CHAPTER 11 ECONOMICS

1. CHAPTER 11 ECONOMICS SAVING AND INVESTING

2. I. WHAT IS “INVESTMENT” • THE ACT OF REDIRECTING RESOURCES FROM BEING USED TODAY SO THEY CAN CREATE BENEFITS IN THE FUTURE. a. Promotes economic growth

3. II. THE FINANCIAL SYSTEM • I. ALLOWS FOR THE TRANSFER OF MONEY FROM SAVERS TO BORROWERS. • Savings is a method to make money available for borrowers, • Savers obtain a document that confirms the amount they have saved. • i. Passbooks / savings account books • ii. Stock or bond records • iii. Portfolio reports • c. These documents are called ASSETS

4. Financial Intermediaries • People / institutions that channel money from the saver to the borrower. • Savers and borrowers are linked together by • FINANCIAL INTERMEDIARIES! • THERE ARE SEVERAL TYPES OF “FINANCIAL INTERMEDIARIES”

5. 1. Banks, S & L’s, Credit Unions • Receive deposits from savers and lend a per cent to borrowers (individuals or business) • Borrowers pay back loans at higher rates of interest. • Savers paid interests on their deposits.

6. 2. Finance Companies • Rates close to 22-24% • Lend money to consumers or small businesses. A higher degree of risk so their interest rates and fees are very high

7. 3. Mutual Funds

8. Mutual Funds • Pool the savings / deposits of the investors and invests them in a variety of stocks and bonds. Key goal is diversification.

9. 4. Hedge Funds • A private investment organization that invests in high risk ventures to make profit for their clients. Not regulated by the SEC. • A hedge fund is a lightly regulated investment fund that is typically open to a limited range of investors who pay a performance fee to the fund's investment manager.

10. 5. Life Insurance Companies • Provides financial protection for the family if the insured dies suddenly. 2 types of insurance: • 1. Universal—premiums applied toward insurance and a variable investment strategy. Policy can be surrendered for cash value when the policy matures. • 2. Term Life—premiums paid insure a life only, no investment. Premiums are lower and based on a number of mortality factors.

12. 6. Pension funds • collect funds which then are invested and allowed to grow. • The funds are dispersed thru payments for injury, retirement, or death.

13. WHAT STRATEGIES DO YOU EMPLOY IN DETERMINING WHAT OR HOW TO INVEST ? • Diversification—Spreading out your investments in order to reduce risk and possible loss. • Find information—Intermediaries will provide the client with information about their investments: • i. Prospectus—A report that gives information about the investment and how it has performed recently. • ii. Portfolios—A collection of all the assets the client owns or controls. • Insure Liquidity—an investment should have the ability to be quickly converted to cash. • Examine the Risk / Return Ratio—The higher the risk, the higher the rate of return. As an investor, you have to decide if the risk is worth the return.

14. III. TYPES OF RISK • Credit Risk—Borrowers may be late with payments or may not make make payments. • Liquidity Risk—May not be able to convert your investment into cash. • Inflation rate risk—Inflation erodes the value of your investment • Time risk—You may miss better investment opportunities because your funds are already invested somewhere else.

15. CHAPTER 11—SAVING AND INVESTING SECT. 2—BONDS AND OTHER ASSETS • I. BONDS AS FINANCIAL ASSETS • a.1942 –U.S. starts a War Bond drive • b.Bonds act like loans. • c.Bonds pay a fixed rate of interest at regular intervals • d.Bonds rank low on the risk / return ratio.

16. I.THE COMPONENTS OF A BOND • a. Par Value—The amount the investor pays to purchase the bond. Also called face value or the principal. • b. Coupon Rate—The amount of interest the bond issuer pays the bondholder. • c. Maturity—The time at which payment to a bondholder is due. Lengths vary according to the bond. • d. Yield—The annual rate of return on an interest paying bond if the bond were held to maturity.

