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Saving & Investing
 

Saving & Investing

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    Saving & Investing Saving & Investing Presentation Transcript

    • Chapter 11 Section MainMenuSaving & Investing
    • Chapter 11 Section MainMenuSaving and Investing• How does investing contribute to the free enterprisesystem?• How does the financial system bring together saversand borrowers?• How do financial intermediaries link savers andborrowers?• What are the trade-offs between risk and return?
    • Chapter 11 Section MainMenuPrivate Enterprise and Investing• Investment is the act of redirecting resources frombeing consumed today so that they may create benefitsin the future.• In short, investment is the use of assets to earn incomeor profit.• When people save or invest their money, their fundsbecome available for businesses to use to expand andgrow. In this way, investment promotes economicgrowth.
    • Chapter 11 Section MainMenuA financial system is a system that allows thetransfer of money between savers and borrowers.The Financial SystemFinancial Assets• When savers invest, they receive documentsconfirming their deposit or bond purchase, such aspassbooks or bond certificates.• These documents are known as financial assets. Theyrepresent claims on property or income of theborrower.
    • Chapter 11 Section MainMenuFinancial intermediaries are institutions that helpchannel funds from savers to borrowers.Banks, Savings and Loan Associations, and Credit UnionsTake in deposits from savers and then lend some of these funds to variousbusinessesFinance CompaniesMake loans to consumers and small businesses, but charge borrowers higherfees and interest rates to cover possible lossesMutual FundsPool the savings of many individuals and invest this money in a variety ofstocks and bondsLife Insurance CompaniesProvide financial protection to the family, or other beneficiaries, of the insuredPension FundsAre set up by employers to collect deposits and distribute payments to retireesFinancial Intermediaries
    • Chapter 11 Section MainMenuFinancial intermediaries accept funds from saversand make loans to investors.Financial IntermediariesCommercial banksSavings & loan associationsSavings banksMutual savings banksCredit unionsFinancial Institutions that make loans to…Life insurance companiesMutual fundsPension fundsFinance companiesInvestorsSavers make deposits to…The Flow of Savings and Investments
    • Chapter 11 Section MainMenuServices Provided byFinancial IntermediariesSharing Risk• Diversification is the spreading out of investments to reduce risk.Financial intermediaries help individual savers diversify theirinvestments.Providing Information• Financial intermediaries reduce the costs in time and money thatlenders and borrowers would pay if they had to search outinvestment information on their own.Providing Liquidity• Financial intermediaries allow savers to easily convert their assetsinto cash.
    • Chapter 11 Section MainMenuReturn is the money an investor receives above andbeyond the sum of money initially invested.Risk and ReturnReturn and Liquidity• Savings accounts havegreater liquidity, but ingeneral have a lower rate ofreturn.• Certificates of deposit usuallyhave a greater return butliquidity is reduced.Return and Risk• Investing in a friend’s Internetcompany could double yourmoney, but there is the risk ofthe company failing.• In general, the higher potentialreturn of the investment, thegreater the risk involved.
    • Chapter 11 Section MainMenuWant to connect to the PHSchool.com link for this section? Click Here!Section 1 Assessment1. Investment is(a) providing money for your family.(b) the act of redirecting resources from being consumed today so that they maycreate benefits in the future.(c) an institution that helps channel funds from savers to borrowers.(d) a collection of financial intermediaries.2. The money an investor receives above and beyond the money initially invested iscalled(a) investment.(b) savings.(c) return.(d) prospectus.
    • Chapter 11 Section MainMenuWant to connect to the PHSchool.com link for this section? Click Here!Section 1 Assessment1. Investment is(a) providing money for your family.(b) the act of redirecting resources from being consumed today so that they maycreate benefits in the future.(c) an institution that helps channel funds from savers to borrowers.(d) a collection of financial intermediaries.2. The money an investor receives above and beyond the money initially invested iscalled(a) investment.(b) savings.(c) return.(d) prospectus.
    • Chapter 11 Section MainMenuBonds and Other Financial Assets• What are the characteristics of bonds as financialassets?• What are the different types of bonds?• What are characteristics of other major financialassets?• What are the four different types of financial markets?
    • Chapter 11 Section MainMenuBonds as Financial AssetsBonds are basically loans, or IOUs, that represent debt that thegovernment or a corporation must repay to an investor. Bonds havethree basic components:1. The coupon rate — the interest rate that the issuer will pay thebondholder.2. The maturity — the time when payment to the bondholder isdue.3. The par value — the amount that an investor pays to purchasethe bond and that will be repaid to the investor at maturity.Not all bonds are held to maturity. Sometimes bonds are traded orsold and their price may change. Economists therefore refer to abond’s yield, which is the annual rate of return on the bond if thebond were held to maturity.
