Economic Awareness
Part V: Investment
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Alex Shi
Our Team
07/15 (Economy); 07/22 & 07/29 (Financial markets); 08/05 (Personal Finance); 08/12 (Investment)
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Angela Zhang
Our Team
07/15 (Economy); 07/22 & 07/29 (Financial markets); 08/05 (Personal Finance); 08/12 (Investment)
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Yaz Hathiram
Our Team
07/15 (Economy); 07/22 & 07/29 (Financial markets); 08/05 (Personal Finance); 08/12 (Investment)
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Eric Yule
Our Team
Disclaimer��The material presented in this deck does not contain any company specific information. All examples and numeric analyses used within are public information for illustration purpose only. The content is intended solely for educational and knowledge sharing purpose only. The comments and remarks entirely reflect the presenters’ opinions and do not represent their employer’s.
Why do we need investment?
What is investment?
How does an investment work?
Example of Investment: Fixed Income
Bonds: government, corporate, and municipal bonds. When a bond issued, the borrower agrees to pay the investor a fixed rate of interest, known as the coupon rate, over a set period of time. At the end of the term, the borrower repays the investor the principal amount of the bond.
Certificates of deposit (CDs): A CD is a type of deposit account that pays interest in exchange for agreeing to keep your money in the bank for a specific period of time. Longer-term CDs tend to pay higher rates.
Money-market funds: These are a type of mutual fund that invests in short-term, low-risk debt securities, such as Treasury bills.
Example of Investment: Fixed Income - Bond Price
Q: What is the relationship between bond yield and bond price? When interest rate goes up, does bond price go up or down?
WRITE YOUR ANSWER IN THE CHAT!
Example of Investment: Fixed Income –
Price vs. Yield
C the coupon payment
r the discount rate, yield to maturity
F face value, $100 for treasury
T the number of coupon payment
kth payment | cash flow | payment value |
1 | $2.50 | $2.45 |
2 | $2.50 | $2.40 |
3 | $2.50 | $2.36 |
4 | $2.50 | $2.31 |
5 | $2.50 | $2.26 |
6 | $2.50 | $2.22 |
7 | $2.50 | $2.18 |
8 | $2.50 | $2.13 |
9 | $2.50 | $2.09 |
10 | $2.50 | $2.05 |
11 | $2.50 | $2.01 |
12 | $2.50 | $1.97 |
13 | $2.50 | $1.93 |
14 | $2.50 | $1.89 |
15 | $2.50 | $1.86 |
16 | $2.50 | $1.82 |
17 | $2.50 | $1.79 |
18 | $2.50 | $1.75 |
19 | $2.50 | $1.72 |
20 | $102.50 | $68.98 |
Bond price | | $108.18 |
Example: 10 Year Bond
Coupon: 5%
YTM: 4%
pay freq: Semi-annual
Maturity: 10 year
face value: $100.00
Homework: prove the above formula is equivalent to below
Example of Investment: Bond Price vs. Yield
Example: 10 Year Bond
Coupon: 5%
pay freq: Semi-annual
Maturity: 10 year
face value: $100.00
Example of Investment:
Fixed Income earning interest
Simple interest: A=P(1+rt)
Finite compounding:
Continuous compounding:
A: accrued amount, principal + interest
P: principal amount
r: annual nominal interest rate
t: time in year
n: number of compounding periods per unit of time
Rate | 5.00% | Principal | $1,000.00 | |
Term | Simple Interest | Annual Compounding | Quarterly Compounding | Continuous Compounding |
1 | $1,050.00 | $1,050.00 | $1,050.95 | $1,051.27 |
2 | $1,100.00 | $1,102.50 | $1,104.49 | $1,105.17 |
3 | $1,150.00 | $1,157.63 | $1,160.75 | $1,161.83 |
4 | $1,200.00 | $1,215.51 | $1,219.89 | $1,221.40 |
5 | $1,250.00 | $1,276.28 | $1,282.04 | $1,284.03 |
6 | $1,300.00 | $1,340.10 | $1,347.35 | $1,349.86 |
7 | $1,350.00 | $1,407.10 | $1,415.99 | $1,419.07 |
8 | $1,400.00 | $1,477.46 | $1,488.13 | $1,491.82 |
9 | $1,450.00 | $1,551.33 | $1,563.94 | $1,568.31 |
10 | $1,500.00 | $1,628.89 | $1,643.62 | $1,648.72 |
11 | $1,550.00 | $1,710.34 | $1,727.35 | $1,733.25 |
12 | $1,600.00 | $1,795.86 | $1,815.35 | $1,822.12 |
13 | $1,650.00 | $1,885.65 | $1,907.84 | $1,915.54 |
14 | $1,700.00 | $1,979.93 | $2,005.03 | $2,013.75 |
Fixed Income earning interest (Questions)
A) 12% paid annually
B) 12% paid semiannually
C) 12% paid quarterly
D) 12% paid monthly
E)12% paid weekly
F)12% paid daily
2. Which of the following investment will end up having higher returns?
A) Investment A appreciated 30% during the 1st year while depreciated 30% in the 2nd year.
B) Investment B depreciated 30% during the 1st year while appreciated 30% in the 2nd year.
