INVESTMENT ALTERNATIVES: AN UPDATE
Contents
2Investment Categories �
2Real Assets �
2Financial Assets �
2Direct Investments �
2Indirect Investments �
2Money Market Instruments �
2Treasury Bills �
3Short-term Municipals �
3Commercial Paper �
3Bankers' Acceptances �
4Repurchase Agreements �
4Capital Market Financial Instruments �
4Long-term Bonds �
4Treasury Notes and Bonds �
5Agency Securities �
5Municipal Bonds �
5Corporate Bonds �
5Preferred Stock �
6Common Stock �
6Foreign Stocks �
6Indirect Investments �
6Mutual Funds �
6Closed-end Funds �
7Exchange Traded Funds �
7Hedge Funds �
7Derivatives �
7Convertible Securities �
7Warrants �
8Options �
8Futures �
8Bank Deposits �
8Fixed Deposits �
8Recurring Deposits �
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Investment Categories
All the investment alternatives can be categorized into 2 categories -
Real Assets
These are the physical or identifiable assets such as land, equipments, patents, gold etc. These tend to be most desirable during the periods of high inflation.
Financial Assets
These are the indirect claims to the real assets. Eg. Stocks, bonds, bank deposits etc.
These can further be sub-divided into 2 categories -
Direct Investments
These are investments where you take actual direct ownership of the assets.
Indirect Investments
These are investments where you have indirect ownership, such as mutual funds, ETFs, and REITs
Money Market Instruments
The money market is comprised of high quality, short-term, large denomination debt instruments. Following are the types of money market instruments -
Treasury Bills
Treasury bills are used to provide short-term liquidity for the U.S. government.
These are backed by the "full faith and credit" of the U.S. government.
They are issued with original maturities of 4 weeks, 13 weeks, 26 weeks and 52-weeks.
They do not pay interest, instead they are sold at a discount to face value and are redeemed at maturity for their full face value.
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Federal funds rate as of June 24, 2009 – 0.21% (effective)
Commercial Paper, non financial 3 months as of June 24, 2009 – 0.26%
CD secondary market 3 months, as of June 24, 2009 -0.38%
T-Bills secondary market 3 months as of June 24, 2009- 0.19%
The above mentioned rates are not similar because Fed promotes economic stability by working to keep interest rates low in recessions and letting interest rates rise in periods of rapid economic expansion to control inflation.
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