Different Types Of Investments

Submitted By kyjame12
Words: 1058
Pages: 5
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Jameson Reid
Dr. Gonas
FIN 3460
September 5, 2013

There are many different types of investments a person can make, but it is important to consider or evaluate your investment risk before you invest your money. There are three things that a person should be aware of when it comes to different kinds of investments: if there is any type of collateral and what it is, the desired yield and its source, and what the term of his or her investment is. This essay focuses on seven different types of investments and the characteristics of each. A medium term US Treasury Bond is an investment with five to ten years to maturity. These investments are considered risk free investments because they are guaranteed by the US government. Income earned by Treasury bonds represents interest payments based upon the stated coupon of the bond. The interest and principle are considered risk free, if held to maturity. Because of this, US Treasury Bills, Notes, and Bonds are risk free. An example of a T-note is one with maturity at 30 Sept. 2018, a coupon rate of 1.375%, and YTM at 1.411. Another type of investment is a medium term non-callable Corporate Bond debenture. This bond is non-callable, which means that the issuer cannot demand this investment from the owner before maturity. A debenture is a type of debt instrument that is unsecured, so, there is no collateral on a Corporate bond. The investor’s money is backed by the financial status of the company’s future performance. If they are not able to pay the coupons to investors, the company may be required to generate cash flow from other sources. The sources can include the selling of assets, refinancing of existing debt, or raising of new capital. The higher the risk of the investment, the higher the interest rates will be. There is a Bank of America corporate bond with a 6.001 YTM that reaches maturity at 5 Dec. 2014 A bond that is issued by a government agency is called an Agency bond. Some well know agency bonds are Freddie Mac and Fannie Mae, which are collateralized by residential mortgages. Also paying in coupons, these investments are used by the agencies to purchase residential mortgages that collateralize the mortgage backed securities. The credit rating of agency bonds is very close to that of the US Treasury, however there is credit risk for these investments. An example of a Fannie Mae agency bond is FNMA with a .850 coupon rate, .148 YTM, and reaches maturity at 15 Sept. 2018. A medium term non-callable general obligation Municipal Bond is issued by state and municipal government organizations. Unlike US Treasury bonds, these are not considered risk free and are unsecured. The payment source of these bonds is the tax revenues of that local government. When needed, these government agencies are able to raise revenues through increased tax rates. As a recent example of the risks of these investments, the city of Detroit recently filed bankruptcy, indicating that the city is not able to meet all of its obligations. There is a Clarksville municipal bond with a YTM of 1.915 that matures at 1 June 2019 with a coupon rate of 4.0. Municipal investments are typically considered tax-free for US income taxes, which can increase the yield and the attraction on these investments. Cumulative Preferred Stock is another type of investment that a person can make. Preferred stock typically has a higher dividend rate then normal equity stock. It will also contain other rights provided to the preferred stock owner. These are unsecure investments because, similar to Corporate bonds, their repayment is based upon the company’s future cash flow. As stated earlier, Preferred stocks pay out income in dividends. BAC-PL is an example of preferred stock for Bank of America. Based upon its dividend that was paid on July 30, and its stock price at that time, its annualized dividend yield was 6.62%. An investment in an equity income Common
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