Investment, Credit, and Interest

BBI2O

Recap: types of investments

Investment options vary according to risk and return Risk: how “safe” is your investment – is it likely

to decrease in value? Return: what rate of return can you expect –

what will the yield of the investment be? Generally speaking, higher risk investments

offer the highest potential returns, whereas low risk investment offer lower returns

Low risk investments

Canada Savings Bond A Canada Savings Bond (CSB) is a loan made by an

individual to the government of Canada On the maturity date, the government will repay the

principal plus interest. Corporate Bonds

Businesses sometimes need money to increase production, expand operations, or introduce new products

Businesses sell securities— corporate bonds and shares of stock—to raise the necessary funds

A bond is a promise to repay borrowed money on a certain future date along with interest.

Low risk investments

T-Bills: Government of Canada Treasury Bills are

investments fully guaranteed by the Government of Canada

Your principal and rate of interest are guaranteed

They are offered for terms of 1 month to 1 year. Interest is paid at maturity

The minimum investment for a T-Bill having a term of three months to one year is $5000. The minimum investment for a T-Bill having a term of one or two months is $25000.

Low risk investments

GICs Guaranteed Investment Certificates are usually issued by

a financial corporation like a trust company or a bank, which actually borrows the money from you in the same way that it borrows from you when you put your money in a savings account

They use the funds to meet their own needs and pay out interest before paying you back in full on a set date

You usually keep a GIC until maturity, but some issuers will redeem their own certificates before maturity for a little less than their full value

Stocks When an individual buys stocks, they become part owner or a

shareholder in the company Shareholders share the risks and rewards of the company. Common Stock

Common stock represents general ownership in a corporation, carries voting privileges, and includes a right to share in its profits

However, there are no fixed dividend rates Common stock is always liquid—it can be bought or sold at any time

on the open market Preferred Stock

preferred stock has advantages over common stock due to the payment of fixed rate dividends

Shareholders have no voting privileges, and stock prices tend to be more stable

This type of stock is also liquid Blue chip companies such as Weston and Imperial Oil are

characterized by a long record of regular dividend payments, stable growth, and active trading.

Bulls and Bears

A bull market occurs when the demand and price for most stocks is high

When demand and price for most stocks is low, it is a bear market.

How would you characterize this first week of our stock market game?

Other investments

Mutual Funds pools of money from many investors that are set up and

managed by an investment company to buy and sell securities from other corporations

Real Estate land and anything attached to it besides buying a home as a form of investment in real

estate, some people buy income property Collectibles

items of personal interest to a collector may increase in value over time due to the scarcity of the

item or the demand in the market.

Borrowing Money

Credit Cards Loans Mortages

Loans

Term Loan: Make fixed monthly payments over a set period of time May be fixed rate (interest rate set in advance for entire

term of loan) or variable rate (rate changes based on prime lending rate)

Demand Loans are more flexible (borrower can make payment or pay back in full at any time, lender can also call in the loan at any time)

Getting a approval for a loan, and getting a favourable rate, are dependent on credit rating and collateral

Mortgage

Basically a loan where property is pledged as collateral

i.e. you buy a $300,000 house – you put $50,000 down and get a mortgage for the remaining $250,000. Over the term of the mortgage (usually 20 years+) you make regular fixed payments to the bank, gradually increasing your equity in the house and reducing the bank’s.

Interest

Whether you are borrowing (credit card, loan, etc.) or investing (bonds, t-bills, etc.) interest applies

Simple Interest

Simple Interest = P x R x T I = the total interest P = the principal (the amount

borrowed) R = the interest rate (as a

decimal) T = the time in years

Simple Interest

If you borrow $10,000 at 5% for 5 years

Interest = 10,000 x 0.05 x 5

= $2,500 So you would end up paying back

$12,500 in total

Compound Interest

Compound interest is calculated on the original principal plus all the interest that has been accumulated for that period

Compound interest is just like a series of simple interests, where the interest occurred is added to the original principal, which is then considered as a principal for the next month or year in simple interest the principal amount is always fixed but

in compound interest the principal changes as the interest for subsequent months is added to it

Compound Interest

A = P (1 + i)n A = the total amount to be repaid

(principal + interest) P = the principal i = the interest rate (as a decimal) n = the number of periods

Compound Interest

If you borrow $10,000 at 5% compounded annually for 5 years

Amount Owed = 10,000 (1 + 0.05)5

= 10,000 (1.05) 5

= 10,000 x 1.28

= 12,800 The total interest paid was $2 800

Which is better?

If you’re investing, compound interest will pay your more

Loans could be simple or compound… compound is better since the interest is calculated on the remaining principle each period (and is therefore lower each time)

Mortgages are pretty much always compound

Which is better?

If I’m investing, is it better to compound interest more often, or less often? i.e. which will pay more, an investment

that is compound weekly or one that is compounded monthly?

If I’m paying off a mortgage, is it better to make weekly payments or monthly payments?