Savings accounts pay interest unless the financial institution has a minimum balance requirement and the account does not meet this requirement. Account owners can make deposits and withdrawals at any time in any amount. Develop per SI 01140.200 -.205.

NOW (Negotiable Order of Withdrawal) accounts are interest-bearing checking accounts. Super NOW accounts are money market checking accounts. They have higher interest rates than NOW accounts. Develop per SI 01140.200 -.205.

MMDA's allow banks to compete with mutual fund money markets. They are interest-bearing checking accounts. Develop per SI 01140.200 -.205.

A CD is a bank deposit that cannot be withdrawn for a certain period of time or that can be withdrawn early only with a penalty. Develop per SI 01140.210.

Develop corporate bonds in accordance with the instructions in SI 01140.250.

1. a. 

   General Types

   Corporations sell corporate bonds to raise capital. There are two types:

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     debentures, which are backed by the issuer's full faith and credit; and

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     mortgage backed bonds, which are backed by a lien on the company's assets.

2. b. 

   Two Forms of Each Type

   Corporate bonds are issued in two forms:

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     registered, which pay interest to their registered owner; and

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     bearer or coupon bonds, which pay it to whomever holds the bond.

3. c. 

   Convertible Bonds

   Convertible bonds are debentures that can be exchanged for a specified number of shares of a company's common stock.

4. d. 

   Junk Bonds

   High risk bonds are called junk bonds.

5. e. 

   Interest

   Corporate bonds usually pay a fixed rate of interest for a fixed period of time—annually, semi-annually, or quarterly.

Municipal bonds are to city, county and State governments and authorities what corporate bonds are to corporations. They are exempt from Federal taxes and often are exempt from State and local taxes as well. Most municipal bonds are one of two general types:

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  general obligation bonds, which are backed by the full faith and credit of the issuing municipality and supported by the taxing power; and

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  revenue bonds, which are backed by the project being financed and the revenue or user fees it generates.

Other types of municipals are: limited-tax bonds, anticipation notes, industrial development bonds, and life-care bonds.

Develop municipal bonds in accordance with the instructions in SI 01140.250.

A UIT is a package of bonds in a portfolio. One can buy shares of the package for $1 to $1,000 per share with a minimum investment of $750 to $5,000, depending on the trust. The interest rate usually is fixed at purchase and does not change. Units usually are sold or redeemed through the trust sponsor.

Zero coupon bonds usually are issued by corporations. They do not pay current interest; accrued interest is paid at maturity. The U.S. Government does not issue zero coupon bonds directly. However, see TIGER and CATS.

Bonds usually are bought and sold through brokers, securities dealers, or other investors. They may sell for more or less than their face value or purchase price, depending on a variety of factors.

The following is a typical bond quotation, showing from left to right:

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  the name of the issuer (AT&T);

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  the bond's nominal or coupon rate (3 7/8 percent);

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  the last two digits of the year in which the bond matures (1990);

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  the current yield (5.6 percent);

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  the number of bonds traded during the year (54,000);

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  the highest, lowest, and last price of the bond for the period covered by the quotation (bond prices are quoted on a par of 100, so the last price of 69 1/4 equals $692.50).

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  the net change in the bond price:

T-Bills are short-term obligations that require a minimum investment of $10, 000. Certificates are not issued for T-Bills; they are registered in book form at the Treasury Department and receipts are provided as proof of purchase. T-Bills can be sold before maturity. Develop in accordance with SI 01140.250.

Treasury notes and bonds are similar to T-Bills but have longer maturities and a lower minimum investment requirement. They have been registered in book entry form since July 1986 but were sometimes issued as bearer bonds before then. Develop per SI 01140.250.

These are Government securities issued with a zero coupon concept. The broker removes the interest coupons from the security and sells it at a big discount with a long maturity. Accrued interest is then paid at maturity. These bonds can be sold before maturity. Develop in accordance with SI 01140.250.

Some of the Federal agencies with charters to issue securities are:

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  the Federal Home Loan Bank Board;

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  the Federal Home Loan Mortgage Corporation (FREDDIE MAC);

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  the Export-Import Bank; and

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  the Government National Mortgage Association (GINNIE MAE).

