Vocabulary:

assets You could invest 40% of your assets in a fund.

bond What's the present value of my bonds?

collateral We can give you a loan with your bonds as collateral.

consolidate I'd like to consolidate my capital in one bank.

diversify I'd like both bonds and shares, to diversify my risk.

dividend Bonds pay interest; shares pay dividends.

fixed period Bonds are issued for a fixed period, usually from 15 years up.

fixed rate With bonds, you lend your money at a fixed rate.

fluctuation The fluctuation of the value of bonds is never very great.

funds I'll certainly need some funds at short notice.

inheritance This money is part of my inheritance.

investment The bank administers an investment fund.

fund

issue Bonds are issued for periods of 15 years or more.

loan The bank can give you a loan with your bonds as collateral.

loss You risk a loss if you sell your bonds now.

market Sell your bonds now; the market is very good.

maturity My bonds won't reach maturity for another six years.

negotiable Bonds are negotiable whenever you like.

portfolio We can prepare you a portfolio in bonds and shares.

rate What would the rate of interest be in this investment?

risk (n) There's a bigger risk with shares than with bonds.

risk (v) You risk a loss if you sell your bonds now.

savings This money is all our savings, so I'd like security first.

share If you have shares in a company, you are a part owner of that

company.

stock We can lend you 80% of the value of your bonds on the stock

exchange exchange.

value (n) What's the present value of 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 power than 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.