Financial experts must understand and develop ways to maximize returns.Knowing where and how money is being used is essential to keeping businesses afloat.As consumers we make financial decisions everyday such as buying a car or home. As financial managers making sound and effective financial decisions is crucial to financial management.

Bond Market

Bonds are loans made to large organizations, such as corporations, local governments, and national governments. They are a type of fixed-income investment. There are several different types of bonds and they vary according to who issues them, maturity length, interest rate, and risk. Some of the most notable bonds are U.S. Treasury bills, municipal bonds, corporate bonds, and junk bonds. The way bonds work is the borrowing organization promises to pay the bond back at an agreed-upon date. The holder of the bond receives a specified amount of annual interest income and a specified amount at maturity. A key difference between a bond and other forms of indebtedness is that bonds are sold to the public in small increments, usually at $1,000 per bond. People who take on bonds are known as creditors or debtholders. The three characteristics of bonds arepar value,coupon rate, andmaturity date. Thepar valuerefers to the amount of money the holder will receive on the bond's maturity date. Thecoupon rateis the specified percentage of the par value the issuer agrees to pay the investor annually as interest income. Once thematurity datehas been satisfied, the organization that issued the bond will pay the bondholder the par value of the bond and discontinue making future interest payments. Some advantages of purchasing bonds are the purchaser receives income through the interest payments and can also profit if the bond is resold at a higher price than originally bought. The disadvantages of purchasing bonds are that over the long haul bonds pay out a lower return they can be confusing when trying to value them.

Stock Market

Stocks are shares of a company and they represent ownership of equity in a firm. A stock market is where individual and institutional investors come together to buy and sell shares in a public venue. Today these exchanges exist as electronic marketplaces. The amount of money a shareholder receives from the company depends on the dividends the company chooses to pay and it is important to understand that the company is under no obligation to pay a dividend. Share prices are set by supply and demand in the market as buyers and sellers place orders for those shares.

Return on Investment - Bonds

A typical bond pays interest on its face value twice a year at an interest rate called its coupon. For example a $1,000 bond with a 5% coupon rate pays $50 year in two installments. The term and credit quality determine a bond's coupon rate. Longer-term bonds will typically have higher coupons to compensate the investor for the risk that interest rates will rise before the maturity date. Credit quality refers to the issuer's ability to pay interest and repay the face value on time.

Return on Investment - Stocks

Valuing stock is both an art and scientific. Investors who want to beat the stock market must first perfect the skill of stock valuation. Determining the intrinsic value of stock may help investors determine whether a particular stock is over or under-valued at its current market price. Two main types of stock valuation areabsoluteandrelativewhere absolute relies on company fundamental information and relative stock valuation compares the investment with similar companies. Twocommonly used valuation models areDividend Discount Model, Discounted Cash Flow Model.

Bond/Stock Value

The bond market affects the stock market and vice versa. When interest rates on bonds are down, they become less attractive to investors. In stocks, the price per share and dividend payout make them a more worthy investment. Typically when the stock market is under performing, bonds become a much safer investment to investors. Of course stocks are a much more attractive security due to their return if properly researched by investors but bonds present a safe investment to consumers who are not in the market to take on too much risk.