Chapter 11: Financial Markets

1. Chapter 11: Financial Markets BW: Grab folders/3-hole punch packet from back Complete Page 97: Chapter Warm-up

2. 11.1 • “What are benefits and risks of saving and investing?” • Objectives to know: • How investing contribute to free-enterprise • How the financial system brings together savers and borrowers • Role of financial intermediaries in financial system • Trade-offs among liquidity, return, and risk

3. Introduction • What are benefits/risks of saving/investing? • Savings you deposit in a bank will grow w/little risk • Investing, while riskier, may earn larger return for same investment; or prove devastating.

4. Investing and Free Enterprise • Investing is essential to free enterprise system • Promotes economic growth and contributes to nations wealth • Deposits by people into savings are loaned to businesses • Allows businesses to increase production • Leading to expansion/growth

5. The Financial System • Est.d so investments can take place • Saving money= loaning it to other people • Savers receive reciept as confirmation • Statements or bonds • Represent the claims, or financial assets, of the borrower • Financial systems bring savers/investors together • Fuels economic growth • Savers include: • Households • Individuals • Businesses • Investors include: • Businesses • Government

6. Financial Intermediaries • Include banks and other financial institutions • Accept funds from savers to make loans to investors

7. Sharing Risk • Dealing w/financial intermediaries offers 3 advantages • Sharing Risk • Providing Information • Providing Liquidity • Sharing Risk • Diversification allows you to spread out investments and not “all eggs in one basket” • Sharing risk helps ward against losing everything on one bad investment • Types • Read/answer 11.2 Chart (pg. 280)

8. Providing Info and Liquidity • They provide both lenders/borrowers vital data that saves them the time/money of gathering selves. • EX: Portfolios or prospectus. • Also allows people to get access to their money with they need it, depending on how liquid it is.

9. Return and Risk • Some investments, like CDs, are very safe b/c insured by govt. • Investing in a new business is far riskier, but can have larger gains • General info: • Higher potential return = higher the risk • Evaluating investments try to balance risks with expected rewards

10. Lesson Closing • 98, 54, and 58 in workbook • 58 will have a little time for BW tomorrow • Watch Case Study Video • Get marker and Check Multiple Choice of test

11. Chapter 11.2 BW: Finish S.1 Quiz: Answer Case study on pg.281

12. Chapter 11.2 • “Why are bonds bought and sold?” • Objectives to know • Characteristics of bonds as financial assets • Different types of bonds • Characteristics of other types of financial assets • 4 different types of financial asset markets • Key Terms (3) • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch11/Econ_OnlineLectureNotes_ch11_s2.swf

13. Introduction • Why are bonds bought and sold? • Bonds are sold by govts and/or corporations to finance projects • Bonds offer a higher return than savings accounts, although generally riskier than savings accounts

14. Bonds as Financial Assets • Bonds are loans that represent debt that the seller must repay to the investor • 3 Basic components • Coupon Rate: interest rate that bond issuer will pay • Maturity: Time which payment to holder is due • Par Value: Amount paid to holder at maturity

15. Discounts from Par • Investors can not only earn money from the interest on their bonds but also by buying bonds at a discount • Read and Answer 11.3

16. Bond Ratings • In order to decide which bonds to buy, investors can check bond quality through independent firms that issue credit ratings • Rate bonds on the issue’s financial strength, ability to make interest payments, and ability to repay principle when bond matures • High grade, such as AAA, means safe investment

17. Advantages v Disadvantages Advantages Disadvantages • Once bond is sold, coupon rate remains same • Company does not have to share profits w/holders if doing well • Company must make fixed interest payments and cannot change its interest payments • Firm’s bonds may be given a low bond rating and be harder to sell when not doing well

18. Types of Bonds Municipal Bonds Savings Bond Treasury Bonds, Bills, Notes • State/localgovt.s issue bonds to finance projects • Highways, libraries, parks, and schools • Relatively save and attractive long-term investments • Low denominations • Issued by U.S. govt. • Govt. pays interest • U.S. treasury issues bonds, bills, and notes • Among safest investments

20. Corporate and Junk Bonds • Corporate bonds are issues by a corporation to raise money to expand business • Moderate risk, bc investors depend on corporation • Junk bonds • High risk and potentially high return • Investors face strong possibility that some of firms may default on their debt

21. Other types of Financial Assets Certificates of Deposit Money Market Mutual Funds • CDs through banks • Lend out funds deposited in CDs for a fixed amount of time • Investors receive higher interest on a MMMF than savings account • Higher interest b/c not covered by FDIC insurance

