Essential Standard 4.00

1. Essential Standard 4.00 Understand the role of finance in business.

2. Objective 4.03 Understand saving and investing options for clients.

3. Topics Saving and investing basics Saving and investing options Evaluation factors for savings and investing options

4. Saving and investing basics

5. Saving and Investing Basics Reasons money is borrowed by the following: Individuals People usually borrow money to purchase large ticket items such as homes and cars. Businesses Businesses usually borrow money to operate or expand their business, which may include purchasing a building, replacing old equipment, or offering new products. Government The Government may borrow money to improve or expand transportation, schools, or other public services.

6. Saving and Investing Basics • What is saving? • Saving is putting away money for future use. • What is investing? • Investing is using savings to earn more money for future financial security. • Saving influences on economic activity • Saving influences the economy by making more money available to be used by individuals, businesses, and the government. When the borrowed money is spent, the demand for goods and services is increased, which creates more jobs and spending for workers.

7. Saving and Investing Basics Main goals of savers and investors include making available immediate income and long-term growth. Growth of savings is interest earned when others borrow your money. Simple interest is the amount of money paid to saver on amount deposited for a period of time. Compound interest is the amount of money paid to saver on money deposited and interest previously earned for a period of time.

8. Saving and Investing Basics • Impact of compound frequency on savings growth rate. • The more times that interest is compounded the more growth of savings. • How is simple interest calculated? • by using the formula (P=Principal, R=Rate, T=Time and I=Interest Rate) • I=P * R * T. • How is compound interest calculated? • by using the formula (A=Amount, P=Principal amount/the initial amount you borrow or deposit, r=Annual rate of interest and n=Number of times interest is compounded) • A=P(1+r/n)nt.

9. Savings Growth Simple interest $1,000 at 10% Year 1: $1,000 * .10 = $100 $1,000 + $100 = $1,100 Year 2: $1,000 * .10 = $100 $1,100 + $100 = $1,200 What would the value be at the end of year 3? Compound interest $1,000 at 10% Year 1: $1,000 * .10 = $100 $1,000 + $100 = $1,100 Year 2: $1,100 * .10 = $110 $1,100 + $110 = $1,210 What would the value be at the end of year 3?

10. Savings Growth Answer • Simple Interest- What would the value be at the end of year 3? $1,000 * .10 = $100 $1,200 + $100 = $1,300 • Compound Interest- What would the value be at the end of year 3? $1,200 * .10 = $120 $1,200 + $120 = $1,320

11. Activity • How Savings Grow worksheet (p.295)

12. Saving and investing options

13. Saving Options Savings Plans Savings account usually allows low or zero balance, deposit or withdrawals anytime and interest to be earned. Usually withdrawals are allowed without penalties. Certificates of deposit (CDs) Certificates of deposits (CDs) requires a minimum deposit, money to remain deposited for a period of time without penalties. Penalties may be assessed if money is withdrawn before specified time. Money market account Money market account requires a minimum deposit and interest is earned based on government and corporate securities. Usually withdrawals are allowed without penalties.

14. Main Categories of Investing Options Stocks Bonds Mutual Funds and Exchange-traded Funds Real Estate Commodities Collectibles

15. Stock Investments Two main categories of stock: Preferred Preferred stock pays dividends at a set rate. Common Common stock represents general ownership in company and sharing of profits.

16. Stock Investments • What are the major similarities and differences between preferred and common stocks? • Major similarities are: • Both have investment risks and pay dividends • Major differences are: • Preferred stock pays dividends before common stock is paid. • Preferred stockholders do not have voting powers; but common stockholders are invited to annual corporate meetings and permitted to one vote per share of stock owned. • Preferred stock is less risky than common stock.

17. Stock Investments • What are stockbrokers? • Stockbrokers buy and sell stock and bonds at a set price for a commission for stockholders. • Stock exchange • Is where the trading of securities take place. • What is market value of stock? • Is the price for which a share of stock can be purchased.

18. Stock Investments • There are two types of Markets: • Bull market refers to prices of securities rising for a long period of time. • Bear market refers to prices of securities falling for a long period of time.

