CH.1 Investment and savings Flashcards
Concept of investing
• Investing: money used to make more money
• Investors invest sum (principal/capital) that is repaid + profit
○ Profit= return
Compound interest
earning interest on investment
○ Interest reinvested
○ Interest on interest= compound interest
○ Very effective over long period of time
Types of Investment returns (3-PNN)
○ 3 types of return:
§ Positive and reflect profit earned
§ Neutral- investor receives sum already invested
§ Negative- investor loses money
Rate of return
return expressed as % of amt invested
Scale of risk
tells investor how likely it is he will get all money back
§ Low risk investment: more certain will get back all money invested
§ Speculative risk: most risky, uncertain if will get money back, possibility of very high returns
returns classified as:
§ Nominal: stated/advertised rate
Real return: nominal return - rate of return
Asset classes
○ 3 main asset classes: § Stocks (equities) § Bonds (fixed income/debt § Cash (money market instruments) ○ Each class has own risk/return features
Diversification
manages risk
○ Combines asset classes–> lowers investment risk,. Higher returns
Liquidity
how easily investment can be converted to cash
○ Or how easily asset/investment can be sold w/o decrease in value
○ Illiquid= NOT liquid
§ i.e. real estate
Presnt value:
- definition
- when to calculate
- formula
goes backwards from future date ○ How much money needed NOW to reach savings goal ○ Calculated when: § FV known § Future date known § Rate between today and future known
PV= FV / (1 + interest rate)n
Future Value
value of current investment @ future date, given interest earned on investment
○ How much will sum of money TODAY be worth in future
○ Calculate when:
§ PV known
§ Future date known
§ Rate between today and future known
FV= PV X (1 + interest rate)n
Investment objectives
investors reasons for investing/saving
Investment objectives classified as:
○ Short term: less than 3 yrs.
○ Medium term: 3-10 years
○ Long term: 10 years or more
Tax advantaged Investing
• Interest taxed at same rate as income from working
• Dividends from stock of qualified cdn co.
○ Gets dividend tax credit
• Capital Gains: taxed at rate lower than interest
Types of Investments-11
- seg funds
- annuities
- stocks
- bonds
- savings account
- GIC’s
- mutual funds
- ETF’s
- real estate
- CPB’s/CSB’s
- group plans
Segreated funds
- where to buy
- risk
- protection
• Only sold through life ins agents and brokers
- money pooled in fund
- maturity and death benefit guarantee
low risk- max loss 25% (100-75)
protected by assuris up to limit
seg funds advantages/disadvanatges
Advantages • Maturity and DB guaranteed • Designate beneficiary + bypass probate • Tax benefit when CL incurred • Investors protection (Assuris)
Disadvantages
• Sales charges ongoin
Annuities
- reliable source of income
- annuitant that receives income pmts
- fixed rate
-pmt determined by Prevailing interest rate at time invested
* Primary risk-- interest rate risk-- b/c fixed * Inflation risk- if not indexed
protected by assuris
Annuity advantages/disadvantages
Advantages • Easy to understand • Steady income stream • 2 forms: • Variable • Indexed • Choose pmt frequency • Investor protection of ins annuity contract--> Assuris
Disadvantages
• NOT flexible
• Interest rate risk- b/c doesn’t rise/fall with rates
• Penalties if surrender/withdrawal
Stocks
- preferred
- common
buy on toronto stock exchg
returns in form of:
○ CG
○ Dividends
○ CL
risks: • Blue chip= least risk • Penny stocks= most risk • Market risk • Industry risk • Risk of loss of capital/principal (total loss)
Protected by CIPF
Stock advantages/disadvantages
Advantages
- High degree of transparency in stock market investing
- Dividends
- Favourable tax rates for CG/CL
Disadvantages
- Possibility of loss (even total loss)
- Possible absence of diversification= more risk
- Liquidity- if need to be sold, may be at lower price
- No beneficiary
- No creditor proofing
- No ability to rescind sale
bonds
• Bonds are debt investment (must be repaid)
○ Borrower (issuer
○ Lender (investor)
also called fixed inciome security
issuers:
- government
- corporations
• Issuer guarantees repayment of bond + regular interest pmt
buy through IIROC nad MFDA market dealers
types: cdn government bonds -gov of cda, provincial, municipal Foreign bonds eurobond
risks: • Interest rate risk • Reinvestment risk • Inflation risk • Credit risk • Liquidity risk • Currency risk
protected by CIPF
Bonds advantages/disadvanatges
Advantages
• Repayment of principal + interest pmts guaranteed
disadvantages??
Savings accounts general infor + adv/disadv
advantages:
• Immediately available cash that benefits from interest
• Money can be withdrawn
Disadv:
Low interest rates– inflation risk
• Exposed to inflation risk
Investor protection by
• CDIC- up to $100,000
• 2 basic types:
○ Traditional: low interest rate, lower fees + no restrictions on withdrawals
○ High interest savings accts: higher rates , withdrawals restricted
• 2 basic types:
○ Traditional: low interest rate, lower fees + no restrictions on withdrawals
○ High interest savings accts: higher rates , withdrawals restricted
GIC’s
= Term, deposit
- Issuer guarantees investor will receive principal + promised rate @ maturity
- Guaranteed return of principal + interest at stated
- Interest rate risk (b/c low)
- Inflation risk (b/c rises, may rise above interest rate)
Investor protection
• CDIC- up to $100,000, 5yrs or less maturity
• Assuris- for Insurance GIC’s
GIC adv/disadv
Advantages:
• Guaranteed return of principal + interest
• Variety of products
• Convenient., easy
Disadv:
• Low rates of return
Significant penalties if withdraw
Types of GIC’s
- Fixed Interest GIC
- Cashable/redeemable GIC
- Escalating GIC
- Variable Interest GIC
- Market linked GIC
- Insurance GIC’s
Fixed Interest GIC
○ Specific interest rate
§ Simple interest paid annually
§ Interest that compounds annually, paid at maturity
Cashable/Redeemable GIC
○ Allows early cashing out
“cost”= lower interest rate
Escalating GIC
○ Increases interest rates on anniversary
Can cash out all/some at anniversary
Variable Interest rate GIC
Rate increases over time
Market Linked GIC
○ Links portion of return to performance of specific equity market index
○ Not cashable before maturity
Insurance GIC
CHK BOOK
Mutual Funds: DEFINITION guarantees NAV + NAVPU Portectd by?
• Investors money pooled in to fund (like Seg funds)
either:
open ended or closed
- No guarantees on mutual funds
- Returns based on Net asset Value (NAV)= TOTAL NET ASSET VALUE OF FUND / # O/S UNITS
protected by
CIPF
MFDA
TO MAX $1 MILLION
Type of mutual funds adn risks
○ Cash- incl funds in money market ○ Fixed income ○ Equity ○ Commodity ○ Other
risks:
○ Cash based funds: interest rate and inflation risk
○ Equity Funds: Market Risk and industry risk
○ Fixed Income funds: Interest rate risk
Mutual Fund Distributions
earnings generated in fund + CG from buying/selling securities
Exchange Traded Funds (ETF’s)
definition
Guarantees
protection
- ETF’s- investors buy shares in fund
- Fund represents all components of a chosen index or multiple indexes
- Value of ETF based on index/indexes
○ Difference in return btwn actual index and ETF
Investor Protection
• CIPF
ETF adv/disadv
advantages: • Diversification • Convenience • Transparent • Lower MER • Professional mgmt • No penalties
Disadv:
??
Types of ETF’s
• Currency, industry, commodity, dividends, real estate
