Personal Finance Written Unit 7 PDF

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written assignment unit 7...

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Financial markets come in different ways in a bid to accommodate the big number of financial instruments that are more beneficial to lenders and borrowers. There are primary and secondary markets where securities are sold. Bonds can be described as a loan contract issued by national governments or local state and by private corporations stipulating a commitment to return borrowed funds ("Bond," n.d.). The borrower promises to pay interest on the debt when due at a specified percentage of the face value and to use the face value of the bond at maturity in legal tender. There are fixed interest rate and floating interest rate that changes as underlying interest rates. In order for one to trade the bond he or she has to go through the broker and the bonds can be redeemable before maturity date. Bonds have many categories which include treasury bonds, foreign bonds, mortgage-backed bonds and other U.S government bonds (Siegal & Yacht 2009). Bonds have different characteristics that include principal which is the amount one gets back from the issuer on the day that bond matures. There is also interest, issue price and a maturity date which is the day that bond is due. Fixed rate bonds normally generate a stable interest rate. Bonds are a form of debt and unlike stock that is traded in stock exchanges; they are traded in bond exchanges (Siegal & Yacht 2009). Stocks are traded on the stock exchange and it is a good place where stocks for thousands of companies are traded from different sectors globally (Siegal & Yacht 2009). Some of the stock yield good and steady capital while others come up with a mix of regular income. Investors ignore volatility and focus mostly on business fundamentals. Corporate earnings replace stocks with actual cash payments because shareholders own profits, whether they receive them as cash or dividends or not (Wright & Quadrini 2009). When one buys a share of stock, he or she is buying a share of the corporation whereby the price of the share in the corporation is proportional to the size of the stockholding. There are several types of stocks and I will use an example exchange traded products, which basically have many characteristics such as being simple to buy and selling at any given time when the market is open The annual rate of return is calculated by taking the amount of money gained or lost at the end of the year and dividing it by the initial investment at the beginning of the year (Siegal & Yacht 2009). It is important for one to know that losses and gains from the beginning of the year. The annual rate of return is the return that is provided by the investment in a certain period of time expressed in percentage. This is measured against the initial investment amount using the geometric mean. The annual rate of return states that stocks value increase over a specific period of time. The rate of return is the amount one receives after the cost of an initial investment calculated in the form of a percentage (Siegal & Yacht 2009). In the scenario that I buy a share of stock for $100 and it pays no dividend and a year later the market price is $105, the rate of return will be 5%. It will be 5% using the below formula:

Current value-Original Value/original value*100 [0+(105-100)]/100=5/100=5% If the same stock is paid $2 then the return would be 7% and it will be calculated as follows: [2+(105-100)]/100=7/100=7% In conclusion, because of the diversity and flexibility of bond features, the bond markets are not as transparent as the stock markets and the stock markets and the stocks do not compromise any returns at all. The relationship between the bond and its price is harder to determine and when one invests in stocks, they share the company’s losses which decrease the value of one’s shares (Siegal & Yacht 2009). Reference Siegal, R. & Yacht, C. (2009). Personal Finance. Saylor Foundation. Licensed under Creative Commons CC BY-NC-SA 3.0. Bond. (n.d.). Retrieved from https://www.britannica.com/topic/bond-finance Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license....