Unit 9: investment: bonds and shares
Text 1: Read the dialogue; translate it into Russian using Vocabulary
Peter Finch, a bank consultant, speaks to Bob Parkins. Mr Parkins has 40,000 pounds sterling that he's been advised to invest, and he'd like some information.
Mr Finch explains what bonds and shares are, and what security and profit they give.
He also mentions investment funds.
Mr Parkins says he will think things over.
Finch. Good morning.
Parkins. I'd like some advice, please. I've got a certain amount of money that I've been advised to invest. I've been told about bonds and shares ... um... but I really don't know anything about banking and I'd like to ask ... um ... you all about it.
Finch. First, I'd like to ask you how much capital you have at your disposal and what your plans are. Do you want to put something aside for your retirement, or do you think you'll need funds at short notice...?
Parkins. Well, part is savings and part is an inheritance that I've just received. In all, about 40,000 pounds sterling. At the moment, most is in deposit accounts spread around various banks.
Finch. Well. I think it's certainly in your interest to consolidate your capital in one bank. We can, if you wish, replace part of it by bonds. In other words, you lend your money to an organization for a fixed period at a fixed interest rate. The organization promises to repay you in the agreed term, and meanwhile pays you a yearly interest.
Parkins. Is the interest higher than on a deposit account?
Finch. Yes, certainly. Bonds are issued for periods from 15 years upwards, and a long-term investment generally pays more.
Parkins. Can I withdraw my money whenever I want?
Finch. You can ask us to sell your bonds for you. Their value will depend on the market at the time. It might be higher than you bought at, or it might be lower. That depends on the market — if it's on the rise or not. In fact, fluctuation of the value of bonds is never very great — not as great as in the case of shares, for example.
Parkins. Yes, ... um, there's something I don't quite understand. You say the interest rate is higher than on my savings accounts, but if I want to use my money, I must sell my bonds.
Finch. Yes, if you want to use your money before the bonds come to maturity. Alternatively, the bank can give you a loan with the bonds as collateral. For example, the bank might lend you 80% of the value of the bonds on the stock exchange at the moment you ask for the loan.
Parkins. If I've understood correctly, I can't use my money — your loan is limited — and I run a risk of loss if I want to sell before maturity.
Finch. Certainly, you run a certain risk.
Parkins. In other words, if I want to be sure of seeing my capital again, I must wait for maturity.
Finch. Exactly.
Parkins. And what about shares ... are the risks the same?
Finch. If you buy shares in a company, you become in a manner of speaking, the owner of the company, together with a lot of other people. Bonds give you a fixed interest, while a share gives you an interest depending on the success of the company. Shares, however, ensure you against devaluation.
Parkins. That's a bit complicated. Can you advise me regularly ... tell me when I should buy and sell?
Finch. We've got specialists who deal with all that. However, you certainly run a greater risk with shares than with bonds. If you have 40,000 pounds sterling to invest, we'd probably advise you to invest a maximum of a third of that in shares. The rest should be invested in bonds or in certificates of deposit, for example. In this way, you can limit your risks.
Parkins. Yes. Of course, you understand, when you've worked hard all your life to save a small sum, you don't want to invest it in just anything.
Finch. I presume, then, you would like to have security more than a profit.
Parkins. Well, one needn't necessarily rule out the other (laughs). It's up to you to advise me.
Finch. We also have investment funds, which banks administer. We administer several, and we can make you up a portfolio. Strictly speaking, a share does not give interest, but pays a dividend in shares and bonds in carefully calculated proportions. Becoming the owner of a unit, you limit your risk. You have a share in the repayment of the bonds in the fund that also holds shares, so that, in addition, you benefit from the profit that the shares produce. I think you could invest 40% of your assets in a fund.
Parkins. How can I control my investment in such a case? Have I got the same freedom of movement as with shares?
Finch. Certainly. They are negotiable whenever you like. The rates are fixed daily, so that you can sell whenever you wish. Of course, you won't be able to avoid the ups and downs of the market.
Parkins. Yes, I see.
Finch. In this way, you can benefit from a larger range of both bonds and shares.
Parkins. In other words, I diversify my risk.
Finch. Exactly.
