Question

Identify five examples of financial investment options available to U.S. households. Identify and briefly explain what will play a role in the choices households make in choosing between these investment alternatives.

Answer 1

The households make a decision on where to invest their money based on the return that they would get from that option. The investment choice is also affected by how it is taxed by the government. Along with this, the risk factor associated with each investment alternative also becomes important when an investor is looking for options to invest in. The alternatives available to households are :

1. Stocks- Individuals who are willing to undertake a certain level of risk can invest in the equity stocks of corporations. This provides them with a return which they earn as dividend on the capital.

2. Bonds- US government bonds are not marketable and non transferable. They are issued by the treasury. They yield a fixed rate of return.

3. Treasury Bill- It is the most significant money market security as it is perceived to be a risk free financial asset. This is because there is very less possibility of defaulting of the US government.

4. Certificates of Deposit- The certificates of deposit ate issued in return of a deposit held by the individuals. Upon maturity, the holder receives interest as well as the principal amount. They are basically buy and hold investments with no risk.

5. Savings Account- In the United States, this is most sort after investment alternative by many individuals. Individuals enjoy a safe rate of return on the principal amount.