    • Chapter 11 Section MainMenuDiscounts from ParBond purchase withoutdiscount from par=1. Sharon buys a bond with a par value of$1,000 at 5 percent interest.2. Interest rates go up to 6 percent.3. Sharon needs to sell her bond. Nate wants to buyit, but is unwilling to buy a bond at 5 percentinterest when the current rate is 6 percent.4. Sharon offers to discount the bond, taking $40 offthe price and selling it for $960.5. Nate accepts the offer. He now owns a $1,000bond paying 5 percent interest, which hepurchased at a discount from par.Bond purchase withdiscount from par=Buying Bonds at a Discount• Investors earn interest on thebonds they buy. They canalso earn money by buyingbonds at a discount from par.
    • Chapter 11 Section MainMenuBond RatingsStandard & Poor’sHighest investment gradeHigh gradeUpper medium gradeMedium gradeLower medium gradeSpeculativeVulnerable to defaultSubordinated to other debt rated CCCSubordinated to CC debtBond in defaultAAAAAABBBBBBCCCCCCDMoody’sBest qualityHigh qualityUpper medium gradeMedium gradePossesses speculative elementsGenerally not desirablePoor, possibly in defaultHighly speculative, often in defaultIncome bonds not paying incomeInterest and principal payments in defaultAaaAaABaaBaBCaaCaCDBond Ratings• Standard & Poor’s and Moody’s rate bonds on a number of factors,including the issuer’s ability to make future payments and to repay theprincipal when the bond matures.• A high bond rating usually means that the bond will sell at a higher price,and that the firm will be able to issue the bond at a lower interest rate.
    • Chapter 11 Section MainMenuAdvantages and Disadvantagesto Bond Issuers• Bonds are desirable from theissuer’s point of view for twomain reasons:1. Once the bond is sold, thecoupon rate for that bondwill not go up or down.2. Unlike stock, bonds arenot shares of ownership ina company.• Bonds also pose two maindisadvantages to the issuer:1. The company must makefixed interest payments,even in bad years when itdoes not make money.2. If the issuer does notmaintain financial health,its bonds may bedowngraded to a lowerbond rating. This makes itharder to sell future bondsunless a discount orhigher interest rate isoffered.
    • Chapter 11 Section MainMenuTypes of BondsSavings Bonds• Savings bonds are low-denomination ($50 to $10,000) bonds issued bythe United States government. Savings bonds are purchased below parvalue (a $100 savings bond costs $50 to buy) and interest is paid onlywhen the bond matures.Treasury Bonds, Bills, and Notes• These investments are issued by the United States Treasury Department.Municipal Bonds• Municipal bonds are issued by state or local governments to finance suchimprovements as highways, state buildings, libraries, and schools.Corporate Bonds• A corporate bond is a bond that a corporation issues to raise money toexpand its business.Junk Bonds• Junk bonds are lower-rated, potentially higher-paying bonds.
    • Chapter 11 Section MainMenuOther Types of Financial AssetsCertificates of Deposit• Certificates of deposit (CDs)are available through banks,which use the fundsdeposited in CDs for a fixedamount of time.• CDs have various terms ofmaturity, allowing investors toplan for future financial needs.Money Market Mutual Funds• Money market mutual fundsare special types of mutualfunds.• Investors receive higherinterest on a money marketmutual fund than they wouldreceive from a savingsaccount or a CD. However,assets in money marketmutual funds are not FDICinsured.
    • Chapter 11 Section MainMenuFinancial Asset Markets• One way to classify financial asset markets is according to the length oftime for which the funds are lent.– Capital markets are markets in which money is lent for periods longerthan a year. CDs and corporate bonds are traded in capital markets.– Money markets are markets in which money is lent for periods of lessthan a year. Short-term CDs and Treasury bills are traded in moneymarkets.• Markets can also be classified according to whether assets can be resoldto other buyers.– Primary markets involve financial assets that cannot be transferredfrom the original holder, such as savings bonds.– Secondary markets involve financial assets that can be resold, suchas stocks.
    • Chapter 11 Section MainMenuWant to connect to the PHSchool.com link for this section? Click Here!Section 2 Assessment1. A bond is a(a) loan that represents debt that the government or a corporation must repay toan investor.(b) portion of ownership in a corporation.(c) system that allows the transfer of funds between savers and borrowers.(d) collection of financial assets.2. How does the risk involved in a money market mutual fund compare with the risk ofa certificate of deposit?(a) The risk of the money market mutual fund is less than the certificate of deposit.(b) The risk of the money market mutual fund is slightly greater than the certificateof deposit.(c) The risk of the money market mutual fund is much greater than the certificateof deposit.(d) The risk of both is about the same.
    • Chapter 11 Section MainMenuWant to connect to the PHSchool.com link for this section? Click Here!Section 2 Assessment1. A bond is a(a) loan that represents debt that the government or a corporation must repay toan investor.(b) portion of ownership in a corporation.(c) system that allows the transfer of funds between savers and borrowers.(d) collection of financial assets.2. How does the risk involved in a money market mutual fund compare with the risk ofa certificate of deposit?(a) The risk of the money market mutual fund is less than the certificate of deposit.(b) The risk of the money market mutual fund is slightly greater than the certificateof deposit.(c) The risk of the money market mutual fund is much greater than the certificateof deposit.(d) The risk of both is about the same.