19. Stock Table

20. Selecting Stock Factors that could influence investors in selecting stock: Economic Inflation Interest rates Consumer spending Employment Company Dividend yield (is the amount paid per share for stock) Price-earnings ratio (is the relationship between a stock’s selling price and its yield)

21. Yield Calculations Yield is usually calculated in the following way: current value – original value = yield original value Current value=closing price for the day Original price= price paid for stock Yield=Interest earned For example: a stock is bought at $40 and valued at $43: $43 – $40 $40 yield = 7.5%

22. Yield Calculations Dividends also may be added to the calculation. For example: a stock is bought at $40 and sold at $43, but also earned a $2 dividend during that time: $43 + $2 – $40 $40 yield = 12.5%

23. Activity • Comparing Stocks Activity (p. 302) • www.freestockcharts.com

24. Bond Investments What is a bond? is a promissory note to pay back a specified amount of money at a stated rate on a specific date. Bonds are issued to lend funds to the organization selling the bond. Main Categories of Bonds Government bonds Corporate bonds

25. Bond Investments • Government bonds • Municipal bonds • are issued by local and state governments for public service projects. • U.S. savings bonds • Series EE bonds, HH bonds, and I bonds. • The EE bond interest is paid once the bond is cashed. • The HH bond interest is paid twice a year, which may be considered income. • Treasury bills and notes • The treasury bills and notes differ by their maturity time frame. • Treasury bills may reach maturity between 91 days to a year. • Treasury notes take one to ten years.

26. Bond Investments • Corporate Bonds • Purchasing corporate bonds is a means of loaning money to a company.

27. Bond Investments • Lenders vs. Owners • When you invest in stock, you become and owner. • When you buy a bond, you are lending money to a company. • How does stated interest rate impact the value of a bond? • The stated interest rate usually determines the price investors want to pay for a bond. • If a bond’s stated interest rate is lower than similar ones, investors will most likely want to pay less for the bond. • If the stated interest rate is higher than similar ones, the seller will most likely want to be paid more than its face value.

28. Mutual Fund Is an investment fund set up and managed by companies that receive money from many investors. A Companies’ major task is assisting investors of mutual funds. Company assist investors by: Studying companies stocks and bonds. Buying a variety of stocks and bonds to sell.

29. Mutual Fund • Some examples of mutual fund categories • Aggressive-growth stock funds • look for quick growth, but also have an higher risk than other stock. • Income funds • concentrate on stocks that pay regular dividends. • International funds • invest in a variety of company stock around the world. • Sector funds • purchase stocks of companies in the same industry. • Bond funds • concentrate in corporate bonds. • Balanced funds • invest in both stocks and bonds.

30. Exchange-traded Fund (ETF) An exchange-traded fund (ETF) is a portfolio of stocks, bonds or other investments that trade on a stock exchange like regular stock.

31. Activities • Comparing Mutual and Exchange-Traded Funds Activity (p.305) • Comparing Bond Investments Activity (p.307) • The right Type of Mutual Fund Activity (p.309)

32. Other Investments Real Estate includes land and anything attached to it. Advantages advantages of investing in real estate are tax benefits, increased equity, and pride of ownership. Disadvantages disadvantages of investing in real estate are property taxes, interest payments, property insurance, and maintenance. Examples a house, condominium, and a mobile home park.

33. Other Investments • Commodities and futures • Include things like grain, livestock, and precious metals. • Commodity investors usually agree to buy and sell for an amount at a specified price in the future. • Examples may include rice, cattle, and gold. • Collectibles • Are items collected over time that may increase in value. • Examples may include art work, antique furniture, and autographed items.

34. Evaluation factors for savings and investing options

35. Evaluation Factors As you decide which investments are best for you, four main factors should be considered: Safety and risk Potential yield (return) Liquidity Taxes

36. Safety and Risk • Guarantee of Money invested to be returned. • Diversity of investment Options. (don’t put al your eggs in one basket) • Types of Risk: • Low Tolerance Risk • High Tolerance Risk

37. Potential yield (return) • Is the percentage of money earned on your saving or investment over a year. • A good savings plan or investment should earn a reasonable return. • Types of yield: • High Yield: • Low Yield:

38. Liquidity • Is the ease with which an investment can be changed into cash without losing its value. • Sometimes cash is needed quickly to pay unexpected bills, investments that can be changed into money quickly are called liquid. • Types of Liquidity: • High Liquidity: • Low Liquidity:

39. Taxes • Earnings from certain types of savings and investments are taxed. • Taxes reduce your rate of return. • Example: • If your earn $100 in interest but 20% is taken in taxes, you have only earned $80. [$100-(4100 x 0.20)] • Some investments have tax-exempt earnings, meaning you don’t have to pay taxes on that income. • These investments are attractive because the tax-free yield may actually be higher than a comparable taxable investment.

40. Activity • Which option is Best Activity (p.313) • I will do a summary day for 4.03 and include a quiz and the very important terms worksheet from this section (p.292).