Parkins. One thing interests me. In speaking of bonds just now, you said that your bank could give me a loan against bonds. In such a case, what are the conditions? Is the interest rate on a loan higher than on the bonds?
Finch. Yes. There's between 0.5 and 1% difference in the rates. After all, the bank has to live.
Parkins. Of course. Well, thank you. I wanted above all to know about the difference between bonds and shares. I think I've understood now. I'd like to talk everything over with my wife, and I'll come back to see you again.
Finch. Why not come with your wife? I'd be happy to meet her and to explain everything as I have just done with you.
Parkins. That's very kind. Could I have your name and telephone number, then?
Finch. My name is Peter Finch, and my number is 224644.
Parkins. Goodbye, then.
Finch. I'll just show you the way.
Vocabulary:
assetsYou could invest 40% of your assets in a fund.
bond What's the present value of my bonds?
collateralWe can give you a loan with your bonds as collateral.
consolidateI'd like to consolidatemy capital in one bank.
diversify I'd like both bonds and shares, to diversify my risk.
dividendBonds pay interest; shares pay dividends.
fixed period Bondsare issued for a fixed period,usually from 15 years up.
fixed rateWith bonds, you lend your money at a fixed rate.
fluctuationThe fluctuationof the value of bonds is never very great.
fundsI'll certainly need some funds at short notice.
inheritanceThis money is part of my inheritance.
investmentThe bank administers an investment fund.
Fund
issueBonds are issuedfor periods of 15 years or more.
loanThe bank can give you a loanwith your bonds as collateral.
lossYou risk a lossif you sell your bonds now.
marketSell your bonds now; the marketis very good.
maturityMy bonds won't reach maturityfor another six years.
negotiableBonds are negotiablewhenever you like.
portfolioWe can prepare you a portfolio in bonds and shares.
rateWhat would the rateof interest be in this investment?
risk(n) There's a bigger riskwith shares than with bonds.
risk(v) You riska loss if you sell your bonds now.
savingsThis money is all our savings,so I'd like security first.
shareIf you have sharesin a company, you are a part owner of that
company.
stockWe can lend you 80% of the value of your bonds on the stock
Exchange exchange.
value(n) What's the present valueof my bonds?
Exercise 1: Fill in the spaces with the appropriate word or words.
1. The bank can give you a loan with your life insurance policy as ________.
2. If you buy ______ in a company, you become, in a manner of speaking, an owner of the company.
3. I think you could invest 40% of your __________ in a fund.
4. Can you give me a ________ against bonds?
5. You certainly run a greater __________ with shares than with bonds.
6. We can make you up a portfolio in shares and bonds in carefully calculated _________.
7. Becoming the owner of a ________ in an investment fund, you limit your risks.
8. Have I got the same _________ of movement with bonds as with shares?
9. There's 0.5% difference in the interest __________.
10. I run a risk if I sell my bonds before they come to __________.
Exercise 2: Paraphrase the following:
l. At the moment, most is in deposit accounts spread around various banks.
2. I think it's in your interest to consolidate your capital in one bank.
3. The organization promises to repay you in the agreed term, and meanwhile pays you a yearly interest.
4. If you want to use your money before the bonds come to maturity …
5. ... the bank can give you a loan with the bonds as collateral.
6. One needn't necessarily rule out the other.
7. They are negotiable whenever you like.
8. Of course, you won't be able to avoid the ups and downs of the market.
Exercise 3: Complete each space with the appropriate word or words.
One way of ____ your money is to buy ____. This means that you lend your _____ to an ____ for a ____ at a ____. The ____ promises to _____ you in the agreed ____, and meanwhile, you get a yearly ____.
_____ are normally _____ for periods of 15 years or more, so they're ____ investments and ____ investments generally pay more than short-term.
If you need your _____ before your _____ come to _____, you can ask your _____ to sell them for you. Their ____ will then depend on the _____ at the time you decide to sell. It might be a bit higher or lower than you bought at, but the _____ in the ____ of ____ is never very great.
You can also use your _______as _______ against a _______ corresponding to slightly less than their ______ on the _______ at the time you ask for the ______. Of course, the ______ rate on _______ is a little higher than that on _______.
Exercise 4: Choose the correct variant:
1. It will enable us to (ensure, secure, provide) timely repayment.
2. We will do our utmost to (ensure, secure, provide) that our customers are (provided, ensured, secured) with the best service.
