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always searching for a higher ROI, and at 3% your bond is attractive because it’s coupon rate is higher than the market interest rate . In that case, your bond may resell for a premium , which is more than its original cost. Conversely, if interest rates go up and the coupon rate is below market rate, the price of your bond must be discounted to make it more attractive to investors. In that case, you may lose money. With regard to bonds, the rule of thumb is: market interest rate rises, bond prices fall; market interest rate falls, bond prices rise . Yield to Maturity. The total amount an investor anticipates earning on a bond if it is held until its maturity date is called the yield-to-maturity . Bonds are actively traded before their maturity date. An investor looking to buy a bond will consider yield-to-maturity, which measures how much more interest will be paid on the bond before it matures . If a bond is close to its maturity date, its price will be lower, because most of its interest has already been paid out. Bond Ratings. All bonds, whether government or corporate issued, are rated and scored for creditworthiness . Private companies, like Standard and Poor (S&P) and Moodys, carefully review the bonds, then publish an opinion about the ability of the issuer to meet all of the payment obligations. Bonds are assigned a letter grade based on the level of risk . There is a range of ratings from AAA , which is a very high rating to D for bonds that are in default. Bonds with a C rating are considered low quality (junk bonds) with a high risk of default. Reflect on Learning: Bonds are complex financial instruments, but be aware that they are a common investment asset class and that they build wealth in two potential ways: by providing a income stream and by potentially increasing in value. Bonds are almost always a part of a diversified portfolio. If you want to learn more about bonds, go to learningmarkets.com, investinginbonds.com, and the U.S. Treasury Department’s website dedicated to bonds: treasurydirect.gov PRODUCT PREVIEW Asset Class: Real Estate Residential Real Estate. As you learned in Chapter 9, a home is an investment. In fact, it is the largest investment that many people make in their lifetime. Some people make a career or at least a second job out of buying and selling homes. For example, they buy an old, run down house, fix it up and resell it for profit. This is called “flipping” and while it carries a great deal of financial risk and requires significant effort and investment, it can have a high ROI. Another way to invest in residential real estate is by acquiring rental property. While the job of a landlord is not easy, owning rental property can provide a long term income stream and build wealth. Commercial Real Estate. Another means of building wealth through real estate is by investing in commercial real estate . This refers to office buildings, shopping malls, hotels, warehouses, industrial buildings, apartment buildings, and mixed-use properties which may have retail, office and apartments on one site . As owner, you are the lessor leasing space to businesses in the case of a retail property, or residents in the case of an apartment building. Commercial real estate can provide a healthy ROI, but can also be labor- intensive, as there may be multiple tenants, lots of maintenance, security, and other issues. Commercial real estate is often more expensive than residential real estate, so it can require a bigger down payment to purchase. For this reason, many commercial real estate investors partner with other investors. Big Boeing The largest building in the world is Boeing’s Everett Factory, a piece of commercial real estate. It covers 98.3 acres. Fin Lit Trivia Fin Lit Trivia Fin Lit Trivia
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 203
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