22. Financial Assets Markets • Bonds, CDs, and MMMFs are traded on financial asset markets • One way to classify markets is according to length of time funds are lent • Capital Markets • Money is lent for periods longer than a year (CDs) • Money Markets • Money is lent for periods of a year or less • Include treasury bills and money market mutual funds

23. Financial Assets Markets • Markets may also be classified according to whether or not assets can be resold to other buyers • Primary Markets • Financial assets can be redeemed only by original holder • Savings bonds and small CDs • Secondary Markets • Financial assets can be resold, which provides liquidity to investors

24. Lesson Closing • Pearson Video • How Economy Works • Exit Card Questions • What are 2 ways of classifying financial asset markets? • What type of bond might have been used to fund construction of your school? • HW: • Workbook: Pgs. 99,, 61, 65 • 65=Quiz, little time to work on tomorrow

25. Chapter 11: Financial MarketsSection 3 Finish up S.2 Quiz

26. 11.1 • “How does the stock market work?” • Objectives to know • Benefits/risks of buying stocks • How stocks are traded • How stock performance is measured • Great Crash of 29’ and recent events • Key Terms (3) • http://www.pearsonsuccessnet.com/snpapp/iText/products/0-13-369833-5/Flash/Ch11/Econ_OnlineLectureNotes_ch11_s3.swf

27. Introduction • How does the Stock Market Work? • Stock, or shares in company, are bought/sold on the stock market • Brokers help individuals/businesses invest their money in the stock market • Investors keep track of the stock market by checking local paper. • When doing well people may see large returns on investments • Vice-versa when market doing poorly

28. Benefits of Buying Stock • In addition to selling bonds, corporations can raise money by selling stock shares • Benefits of buying stocks: • Dividends • Sharing in part of firms profits • Usually paid four times/year (quarterly) • Larger the profit of company, larger the dividend • Capital Gains • Selling the stock for more than paid for it • Loss=selling for less (you’ve all seen both in game)

29. Types of Stock • Stocks may be classified by whether or not it pays dividends • Income stock • Provides investors w/income by paying dividends • Growth Stock • Pays few or no dividends and earnings are reinvested in the company

30. Types of Stock • Classified by whether or not the holder has a voice in company • Common stock • Holders are voting members of the company • Preferred Stock • Holders are nonvoting members of company • Common Stock owners may initiate a stock split when stock price becomes to high. • Berkshire did this in game!

31. Risks of Buying Stock • Buying stock is risky • B/C dividends are determined by how well a company is doing • B/C of laws of bankruptcy • Stocks end up riskier than bonds since bondholders are paid before stockholders in case of company bankruptcy

33. How Stocks are Traded • If you want to buy stock contact a stock-broker • Gives advise on stocks to guy • You buy stocks on a secondary market known as a stock exchange • NYSE is country’s largest and most powerful • Handle top stock/bond exchanges in U.S. and world • Nasdaq is 2nd largest securities market and largest electronic market

34. Futures and Options • Futures are contracts to buy/sell commodities at a particular date in the future at a specified price today • Grain and livestock • Options are contracts that give investors the choice to buy or sell stock and other financial assets • Most people who buy stock hold their investment for a significant period • Day traders trade stocks daily, which is very risky

35. Measuring Stock Performance • Bull Market • When stock market rises steadily or a period of time • Bear Market • When stock market falls or is stagnant for period • Dow Jones Industrial Average • Measure stock performance • Represents the average value of a set of stocks • Reported in points

36. Great Crash: Read Great Crash : 296 • In the 1920s, stock market was soaring • Speculation and buying on margin (credit) led to crash that killed economy • Dow fell steadily in Sept. 1929 • People began selling shares • Companies couldn’t keep up. • Oct. 1929 16.4 million shares sold and market crashed • Aftermath: Crash led to Great Depression • Now people saw stocks as risky and avoided them • By 1980s, w/new mutual funds Americans gained confidence • Crashed again in 1987 but recovered much faster

37. Scandals and Market Today • By 1990s people began to buy more stocks • Investors began to worry that companies could not make enough money to justify high priced stocks • Enron scandal causes investors to question knowledge of companies investing in • 2008, stock markets begins fall • Causes major economic crisis in U.S.

38. Lesson Closing • Pearson Videos • Visual Glossary • Action Graphs • Case Study Video • Workbook • All unfinished 100-104 • Section quizzes • Quiz Tuesday • Sub Monday: Will give you practice Test to take • I will not provide answers to it though.