Chapter 6.2, Problem 4R

To determine

To list five investments a person can make by ranking them from highest to lowest risk.

Explanation of Solution

1) Treasury bills, bonds and notes - The U.S. Treasury also issues Treasury bills, Treasury bills, Treasury bonds, and inflation-protected Treasury securities or TIPS:

• Treasury bills are expected to mature in one year or more.

• Treasury notes last for up to 10 years.

• Treasury bonds build up up to 30 years.

TIPS are securities whose principal value, depending on whether inflation is up or down, is up or down.

These are all marketable instruments which can be purchased and sold directly or through mutual funds.

2) Money Market funds - CD pools, short-term bonds and other low-risk assets are put together in order to establish risk-free diversification and are generally sold by brokerage firms and mutual fund firms.

Unlike a CD, a money market fund is liquid, which guarantees that a person can usually withdraw his money at any time without anyone being penalised.

3) Certificate of deposit - Bank CDs are also a loss-proof balance in the FDIC-backed account, unless a person takes his money out early.

For a CD, the bank offers to pay him a fixed interest rate for a specified period of time if he keeps the CD unchanged until the end of the contract.

4) Savings Bonds - Like savings deposits, US savings bonds really aren't portfolios, legally true. Series EE savings bonds accrue interest for up to 30 years and offer a fixed rate of return if issued in or after May 2005. If a U.S. savings bond is redeemed before five years, an interest charge of the last three months is payable.

5) High return savings account - Although not technically an investment, savings accounts have a moderate return on assets. A number of accounts are open with a 0.75% return. And if a person is inclined to test out the costing tables and shop around here, he can get a little extra.

A savings account is absolutely secure in the sense that a person is never going to lose money. Most accounts are government-insured up to certain thresholds, meaning he can be paid even if the financial institution fails.