CHAPTER 15 types of investments.docx

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21 Apr 2012
CHAPTER 15 types of investments
Federal government of Canada securities
o Treasury bills: short-term obligations issued normally in denominations ranging from $1,000 to
$1 million and with 91-day, 182-day, and occasionally 1-year term
Does not pay interest, but purchased at a discount from their face value
Difference between the face value and the initial price paid, is considered as interest
income for tax purposes
o Canada savings bonds (CSBs): sold once a year with the actual issue date and the maturity date
falling on November 1
Regular interest bond: pays annual interest either by cheque or by direct deposit into
the investor’s bank account each year
Compound interest bond: does not pay annual interest but reinvests the interest
payable automatically until maturity or redemption
Deposits with financial institutions
o Bank accounts
Chequing accounts: does not pay interest
Savings account: do not allow chequing but pay interest to the account holders
Cheuqing-savings account: attributes of the two; allows chequing but pays a lower
interest rate than savings accounts
o Term deposits: guarantee a rate of interest for a specified term
o Guaranteed investment certificates (GICs): long-term deposits with guaranteed interest rate
o Canada deposit insurance corporation (CDIC): provides investor with insurance against any loss
on his deposits should a member institution become insolvent or bankrupt
Maximum coverage is $100,000 for each person in each member institution, amount
applies to the combined total of principle and interest
Does not cover investments in stocks, bonds, mortgages or mutual funds
Bonds: fixed income securities issued by various levels of government and corporations
Bond market: a communication system where brokers put orders to buy and orders to sell together
Investment dealers (bond dealers): holds hundreds of millions of dollars of bonds in inventory and then
buy or sell bonds on their own account
Bond quotations: investment dealers set a price lost for the bond
o Bid price: price which the deal will pay to buy the bond
o Ask price: price which the dealer will sell the bond
Spread: difference between he ask price and the bid price, represents the dealer’s gross profit margin
Yield to maturity (return to maturity or internal rate of return): average rate of return that will be
earned on the bond if it is bought now and held until maturity
Bond price equation: current bond price is equal to the present value of the interest annuity plus the
present value of the face value of the bond
Current yield: bond’s annual coupon payment divided by the bond price
Default risk: risk that the issuer may not be able to pay part or all of the interest and face value
o Bond rating agencies: specializes in rating the credit risk of different issuers
o Bond ratings: used as indicator of the probability of uninterrupted payment of interest and
principle repayment
Interest rate risk: volatility or fluctuation of the bond’s price due to the fluctuation in interest rates
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