ratings Moodys Standard and PoorsAaa Prime qualityAa High gradeA Upper medium gradeBaa Medium gradeBa Lower medium or speculativeB SpeculativeCaa From very speculativeCa to near or in defaultC Lowest gradeAAA Bank investment qualityAAABBB BB Speculative

    CCCCCCC In default

  • Risks of BondsInterest rate riskreinvestment riskdefault risk (credit risk)purchasing power risk (inflation risk)maturity riskcall riskliquidity riskcall riskforeign exchange riskevent risk

  • Buy: If interest rates high and you expect them to fall to make a capital gainSell: If you believe interest rates are set to increase to avoid a capital loss

    Try to read and interpret the yield curve. Dont buy bonds trading at a premium close to maturity date.DECIDING WHEN TO BUY AND SELL BONDS/FIXED-INCOME SECURITIES

  • Reading the yield curve Using strip bonds to lock in a set known interest rate when rates are attractiveBuilding a bond ladderBuying high-yield or junk bondsSwitching bondsBuying convertible bondsBuying bonds on marginBOND TRADING STRATEGIES

  • Buy a one year government bond in June 1999When it matures in June 2000, use proceeds to buy a 5-year bond.Buy a 2-year bond in June 1999When it comes due in June 2000, use proceeds to buy a 5-year bond.Do the same for the other three years of your ladder.YOUR BOND LADDER

  • Accrued InterestYou buy a 10% $10,000 bond, maturing September 1, 1999. Interest payment dates are Sept. 1 and March 1, six months apart. You buy this bond on Sept. 20, and it is settled on Sept. 23. Next March 1, you will receive the entire six months of interest from Sept. 1 to March 1 because you only owned the bond as of Sept. 23. Therefore you would pay the seller the accrued interest from Sept. 1 to Sept. 22:Sept. 1 to Sept. 22 is 22 days10,000 x .10 x 22 = $60.27 365

  • Cumulative feature Non cumulative Voting privileges Purchase fund Sinking fund Redemption feature RetractablePREFERRED SHARE FEATURES

  • Working capital maintenance clauseMaintaining purchase or sinking fund requirementsRight to vote in event of arrearsRestrictions on further preferred issuesRestriction on sale of assetsRestrictions on change of termsPREFERRED SHARE PROTECTIVE PROVISIONS

  • 1.Preferred dividend coverage2.Record of continuous dividend payments3.Equity (or book value) per preferred share4.An independent credit assessmentYOUR FOUR-STEP PREFERRED SHARE CHECK LIST

  • Advantages of IncorporationLimited liability of shareholdersContinuityTransfer of ownershipEase of raising capitalLegal entityProfessional management

  • Rights and Privileges of a ShareholderThe privilege to share in the companys earnings through dividendsThe right to control through election of directorsThe right to information

  • Types of stocksBlue Chips (Income)safety: established, dominant companyincome from dividends is prime goal: large payout ratiosteady growth in stock price liquidityGrowthcapital growth is main goalearnings expected to increase expect above-average returnsreinvest most of their earnings

  • Types of stocks...Cyclicalsrapid growth in good economic conditionsfalling price in poor economic conditionsexample: commodities, mines, resourcesDefensivelargely unaffected by economylower-than average riskretail food and utilities are examples

  • Types of StocksSpeculativeturnaroundstakeover candidatesnew venturesPenny stockslow probability of large profitspotential for large profits quickly, large losses

  • How Mutual Funds WorkGold$$$$$$$$$$$$Mutual FundCompanyFund manager uses pooled money to buy securitiesSuccessful investments make fund worth moreInvestors get distribution

  • Net Asset Value Per ShareAs of today, a mutual fund has four million shares outstanding. The assets are common stocks with a market value of $102,000,000. The fund's liabilities amount to $2,000,000.$102,000,000 minus $2,000,0004,000,000

    = $25 per share/unit

  • Open-end vs. Closed-endOpen-end fundsContinuously sells to publicRedeems units directlyFund size fluctuatesSells at NAVPsClosed-end fun