17. I. BUYING BONDS ON DISCOUNT • Buy bonds at below full par value. • Example -Purchase a $100 bond for $80 • Bondholder may need cash. • Then redeem the bond at full value! • Profit of $20

19. RATING THE BONDS—CHECK THE QUALITY OF THE INVESTMENT • a. Standard & Poor’s and Moody’s are companies that rate bonds • b.Ranks go from AAA (Highest) to D (Usually in default) • c.Higher rating has a lower risk and return, lower rating has a higher rate and return.

20. ADVANTAGES AND DISADVANTAGES OF THE BOND ISSUER • ADVANTAGES • i. Interest rate will not vary—Know that you have fixed payments • ii. Selling bonds does not give up ownership of your company. • DISADVANTAGES • i. Must make fixed payments even when the company is not doing well. • ii. If your bond rating goes down it will be harder to sell them in the future.

21. TYPES OF BONDS • U.S. SAVINGS BOND • i. Denominations of $50 to $10000 issued by U.S. Govt. The par value is only one half of the face value ($50 bond costs $25) • ii. Funds used to finance public projects • iii. Next to No risk of default • iv. Interest payments are paid when the full maturity date is reached. • v. Specific tax advantage

23. The Treasury Bond • Denominations / minimum purchase of $1000 issued by U.S. Government • Safe investment since backed by U.S. Government • Maturity date ranges from 10-30 years—considered a long term investment. • Specific tax advantage

24. The Treasury Note • Denominations / minimum purchase of $1000 issued by U.S. Govt • Safe investment since backed by U.S. Gov’t. • Maturity date ranges from 2-10 years—mid term investment • Specific tax advantage

25. The Treasury Bill • Denominations / minimum purchase of $1000 issued by U.S. Govt • Safe investment since backed by U.S. Gov’t. • Maturity date ranges from 3-12 months, the most liquid of these types of investments.(Short term investment) • Specific tax advantage

26. The Municipal Bond (the Muni’s) • Issued by state and local governments to finance public works • Considered reasonably safe investment • Denominations usually begin at $100** • Maturity can range from a few months to as high as 20-30 yrs. • Exempt from income taxes

27. *** Most government Bonds are NOT Inflation indexed Bonds • This means their interest rate does not change with inflation.

28. Corporate Bonds • Used by corporations to raise capital. • Denominations range from $1000 and up(set by corporation) • Maturity date is also set by corporation • Bond sales are monitored by : • a) Standard and Poor’s • b) Moody’s • c) Securities and Exchange Comm.

29. Junk Bonds—High Yield &High Risk Securities • The return may be 12% or higher • The rating is lower for the chance of default is greater • Term ranges from less than 1 year to 5 years in rare occasions • Denominations set by each company, usually start at $50-100.

30. JUNK BONDS

31. International Bonds • Issued by foreign countries at units that begin at $1million • Interest payments made in foreign countries/ currency • Subject to being affected by international politics.

32. VII. OTHER TYPES OF INVESTMENTS • The Pros and Cons of Alternative Investment • +They can diversify your overall portfolio • + provide some tax advantages • + provide strong cash flow and/or appreciation. • - your liquidity is very limited until the program goes full cycle and returns your principal along with whatever gain or loss it generated. • - As with all investments, the return of your principal is not guaranteed.  

33. Certificates of Deposit (C.D.’s) • Time sensitive accts. where investors can invest for as little as $100 at a higher rate than regular savings acct. • Investors can vary the term of the CD • Penalty paid on early withdrawals

34. MONEY MARKET MUTUAL FUNDS • SHORT TERM FINANCIAL ASSETS ARE PURCHASED (LIQUIDITY) • RATE OF RETURN IS HIGHER THAN A REGULAR SAVINGS ACCOUNT AND MOST C.D.’S • HIGHER RISK FOR HIGHER RETURN

35. The IRA (Individual Retirement Account) • 1)Basic IRA • 2) Educational IRA • 3) Roth IRA • 4) 401 plan

36. INDIVIDUAL RETIREMENT ACCOUNT • http://www.youtube.com/watch?v=2K0ubOpyZt8 • http://www.youtube.com/watch?v=movFGvSBkF8

37. FINANCIAL ASSET MARKETS • BASED UPON THE LENGTH OF TIMES THAT FUNDS ARE LENT. • A. Capital Markets—Where investments last more than 1 year • B. Money Markets-Where investments reach maturity • (Money is lent) for less than 1 year.