Minimum investment requirements range from $1,000 to $25,000. Develop per SI 01140.250.

U.S. Savings Bonds are registered,nontransferable Treasury securities. Develop per SI 01140.240.

“Mutual fund” is a term that encompasses a wide range of investments. Basically,it is a pool of assets (stocks, bonds,etc.) managed by an investment company. A mutual fund share represents ownership interest in this pool as opposed to a particular stock or bond. Develop mutual funds per SI 01140.230.

The primary objective of these funds,also known as performance funds and hedge funds, is aggressive long term growth of investment rather than current income. Dividends typically are low.

The objective is current income through high dividends and interest, as opposed to capital gains.

The objective is a balance of growth and income.

The fund invests in tax-exempt bonds and the interest is passed along to holders on a tax-exempt basis.

The fund invests in conservative vehicles such as T-Bills and bank certificates. The minimum investment usually is $1,000, but may be less. Income may fluctuate daily based on interest rates. Money market funds often have a check-writing feature.

“Load” funds are sold through a broker who collects a commission. “No-load” funds usually are purchased directly from the fund (no commission) and often are advertised in newspapers and magazines.

The format of the following table is typical of those shown in newspapers and financial publications, showing from left to right:

• •

  the names of the funds available for each management group (in this case,four funds managed by the Fund Founders Group);

• •

  the high and low values for the preceding 52-week period;

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  the most recent closing price;

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  the change over the previous week; and

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  the fund's income and capital gains totals for the previous 12 months.

Common stock usually is held in the form of a certificate registered in the owner's name. Dividends usually are paid quarterly and may vary with company earnings.

• •

  “Listed” stocks are those listed on the NYSE, AMEX, or on one of the regional exchanges such as Boston, Philadelphia, or Chicago.

• •

  Over-the-counter (OTC) stocks, which include “penny” stocks, are not listed on the major exchanges. They usually are reported in the National Association of Security Dealers Automated Quotations (NASDAQ) system.

Preferred stock receives preference with respect to dividends and, in case of bankruptcy, the distribution of assets. Preferred stock dividends:

• •

  are paid at a fixed rate;

• •

  must be paid before common stock dividends can be paid; and

• •

  must be made up later, when not paid timely, whereas common stock dividends may be skipped.

Stock tables vary little from publication to publication. The following quote is typical, showing from left to right:

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  the standard abbreviation of the name of the company (Philadelphia Electric in this case), followed by “pf” for preferred stock on the second line;

• •

  the dividend amount;

• •

  the price-to-earnings ratio;

• •

  sales volume, in thousands;

• •

  the day's high, low, and closing prices (22 3/4 = $22.75); and

• •

  the change in price from the previous day.

An option is the right to sell or buy something at a specified price by a specified date. The “something” is usually stock, but there are options on interest rates, stock market indexes,commodity futures, and other items as well. An option to sell is called a “put.”  An option to buy is a “call.”  The value of an option depends on:

• •

  the length of the contract (3, 6, or 9 months);

• •

  the difference between the CMV of the item and the price at which the put permits it to be sold or the call permits it to be bought; and

• •

  the volatility of the item (how much its CMV is expected to fluctuate).

Options can be sold through a broker. If the CMV of an item goes up in relation to a call price, the value of the option increases. If it goes down, the value of the option decreases. The reverse is true for a put.

There are several exchanges across the country that list option prices for about 300 stocks: the Chicago Board of Options Exchanges (CBOE), AMEX, the Philadelphia Stock Exchange, and the Pacific Stock Exchange. Transactions on these exchanges are listed in financial publications and many newspapers.

Although a stock option contract controls 100 shares of stock, options are quoted on the price per share. If a contract sells for $300, the cost per share is $3. Options come due and are quoted for each January, April, July and October.

The following example is a typical options quotation and shows, from left to right:

• •

  the name of the stock (Tandy), the expiration month (April) and per- share price of the option ($30 for a put option on line 2);

• •

  the number of contracts sold (996 on line 2);

• •

  the high, low, and closing prices for a contract ($56.25, $25, and $37.50,respectively, on line 2); and

• •

  the net change in the value of the contract ($6.25).