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Lecture Personal financial planning – Chapter 16: Stocks, bonds, and mutual funds

The goals of this chapter are: Illustrate the characteristics of bonds, stocks, and mutual funds more fully, calculate the value of a bond and bond yields, compute the value of a stock, differentiate between fundamental and technical stock analysis, develop a logical approach to selecting individual mutual funds. | Lecture Personal financial planning Chapter 16 Stocks bonds and mutual funds Chapter 16 Stocks Bonds and Mutual Funds 1 Chapter Goals Illustrate the characteristics of bonds stocks and mutual funds more fully. Calculate the value of a bond and bond yields. Compute the value of a stock. Differentiate between fundamental and technical stock analysis. Develop a logical approach to selecting individual mutual funds. 2 Bonds Bonds can be broadly classified by maturity and quality. Maturity The number of years until the amount borrowed is to be repaid. The longer the period until maturity the greater the risk of the bond as The greater the potential for a change in the ability of a company to repay its debt. A broad-based change in interest rates will have a greater effect on long-term bonds. Both factors are included in the term maturity risk. 3 Bonds cont. Bonds are generally given the following classification and risk profile by maturity date 4 Bonds cont. Quality The likelihood that the bond will fulfill its obligation to pay interest and repay the amount owed at maturity. There are bond rating agencies such as Standard amp Poor s and Moody s that assign ratings indicating the relative quality of a bond. Ratings range from AAA the highest to C the lowest. BBB represents the lowest possible rating for which the rating agency believes the bond will fulfill all its obligations. Anything below BBB is regarded as a high-yield bond or a junk bond with a chance of default nonpayment which typically results in bankruptcy. The lower the rating the greater the default risk and 5 correspondingly higher anticipated returns. Bonds cont. Bonds can be classified into the following categories 6 Bonds cont. Liquidity The ability to convert an asset into cash quickly and at a relatively low transaction cost. Liquidity risk The possibility that you will not be able to find a buyer at the current market price for an asset. Assets vary in terms of liquidity. For example a U.S. Treasury