38. FINANCIAL ASSET MARKETS • ) BASED UPON HOW ASSETS ARE SOLD TO OTHER BUYERS • Primary Markets—Financial assets that can be redeemed ONLY by the original owner • Secondary markets—A market where the assets can be traded

39. SECTION 3—THE STOCK MARKET • 1. BUYING / INVESTING IN STOCK • 1) PURCHASING STOCK IN THE MARKET • a) Each stock represents a share of ownership • b) Also called Equities–based on ownership.

40. 2) BENEFITS OF STOCK PURCHASES—PROFITS • A) Dividends—share of a profit made by a corporation. • B) Capital Gains-selling stock at more that you paid for it. • C) Net Worth--increase the overall financial standing of your portfolio

41. TYPES OF STOCK • 1) COMMON STOCK • a) A share of ownership • b) One corporate vote per share • 2) PREFERRED STOCK • a) Nonvoting share of stock • b) Receive dividends before common stockholders • 3) INCOME STOCK • a) Pays dividends when a profit is shown—at regular intervals • 4) GROWTH STOCK • a) Pays no dividends—profit is reinvested into the company • b) Stock value rises over time. • 5) WHEN A STOCK SPLITS • a) Purchase price so high that investors are discouraged • b) Price lowered so that more investors can afford stock. • c) Each previously owned share now splits into two. • d) More investing will drive stock prices back up.

42. SELLING STOCK • 1) STOCKBROKERS—LINK COMPANIES TO INVESTORS • a) Work for Brokerage firms • b) Sell products as OTC –Over the Counter stock • c) Also buy / sell on the major markets like the New York Stock Exchange (NYSE) or electronically (NASDAQ.)

43. SELLING STOCK • DAY TRADERS • a) Buy and sell stock by the hour or less • b) Quick profit on price changes • c) High risk trading! • http://www.youtube.com/watch?v=7JtCF2i2r2M • http://www.youtube.com/watch?v=ALn0GBkM_5c&feature=related

44. FUTURES AND OPTIONS • a) Futures—contracts to buy or sell stocks at a set future date. • 1) Listed on the New York Mercantile Exchange and the Chicago Board of Trade. • b) Options—contracts to buy or sell stocks at a future date based on a set price, but with the option to buy or sell at a better price and bypass the contract. • 1) Put Option—The option to sell stocks at a specified time in the future. • 2) Call Option-- The option to buy stocks at a specified time in the future.

45. Call Options

46. Put Options

47. THE BULL AND BEAR MARKETS • 1) THE BULL MARKET • ** Refers to any Market that shows a prolonged rise in prices or sales. • 2) THE BEAR MARKET • ** Refers to the market that shows a decrease in prices and sales. • ** May lead to a recession or depression!

48. THE GREAT CRASH OF 1929 & BEYOND • 1) CAUSES OF THE GREAT CRASH • a) Inequal distribution of wealth • b) Overproduction caused demand to drop and unemployment to rise • c) Credit buying of consumer goods • d) Buying stocks on Margin—SPECULATING • 2) MARGIN CALLS--Demands to repay “borrowed money used to purchase stocks. • Margins not met--money not repaid!

49. EFFECTS OF THE CRASH • a) High Unemployment-25% • b) Homes and Lands lost • c) Hoovervilles erected • d) New Deal programs established • http://www.youtube.com/watch?v=-b1dTvNaL0Q

50. THE STOCK MARKET IN MODERN TIMES. • a) 1930’s thru the 1980’s people lost confidence in market. • b) Market now highly regulated by the Government • c) Oct, 1987—Black Monday. Market crashes, loses 23% of value but rebounds with government help.