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Module 4
How To Make Loans Work For You
Loans serve as a bedrock of the economy and can turn an intimidating purchase price into much smaller, more manageable payments, that allow consumers to plan purchases into the future.
In some case, purchasing an asset such as a home using debt can be cheaper than renting. In other situations, such as a car, it’s a little more complicated...
Module At A Glance
Grade Levels:
7th - 12th
Est. Length:
3-5 Hours (24 slides)
Activities:
4 Activites
Articles:
6 Articles
Languages:
English & Spanish
Curriculum Fit:
Math, Business, Economics, CTE, Social Studies
Standards Alignment:
CEE National Standards, Jump$tart National Standards & Relevant State Standards
Guiding Questions
- What are loans and how can you utilize debt?
- What are the differences between good and bad debt?
- How do companies and governments borrow money?
- Are there good and bad types of debt for companies and governments as well?
- What are credit scores for large institutions when they want to borrow capital?
- How can a company access capital once they have already had an initial public offering?
Enduring Understandings
- Good debt helps you achieve growth for a higher earning potential or for an asset that appreciates in value.
- Governments and companies borrow capital issuing bonds or other debt instruments.
- Bond ratings are like credit scores for large borrowers issued by credit rating agencies.
- Bond prices are closely related with interest rates because they are a collection of cash flows which investors discount.
- Bond markets provide a massive source of funding for large companies.
Module Vocab & Key Topics
Fixed Income Securities
A type of debt instrument that provides a steady income stream in the form of interest payments (due at predetermined intervals) over the life of the security. Examples include bonds, CDs, and treasury notes.
Bond Yields
The rate of return on a bond calculated as its coupon rate divided by the current market price.
Credit Ratings
An evaluation assigned to bonds based on their creditworthiness and ability to repay investor's capital in full and on time. Generally, higher ratings indicate higher quality and more desirable bonds for investors.
Principal
The amount of capital initially lent to the borrower through the bond.
Face Value
The net present value of all future cash flows related to an existing bond. This is used to show how much the bond owner will receive through maturity.
Coupon
The dollar value of the periodic interest payment promised to bondholders (usually paid semiannually), as calculated by: Coupon ($)=Coupon Rate x Face Value
Yield to Maturity
Maturity is the length of time until the principal is scheduled to be repaid. The yield is the rate of return assuming the investor holds the bond until its maturity date. It rises and falls depending on the market value of bond and number of payments left until maturity.
Internal Rate of Return (IRR)
The rate of return that sets the net present value of an investment equal to zero.
Interest Rate Risk
The risk associated with adverse changes in interest rates over time, causing prices for existing bonds to fall if rates rise or remain constant since new issues will be issued at current market rates which are typically lower than existing issues’ coupon rates.
Inflation Risk
The risk that inflation will erode purchasing power over time and reduce the initial value received from investments with fixed returns such as bonds and other fixed-income securities because they do not provide any protection against inflationary pressures.
Call Provisions
Certain clauses are written into bond contracts that allow issuers to buy back particular outstanding bonds prior to their maturity date under certain conditions such as reaching a preset price, redemption amount, or exceed a specified cap on maximum coupon payments.
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The information contained on this website and from any communication related to this website is for information purposes only. Rapunzl Investments LLC (Rapunzl) does not hold itself out as providing any legal, financial or other advice. Rapunzl also does not make any recommendation or endorsement as to any investment, advisor or other service or product or to any material submitted by third parties or linked to this website. In addition, Rapunzl does not offer any advice regarding the nature, potential value or suitability of any particular investment, security or investment strategy. The material on this website does not constitute advice and you should not rely on any material in this website to make (or refrain from making) any decision or take (or refrain from making) any action. All investment, borrowing or tax decisions should be made with the advice of an appropriately qualified and licensed advisor.
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