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means for adding or removing money from the money supply. The sale of treasuries pulls money out of the money supply. The purchasing of treasuries increases the money supply.) Many nations and economic units, such as the Eurozone, issue bonds to raise money to pay debts or to obtain capital for projects. It is referrred to as sovereign debt . Countries frequently invest in one another’s sovereign debt. In fact, more than one-third of U.S. treasuries are held by foreign countries . Likewise, the U.S. holds the debt of many other countries. In the case of a politically or economically unstable country, sovereign debt can be risky. If you want to learn more about treasuries, the U.S. Treasury Department has pretty a good website at www.treasury.gov . What’s that Rated? All bonds, whether government or corporate issued, are rated . Private companies, like Standard and Poor (S&P) or Moodys carefully review the bonds, then publish an opinion about the credit worthiness of the issuer, which means their ability to meet all of the payment obligations under the bonds. 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 Default . Bonds with a C rating are considered low quality ( junk bonds ) with a high risk of default. Government-issued bonds from economically stable countries usually receive high ratings because they are considered low risk . Why? Because, in most cases, the repayment obligation is always backed by big muscle: the power to tax people to repay the bonds if necessary . That makes government bonds pretty popular with investors, as there is rarely a default. An important principle of financial literacy is understanding that risk and return are closely associated . The lower the risk, the lower the return (coupon rate) on the bond (or generally any investment return). Higher risk bonds have higher interest (coupon) rates in order to attract buyers. Higher risk investments often have higher returns. Securities Exchanges Securities exchanges are public forums for buying and selling stock, notes, and bonds . They are also called stock exchanges. Buying and selling of securities is actually referred to as trading because when a shareholder, noteholder, or bondholder sells their security, it does not revert to the issuing corporation or government for resale . It is purchased by another buyer who happens to be looking to own that particular security. On and on and on, the stock, note, or bond may change hands many times over through trading. Bonds and notes, because they are debt, are eventually paid off at their maturity date. Stocks can trade indefinitely. Securities exchanges have been around a long time. In fact, they existed in Europe as early as the 1300‘s. At that time, they served as a market for trading notes and bonds, since shared ownership of companies, and therefore stock, didn’t yet exist. When did they also become stock markets? In Lesson 6, Crusaders, Unpleasant Peasants & Mobsters , students learned that some early investors pursued wealth by investing in voyages and trading expeditions. Ships traveled to the four corners seeking precious metals, or trading for goods and spices. These investments were very risky. An investor could be completely wiped out if the ship sank or was captured by pirates. In 1551, the awesomely-named London-based Company of Merchant Adventurers wanted to attract investors to raise capital for expeditions to China and Indonesia. It was expensive and risky, so it divided the cost and risk among 250 investors. Each investor was entitled to share in the profit of the expedition in an amount corresponding to the percentage of their investment in the venture. SLIDE 14J PRODUCT PREVIEW
263 THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY
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