Investment Types and Returns: Bonds, Ownership Investments, and Interest Rates, Slides of Fundamentals of E-Commerce

Download Investment Types and Returns: Bonds, Ownership Investments, and Interest Rates and more Slides Fundamentals of E-Commerce in PDF only on Docsity! Lending Investments • Placing your money into savings accounts and bonds which are issued by corporations and the government • Bonds -- debt instruments that provide a return in the form of a coupon interest rate payment and par value at the stated maturity date • Most have a fixed rate of return, although some rates vary or float Docsity.com Ownership Investments • Placing your money into preferred and common stocks. You become part owner in the corporation and receive a portion of the profits as dividends. – Dividends on preferred stock are generally fixed. • Buying real estate to generate a return through rent or capital appreciation. Docsity.com Returns From Investing (cont’d) • Rate of return = (ending value - beginning value) + income beginning value • Annualized rate of return = (ending value - beginning value) + income X 1 beginning value N Docsity.com A Brief Introduction to Market Interest Rates • Nominal and real rates of return. • Historical interest rates. • Interest rate risk. • Determinants of the quoted, or nominal, interest rate. • How interest rates affect returns on other investments. Docsity.com Nominal and Real Rates of Return • Nominal (quoted) rate -- the rate of return without adjusting for inflation. • Real rate -- the inflation adjusted rate of return. • Premiums -- additional returns demanded by investors for taking on additional risk. Docsity.com Types of Risk Premiums • Inflation risk premium (IRP) -- compensation for the anticipated inflation over the life of the investment. • Default risk premium (DRP) -- compensation for the possibility that the issuer may not pay the interest or repay the principal. Docsity.com Types of Risk Premiums (continued) • Maturity risk premium (MRP) -- compensation on longer-term bonds for value fluctuations in response to interest rate changes. • Liquidity risk premium (LRP) -- compensation for a bond that can not be quickly converted into cash at a fair market value. Docsity.com