Final answer:
RSA retail savings bonds offer a way for savers to earn a return on their investment with the government as the borrower. The bond yield fluctuates with market interest rates. These bonds are less risky compared to stocks or mutual funds, providing a secure albeit lower return.
Step-by-step explanation:
The impact of RSA retail savings bonds can be evaluated by showing the relationship between savers, banks, and borrowers, calculating bond yield, contrasting bonds, stocks, mutual funds, and assets, and explaining the tradeoffs between return and risk.
Relationship Between Savers, Banks, and Borrowers:
Savers invest their money with the expectation of earning a return. Banks act as intermediaries, taking deposits from savers and loaning them out to borrowers. Borrowers then use these loans for various purposes like business expansion, and they pay back the loans with interest, which banks use to pay returns to savers. RSA retail savings bonds are an example where the government is the borrower, and individuals who purchase the bonds are the savers.
Calculating Bond Yield:
Bond yield is the return an investor expects to earn from a bond. It is usually expressed as an annual percentage, calculated by dividing the annual interest payment by the current price of the bond. If interest rates in the economy rise, the price of existing bonds typically decreases to increase their yield and remain attractive to investors.
Contrast Between Investment Types:
Bonds are considered less risky than stocks but offer a fixed return whereas stocks have higher potential gains but also greater risk. Mutual funds pool money from several investors to purchase a diversified portfolio of assets, offering a balance of risk and returns.
Return and Risk Tradeoffs:
If an investment becomes riskier or the expected return decreases, investors may shift their funds to other investments. This dynamic affects the supply curves of financial capital for various investments. RSA retail savings bonds, being government-backed, are typically less risky than other investments and offer a lower but secure rate of return.