    • Chapter 11 Section MainMenuThe Stock Market• What are the benefits and risks of buying stock?• How are stocks traded?• How is stock performance measured?• What were the causes and effects of the Great Crash of1929?
    • Chapter 11 Section MainMenuBuying Stock• Corporations can raise money by issuing stock, whichrepresents ownership in the corporation. A portion ofstock is called a share. Stocks are also called equities.• Stockowners can earn a profit in two ways:1. Dividends, which are portions of a corporation’sprofits, are paid out to stockholders of manycorporations. The higher the corporate profit, thehigher the dividend.2. A capital gain is earned when a stockholder sellsstock for more than he or she paid for it. Astockholder that sells stock at a lower price than thepurchase price suffers a capital loss.
    • Chapter 11 Section MainMenuStocks may be classified either by whether or notthey pay dividends or whether or not the stockholderhas a say in the corporation’s affairs.Types of StockDividend Differences• Income stock pays dividendsat regular times during theyear.• Growth stock pays few or nodividends. Instead, theissuing company reinvestsearnings into its business.Decision-Making Differences• Investors who buy commonstock are voting owners of thecompany.• Preferred stock owners arenonvoting owners of thecompany, but receivedividends before the ownersof common stock.
    • Chapter 11 Section MainMenuStock Splits and Stock RisksStock Splits• A stock split is the division ofa single share of stock intomore than one share.• Stock splits occur when theprice of a stock becomes sohigh that it discouragespotential investors frombuying it.Risks of Buying Stock• Purchasing stock is riskybecause the firm selling thestock may encountereconomic downturns thatforce dividends down orreduce the stock’s value. It isconsidered a riskierinvestment than bonds.
    • Chapter 11 Section MainMenuHow Stocks Are Traded• A stockbroker is a person who links buyers and sellersof stock.• Stockbrokers work for brokerage firms, or businessesthat specialize in trading stock.• Some stock is bought and sold on stock exchanges, ormarkets for buying and selling stock.
    • Chapter 11 Section MainMenuStock ExchangesThe New York Stock Exchange (NYSE)• The NYSE is the country’s largest stock exchange. Only stocks for thelargest and most established companies are traded on the NYSE.NASDAQ-AMEX• NASDAQ-AMEX is an exchange that specializes in high-tech and energystock.The OTC Market• The OTC market (over-the-counter) is an electronic marketplace for stockthat is not listed or traded on an organized exchange.Daytrading• Daytraders use computer programs to try and predict minute-by-minuteprice changes in hopes of earning a profit.
    • Chapter 11 Section MainMenuFutures and Options• Futures are contracts to buy or sell at a specific date inthe future at a price specified today.• Options are contracts that give investors the option tobuy or sell stock and other financial assets. There aretwo types of options:1. Call options give buyers the option to buy shares ofstock at a specified time in the future.2. Put options give buyers the option to sell shares ofstock at a specified time in the future.
    • Chapter 11 Section MainMenuMeasuring Stock PerformanceBull and Bear Markets• When the stock market rises steadily over time, a bull marketexists. Conversely, when the stock market falls over a period oftime, it’s called a bear market.Stock Performance Indexes• The Dow Jones Industrial Average– The Dow is an index that shows how stocks of 30 companies invarious industries have changed in value.• The S & P 500– The S & P 500 is an index that tracks the performance of 500different stocks.
    • Chapter 11 Section MainMenuThe collapse of the stock market in 1929is called the Great Crash.The Great CrashCauses of the Crash• Many ordinary Americans werestruggling financially: manypurchased new consumer goodsby borrowing money.• Speculation, or the practice ofmaking high-risk investmentswith borrowed money in hopes ofgetting a big return, wascommon.Effects of the Great Crash• The Crash contributed to a muchwider, long-term crisis — theGreat Depression during whichmany people lost their jobs,homes, and farms.• Americans also became wary ofbuying stock. As recently as theearly 1980s, only about 25percent of households in theUnited States owned stock.
    • Chapter 11 Section MainMenuWant to connect to the PHSchool.com link for this section? Click Here!Section 3 Assessment1. A share of stock represents(a) debt that the government or a corporation must repay to an investor.(b) a portion of ownership in a corporation.(c) a system that allows the transfer of funds between savers and borrowers.(d) a collection of financial assets.2. Which of the following represents a way to profit from buying stock?(a) capital gains(b) portfolios(c) speculation(d) capital losses
    • Chapter 11 Section MainMenuWant to connect to the PHSchool.com link for this section? Click Here!Section 3 Assessment1. A share of stock represents(a) debt that the government or a corporation must repay to an investor.(b) a portion of ownership in a corporation.(c) a system that allows the transfer of funds between savers and borrowers.(d) a collection of financial assets.2. Which of the following represents a way to profit from buying stock?(a) capital gains(b) portfolios(c) speculation(d) capital losses