3. A bank should be ready to (provide, ensure, secure) a full and fair account of its investment activities.
4. A bank should (ensure, secure, provide) fair treatment to all its customers.
5. We would like to take this opportunity to (ensure, secure, provide) that you are fully familiar with our products.
6. The joint venture will try to (provide, secure, ensure) a loan to carry out its construction programme.
7. The reason for the foundation of the Bank of England was to (provide, secure, ensure) finance for the war against France.
8. The Bank of England undertook to (ensure, provide, secure) good practice and public confidence in the banks.
9. This monetary policy is meant to (ensure, provide, secure) stability.
10. The reserves requirement (ensures, provides, secures) that the liquid assets of the banks are reduced.
11. We (ensure, secure, provide) up-to-the-minute banking, 24 hours a day.
12. We also (provide, ensure, secure) help and advice for business start-ups.
Text 2: PORTFOLIO BALANCE
Types of Risks
One type of risk is default risk, that is, the risk that the borrower will simply not repay the loan,due to either dishonesty or plain inability to do so. Another type of risk, called purchasing-power risk, is the risk that, due to an unexpectedly high inflation rate, the future interest payments, and the principal of the loan when finally repaid, will have less purchasing powerthan the lender anticipated at the time the loan was made. A similar risk is faced by borrowers. A borrower may cheerfully agree to pay, say, 15 percent interest, expecting that a 12 percent inflation rate will reduce the real value of the loan. But inflation may be only 4 percent.
A third type of risk is called "interest-rate risk" or "market risk", that is, the risk that the market value of a security will fall because interest rates will rise.Suppose that five years ago you bought a ten-year $1,000 bond carrying a 6 percent interest rate, and that the interest rate now obtainable on similar bonds that also have five years to go until they mature is 8 percent. Would anyone pay $1,000 for your bond? Surely not, because they could earn $80 per year by buying a new bond, and only $60 per year by buying your bond. Hence, to sell your bond you would have to reduce its price. But suppose the bond, instead of having five years to maturity, would mature in, say, ninety days; what would its price be then? It would still be less than $1,000 since the buyer would get 6 percent instead of 8 percent interest for ninety days; but since getting a lower interest rate for only ninety days does not involve much of a loss, the bond would sell for something close to $1,000. Hence, while holding any security with a fixed interest rate involves some interest-rate risk, the closer to maturity a security is, the lower is this risk. On the other hand, if interest rates fall you gain because your bond is worth more; and the longer the time until the bond matures, the greater is your gain. But the fact that you may gain as well as lose does not mean that you are taking no risk.
Diversification
All three types of risks are relevant for deciding what assets to include in a portfolio, and what debts to have outstanding. (The term portfolio means the collection of assets one owns.)
Anyone holding more than one type of asset has to consider not the risk of each asset taken by itself, but the totality of the risk on various assets and debts jointly. Suppose someone holds stock in a company that is likely to gain from inflation, and stock in another company that is likely to lose from inflation. The riskiness of a portfolio that combines both of these stocks may be less than the riskiness of each stock taken separately. A portfolio consisting of assets that are affected in opposite directions by given future events is less risky than are the assets that compose it when taken individually.Hence a low-risk portfolio need not contain only assets that individually have little risk; sometimes one reduces the riskiness of a portfolio by adding some high-risk assets that offset the risks of other assets in it.
Vocabulary:
defaultFailure to meet a contractual obligation such as repayment of a loan by a borrower or payment of interest to bond holders. In the event of default lenders and bondholders can make claims against the borrower or the issuer.
default ofUpon default of performanceon the part of the customer, the Bank
performancemay, at its discretion, realize upon the pledges by formal proceedings or by private sale (General Banking Conditions).
the principalThe debtor is expected to repay the principaland the interest.
(of the loan)
lenderAlendershouldn't lend money unless he knows what it is going to be used for.
borrowerIf the borrowerdoes not have an account with the bank, the banker should pay particular attention to the borrower's reasons for not obtaining an advance from his own bank.
UNIT 10: INCOME AND CREDIT
Text 1: THE SOURCES OF INCOME
Before people can consume anything, however, they must do two things. First they must earn the income to buy the things they want. Then they must decide how the money will be spent. There are two ways to earn income: from work and from the use of wealth.
