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Chapter 11- Saving and Investing Options

Chapter 11- Saving and Investing Options. Section 11-1-Low-Risk Choices. Low-Risk Savings Options. What is Savings? Savings is money set aside for future needs Characteristics of Savings: It should be liquid-meaning it can be quickly changed into cash

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Chapter 11- Saving and Investing Options

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  1. Chapter 11- Saving and Investing Options Section 11-1-Low-Risk Choices

  2. Low-Risk Savings Options • What is Savings? • Savings is money set aside for future needs • Characteristics of Savings: • It should be liquid-meaning it can be quickly changed into cash • A checking or savings account in a bank with no restrictions on withdrawals • It should be safe-FDIC insured • Illiquid investments-cannot be converted to cash quickly or without penalty

  3. Savings Accounts • A low-risk, liquid savings option • FDIC insured • Usually don’t have withdraw penalties • Usually pays a low rate of interest • Considered a safe place to put your money

  4. Money Market Accounts • Low-risk, liquid savings option • Money Market Deposit Account • Large deposit required • FDIC insured • Liquid • Higher interest rate than savings account • Money Market Fund Account • NOT FDIC insured • A low-risk mutual fund that invests in low-risk securities

  5. Certificates of Deposit • Money set aside for a specific length of time at a fixed interest rate • Must invest a certain amount for a specific length of time • NOT a liquid investment • Heavy penalty if you withdraw funds early • Early-withdrawal penalty-a fee imposed to discourage depositors from withdrawing the money before the stated time period • Low-risk investment • Inflation risk is the only risk • Some CDs can be “borrowed against” • Can get a loan because you have a CD with a bank • CD is then “pledged” until it matures or the loan is paid off

  6. Life Insurance Savings Plans • Permanent life insurance policy • Savings feature that gains cash value • Low rate of return • Illiquid investment • NOT FDIC insured

  7. Brokerage Accounts • An account with an investment company • Clearing account-used to buy and sell investments • Money taken from account to buy investments • Money returned when investments are sold • Low rate of return • NOT FDIC insured • Liquid investment

  8. Low-Risk Investment Options • Usually pay a lower rate of return • Liquid

  9. Bonds • A bond is a loan that a buyer makes to a bond issuer. • Face Value Bonds-the amount that the bondholder will be repaid on the maturity date (date the borrowed money must be repaid) • Discount Bond-a bond that is sold for less than its face value • Premium Bond-a bond that is sold for more than its face value

  10. Corporate Bonds • Issued by corporations to raise money • Bonds are a form of borrowing for a company • Coupon rate-the fixed rate of interest that is paid semiannually for the life of a bond • Callable bond-a bond with a clause that allows the issuer to repay the bond early • Convertible bond-a bond that can be exchanged for shares of common stock at the option of the bondholder • Zero Coupon Bond-A discount corporate bond that does not provide the typical semiannual interest payments

  11. Government Bonds • A tax-shelter investment-allows you to legally avoid or reduce income taxes • Types of investments: • Series EE Savings Bonds: safe, low-risk, sold for half of the face value, penalty if redeemed before five years, tax free earnings if used for educational expenses • I Savings Bonds: low-risk, liquid savings option, penalty if redeemed before five years, tax free earnings if used for educational expenses

  12. Government Securities • Treasury Bills (T-Bills): discounted from face value, no minimum ownership term required • Treasury Notes (T-Notes): minimum $100 purchase required, 30-year term, no minimum ownership term required • Treasury Bonds: Minimum purchase of $100, 30-year term. Pays interest every six months until maturity, no minimum ownership term required • Treasury Inflation-Protected Securities (TIPS) Guaranteed to keep pace with the rate to inflation. Face value increases with the rate of inflation. Interest paid twice yearly, at a fixed rate, minimum purchase is $100, no minimum ownership term

  13. State and Local Securities • Municipal bonds: issued by states, counties, cities and towns • Used to pay for projects, such as roads or public buildings • Tax-exempt earnings • Low-risk investment

  14. Annuities • Annuity: a contract purchased from an insurance company that guarantees a series of regular monthly payments for a set time. • To purchase an annuity: • A monthly payment is paid into an account for a set number of years • At the end of the set number of payments, the account starts paying you monthly payments • Usually, low-risk • Not insured • Tax-deferred

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