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Three Categories of Finance
- Lending investments
- ownership investments
- derivatie investments
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Lending investments
debt instruments and bonds issued by the government or corporations.
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ownership investments
common stocks, preffered stock, income producing real estate. investment vehickles that represent an ownership position in a corporation
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derivative investments
investments that get or derive their value from the price of a specified asset. These investments involve conracts that give the contract holder the obligation or chocie to buy or sell a specified asset over or at a specified time period.
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money markets/ cash investments
a type of lending investment that is short term
Pros: they are highly liquidable and secure.
Cons: your interest rates or returns are low.
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captial market investments
a type of lending investment that is long term
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money market mutual fund
you invest your money into a pool of money in which an investor invests the money.
short term interst rates in return
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Treasury bills
short term notes of debt issued by the federal government. (4 weeks-1year)
you receive no interest. instead, your money appreciates, and you get more money at face value then what you paid for it.
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Commercial paper
short term unsecured promissory notes sold by large corporations to raise money. 5000 to 5million denominations. span from 3- 270 days, so they don't have to register with the SEC.
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Fixed income securities (capital market investments)
- Also known as bonds.
- Long term borrowing instruments where you know your returns ahead of time and maturity date.
- 5 years- short term
- 10 years- intermediate
- +10 years- long term
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Face value
Also known as par value or principal.
the amount you recieve when the bond matures.
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Treasury bills, notes, bonds
US Federal government borrowing instruments.
- Bills- short term maturities, usually less then 1 year
- Notes- maturities of 1-10 years
- Bonds- maturities greater then 10 years.
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federal agency debt
federal agencies and agencies that are federally sponsored.
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municipal bond
- debt issued by state and local governments.
- The advantage is that they are exempt from federal taxes, and sometime state and local taxes.
- Two types:
- 1. revenue bond
- 2. General obligation bond
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corporate bonds
over the life of a bond, you receive semi annual interest payments, which remain the same over the life of the bond.
coupon rate- the actual rate of interest that the bond pays.
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