3. How long will it take to double the value given the interest rate 4%
4. How long will it take to double the value given the interest rate 15%
Fixed Income earning interest, answers
2. A = B
Fixed Income earning interest, answers
Rate | 15.00% | Principal | $1,000.00 | |
Term | Simple Interest | Annual Compounding | Quarterly Compounding | Continuous Compounding |
1 | $1,150.00 | $1,150.00 | $1,158.65 | $1,161.83 |
2 | $1,300.00 | $1,322.50 | $1,342.47 | $1,349.86 |
3 | $1,450.00 | $1,520.88 | $1,555.45 | $1,568.31 |
4 | $1,600.00 | $1,749.01 | $1,802.23 | $1,822.12 |
5 | $1,750.00 | $2,011.36 | $2,088.15 | $2,117.00 |
Example of Investment: Stock/Mutual Fund/ETF/Cryptocurrency
Stock: A stock, also known as equity, is a security that represents the ownership of a fraction of the issuing corporation. Units of stock are called "shares" which entitles the owner to a proportion of the corporation's assets and profits equal to how much stock they own. Stocks are bought and sold predominantly on stock exchanges and are the foundation of many individual investors' portfolios. Stock trades have to conform to government regulations meant to protect investors from fraudulent practices. (quoted from investopedia). Examples Apple, Google, Microsoft
Mutual Fund:A mutual fund is an investment fund that pools money from many investors to purchase securities. Mutual funds are often classified by their principal investments: money market funds, bond or fixed income funds, stock or equity funds, or hybrid funds. Funds may also be categorized as index funds, which are passively managed funds that track the performance of an index, such as a stock market index or bond market index, or actively managed funds, which seek to outperform stock market indices but generally charge higher fees. (quoted from wikipedia)
Exchange-Traded Fund (ETF): An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies. (quoted from investopedia). Examples: SPY, QQQ. Bond ETFs, stock ETFs, Industry/Sector ETFs
Cryptocurrency: A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.It is a decentralized system for verifying that the parties to a transaction have the money they claim to have, eliminating the need for traditional intermediaries, such as banks, when funds are being transferred between two entities. (quoted from wikipedia) Example Bitcoin
Example of Investment: Stock
Example of Investment: ETF
Example of Investment: Cryptocurrency
Example of Investment: Real Estate
Investment: risk
Risk and Return
Alpha ratio: to determine excess returns on an investment
Beta ratio: the correlation between the stock and the benchmark that determines the overall market, usually the Standard & Poor’s 500 Index
Sharpe ratio: determine whether the investment risk is worth the reward
Risk and Reward (Return)
Risk and Reward
Risk
Reward
Risk
Reward
Greed
Risk
Reward
Risk
Reward
Dream!
Fear
Risk and Reward
Bankruptcy of SVB
On March 10, 2023, Silicon Valley Bank (SVB) failed after a bank run, marking the third-largest bank failure in United States history and the largest since the 2007–2008 financial crisis. It was one of three bank failures, along with Silvergate Bank and Signature Bank, in March 2023 in the United States.
Seeking higher investment returns from its burgeoning deposits, SVB had dramatically increased its holdings of long-term securities since 2021, accounting for them on a hold-to-maturity basis. The market value of these bonds decreased significantly through 2022 and into 2023 as the Federal Reserve raised interest rates to curb an inflation surge, causing unrealized losses on the portfolio. Higher interest rates also raised borrowing costs throughout the economy and some Silicon Valley Bank clients started pulling money out to meet their liquidity needs. To raise cash to pay withdrawals by its depositors, SVB announced on Wednesday, March 8 that it had sold over US$21 billion worth of securities, borrowed $15 billion, and would hold an emergency sale of some of its treasury stock to raise $2.25 billion. The announcement, coupled with warnings from prominent Silicon Valley investors, caused a bank run as customers withdrew funds totaling $42 billion by the following day. (quoted from wikipedia)
Sourcing from coastalwealthmanagement24
Bankruptcy of Lehman Brothers
The bankruptcy of Lehman Brothers on September 15, 2008, was the climax of the subprime mortgage crisis. After the financial services firm was notified of a pending credit downgrade due to its heavy position in subprime mortgages, the Federal Reserve summoned several banks to negotiate financing for its reorganization. These discussions failed, and Lehman filed a Chapter 11 petition that remains the largest bankruptcy filing in U.S. history, involving more than US$600 billion in assets.
The bankruptcy triggered a 4.5% one-day drop in the Dow Jones Industrial Average, then the largest decline since the attacks of September 11, 2001. It signaled a limit to the government's ability to manage the crisis and prompted a general financial panic. Money market mutual funds, a key source of credit, saw mass withdrawal demands to avoid losses, and the interbank lending market tightened, threatening banks with imminent failure. The government and the Federal Reserve system responded with several emergency measures to contain the panic.(quoted from wikipedia)
Bankruptcy of FTX
The liquidation of FTX, a Bahamas-based cryptocurrency exchange, began in November 2022. The collapse of FTX, caused by a liquidity crisis of the company's token, FTT, served as the impetus for its bankruptcy. Prior to its collapse, FTX was the third-largest cryptocurrency exchange by volume and had over one million users. (quoted from wikipedia)
Quotes from Forbes:
The market reaction (quoted from nerdwallet):
Golden Rules of Investing
THANK YOU FOR ATTENDING OUR SESSION
We appreciate all of you for attending and listening to our ECONOMICS session.
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