Income From Work
Most of the income comes from work. In return for working, people receive a wage or a salary. The term «wage» typically refers to the earnings of workers paid by the hour or unit of production. «Salary» refers to earnings paid on a weekly or monthly basis. How much you earn will depend on the kind of job, the abilities, the performance, and a number of other factors.
Income From Wealth.
Wealth can be expressed as the value of the things you own. Adding the value of all your possessions, bank accounts, savings, and the like will give you the total amount of your wealth.
Used in certain ways, wealth can earn income. If you owned a house, you might be able to let others use it for a fee. In that instance economists would say that you used your wealth to earn «rent». Wealth, in the form of money that is loaned to others or deposited in a savings account, will earn interest. As you can see, interest and rent are two forms of income that can be earned by wealth.
Other types of income are dividends and capital gains that can be generated from the wealth.
Vocabulary:
to consume — потреблять
earn the income — зарабатывать доход
earnings — заработки
dividends — дивиденды
capital gains — прирост капитальной стоимости
Text 2: WHERE DO PEOPLE PUT THEIR SAVINGS IN THE UNITED STATES?
Most of the nation's personal savings are held by the commercial banks, different types of savings institutions, and credit unions. The deposits held by these institutions are insured by agencies of the federal government. Savings institutions offer one or more of the following kinds of accounts:
• Passbook and statement savings accounts. The safety of your money and high liquidity are the most important advantages of these accounts. Minimum balance requirements are usually quite low, and your savings can be withdrawn at any time The disadvantage of passbook and statement savings accounts, however, is that they pay relatively low interest rates.
• NOW (Negotiable Order of Withdrawal) accounts. NOW accounts pay interest and allow the depositor to write checks. NOW accounts generally offer a slightly lower rate of return than savings accounts.
• Money-market accounts. These insured accounts allow you to write a limited number of checks while participating in the "money market" where banks and other businesses buy and sell short-term credit instruments, notes and other kinds of IOU's that come due in a year or less. The rate of return for money market accounts is usually higher than for passbook savings accounts.
• Certificates of deposit. Certificates of deposit, or CD's, pay the highest rates of interest offered by banks and savings institutions. They require the money to be left on deposit for a specified period of time that can run from a few weeks to five or more years. The money can be withdrawn early, if necessary, but not without a penalty.
• Credit-union accounts. Credit unions, associations of people with some thing in common, often serve people who have the same employer, work in the same industry, or belong to a particular church, labor union, or club. Credit unions offer insured savings plans similar to those offered by other savings institutions. In most instances, however, the rate of return offered by credit unions is higher than that of the other institutions.
• US savings bonds. US savings bonds can be purchased at most savings institutions. Guaranteed by the United States government, they are one of the safest investments one can make. Since 1986 the bonds pay no less than 6 percent interest when held for five years. After five years bonds earn a variable rate adjusted every six months.
• Money-market funds. Money market funds use the resources of their investors to buy money-market certificates. Money-market funds generally pay a higher rate of return than savings and NOW accounts. Unlike other accounts at savings institutions, money-market fund accounts are not insured nor do they provide check-writing privileges.
Vocabulary:
savings institutions – сберегательные учреждения
passbook and statement savings accounts – сберкнижка и сберегательные счета
Negotiable Order of Withdrawal – текущий счет, приносящий доход
money-market accounts – счета денежного рынка
short-term credit instruments – документы краткосрочного кредита
rate of return – ставка дохода
come due – зд. подлежат оплате
certificates of deposit – свободные обращающиеся депозитивные сертификаты
penalty – штраф, пеня
credit-union accounts – счета общества взаимного кредита
US savings bonds – сберегательные облигации США
money-market funds – фонды денежного рынка
Text 3: CONSUMER CREDIT
Consumer credit provides cash, goods, or services now, while spreading repayment into the future. In this way credit enables you to enjoy your purchase even before you have paid for it.
But there are two important things attached to every credit purchase: credit costs something, and the principal, the original amount borrowed, must be paid back. If you are thinking of borrowing money or buying something on credit, you will want to know how much that credit will cost you and whether or not you can afford it. Then you can look for the best terms.