Akiyoshi Saito Hypothetical Situations You worked for a company called Akiyoshi President, Akiyoshi, did not pay you well 55 Years Own $300,000 by cash Have a bad heart condition by working with Aki for a long time No tolerance to Stress
Appropriate Place to Put Money? Savings Account Professer Brooks portfolio
My Pocket Stock Market Treasury Bill Municipal Bond Typical Return of Investment Savings Account Treasury Bound
1.04% 4.0% Stock Market 11.1% My Pocket
-100% Municipal Bond 5.5% Inflation and Rate of Return(ROR) What is the real ROR with Inflation??
Inflation ROR Inflation and Real ROR ROR Inflation Real
ROR Go Back to Savings Account IS SAVINGS ACCOUNTS REALLY APPROPRIATE FOR YOUR INVESTMENT? ROI 1.04% Inflation 3%
Real ROR -1.96% ROR of Investment My Pocket Savings Account
Treasury Bond -1.96% 1.0% Stock Market 8.1%
-100% Municipal Bond 2.5% Risk of Investment Variance of Market Price Stock Price Bond Price
Inflation Rate Typically positive every year No Risk Investment? TIPS Treasury Inflation-Protected Securities STRIPS
Separate Trading of Registered Interest and Principal of Securities TIPS: How does this work? Consumer Price Index(CPI) Face Value Coupon Rate Face Face Value
Increase Increase in Tax Expense ROR Fixed No Risk of Inflation CPI Increase
CPI TIPS TIPS : Example Excel Sheet STRIPS STRIPS are effectively zero coupon bonds Separated in Coupon Strips and Principle Strips
Effectively zero coupon bonds? Year to Maturity of STRIPS will be used to discount future cash flow STRIPS Can be purchased from Bank Bank will use spot rate to price each of Zero coupon bounds, whose rate can be calculated by observed yields of Treasury bills and treasury Coupon securities
SPOT Rate Example Purchased 1.5 years, semiannual coupon of 8.5% and $100 par bound Observed YTM of .5 and I year are 8% and 8.3% respectively without no coupon. Price of 1.5 Maturity bill is $99.45 STRIPS http://www.google.com/search?q=treasury+strips&oe=utf8&rls=org
Example Excel STRIPS : History Originally started by Merrill Lynch and Salomon Bros in 1982 Caused less liquid bounds and indirect obligation of US movement bounds To address those Problems
In 1985, US government announced STPRIPS program All of 10 years and longer treasuries are qualified STRIPS : Quiz
Face $100,000 Coupon rate 3% YTM 4% Annual Interstate Payment Year to Maturity 10 How many Zero Coupon bonds can be created ?
What would be the rough projected price of Zero Coupon bounds for year 2 interest rate Payment? Questions ?? Thank you for listening Source http://www.money-rates.com/savings.htm Foundation of Finance Market and Institutions http://www.youtube.com/watch?v=pvTCTl86rrg
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