Understand the role of finance in business.Understand saving and investing options for clients.

ESSENTIAL STANDARD 4.00OBJECTIVE 4.03

TOPICS

Saving and investing basics

Saving and investing options

Evaluation factors for savings and investing options

WHO BORROWS MONEY & WHY? Who Borrows Money? Individual consumers

Businesses

Governments

Why Borrow Money? Immediate purchase of goods and services Emergencies Can buy now and pay later

HOW SAVING INFLUENCES ECONOMIC ACTIVITY

By making more money available to be used by individuals, businesses, and the government the economy grows

When borrowed money is spent, the demand for goods and services is increased, which creates more jobs and spending for workers

SAVINGS PLAN-REVIEW

Putting money aside in a systematic order.

Ways to put money aside:

Regular deposit

Automatic deposit

Electronic funds transfer

WHAT IS SAVING & WHY SAVE?

Putting away money for future use

Use for emergency situations

Use as backup for regular budget

Start fund for special purpose Big ticket items-furniture, vacation, electronics

Down payment on car, house

A savings plan should be the first element of every budget!

As a consumer, you must be your own best advocate…take care of yourself by planning for your future.

WHAT IS INVESTING?

Investing is using savings to earn more money for future financial security

IF THE INVESTMENT SEEMS TOO GOOD TO BE TRUE, WATCH OUT..IT PROBABLYISN’T TRU!

GOALS OF SAVERS & INVESTORS

Main goals of savers and investors include

Earning immediate income and

Creating long-term growth

Brainstorm: What factors are critical to investors ?

What if I need my money immediately?

Is my money safe invested this way?

What other questions might be important?

FINANCIAL LIFE CYCLE EVENTS ACTIVITY

People in certain age groups tend to have similar financial life cycle needs. Plans change based on the individual’s situation.

High school: 13-17

Adult with or without children:

25-34 Midlife: 45-54Retired: 65 and

older

How do you think financial planning changes for each age group?

INVESTMENT DECISION MAKING

Depends on these factors:

Time periods required How long will $ have to

stay? When is maturity date of

bond?

Risk tolerance of saver/investor Is investor willing to accept

high/low risk level?

Diversity Process of spreading your

assets among several different types of investments to lessen risk.

Yield Amount earned by the

investment as % of investment

Safety of investment How safe is money

invested? Insured?

Liquidity If investor needs money,

can he get cash quickly?

Tax considerations Income tax deferred,

exempt, or deductible?

SAVINGS GROWTH Growth of savings is measured by

Simple interest

Compound interest Compound frequency impacts savings growth rate

* Review Calculations of each type of interest

Interest –cost of money

Interest EARNED is when others borrow your money and pay you.

You deposit $ at bank, bank loans $ to others, bank earns more interest and can pay you interest for using your money

Interest PAID is when you borrow money from other s and pay them.

HOW IS SIMPLE INTEREST CALCULATED?

Simple interest is the amount of money paid to saver on amount deposited for a period of time.

The more times that interest is compounded the more growth of savings.

Simple interest is calculated by using the formula (P=Principal, R=Rate, T=Time and I=Interest Earned)

I = P * R * T.

Linda borrowed $5000 for one year @7% APR from Wachovia Bank. How much interest will Linda owe Wachovia for using their money? How much will Linda have to pay back in total?

$5000 principal

7% interest rate

1 year

Calculation of simple interest

$5000 x .07 x 1 = $350 interest

$5350 is owed to Wachovia to pay back loan with interest

SIMPLE INTEREST CALCULATION

Full Year Calculation Example:

Fran borrowed $5000 for 1 year from Wachovia Bank at 12% APR. Calculate the amount of interest she will pay.

$5000 x 12% X 1 = $600

Multiple Year Calculation:

Fran had a 3 year simple interest loan on $5000 at 12% APR.

$5000 x 12% x 3 = $1800

If time is in months, use fractional # of months divided by 12 months in year.

If time is in days, use fractional # of days divided by 365 days in year.

Partial Year Calculation Examples:

If Fran paid back the loan early, how much interest does she owe for the following time periods?

A. 4 months?

5000 x 12% x 4/12 = $200.00

B. 245 days?

5000 x 12 x 245/365 = $402.74

HOW IS COMPOUND INTEREST CALCULATED?

Compound interest is the amount of money paid to saver on money deposited and interest previously earned for a period of time.

A=P(1+r/n)nt.

Compound interest is 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)video link: what is compound interest?

SAVINGS GROWTHSimple interest

$1,000 at 10%

Year 1:

$1,000 * .10 = $100

$1,000 + $100 = $1,100Year 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 = $1,100Year 2:

$1,100 * .10 = $110

$1,100 + $110 = $1,210

What would the value be at the end of year 3?

Video clip: What is compound interest?

Compound Interest TableYear Beginning Balance 9% Interest Ending Balance

1 $3,000

________ ________

2

________ ________ ________

3

________ ________ ________

4

________ ________ ________

5

________ ________ ________

Total Amount of Interest ________

WHAT WOULD HAPPEN IF THE INTEREST WAS COMPOUNDED MORE THAN ANNUALLY?

Interest would accumulate quicker.

Frequency of compounding increases interest earned.

Which method of calculating interest is best?

If you are borrowing money, and paying interest, which type of loan do you want?

Compound interest?

Simple interest?

If you are saving money, and earning interest, which type of loan do you want?

Compound interest?

Simple interest?

SAVING & INVESTMENT OPTIONS

Savings Plans

Savings account

Certificates of deposit (CDs)

Money market account

Available through banks, savings banks, savings and loans, credit unions

Very safe since insured through FDIC

Low risk = low interest rate

CERTIFICATES OF DEPOSIT (CDS)

CDs require

a minimum deposit

money to remain deposited for a period of time without penalties

penalties are assessed if money is withdrawn before specified time (maturity date)

Available through banks, credit unions, savings banks, savings and loans

Very safe

Earns slightly higher rate than savings due to time commitment

SAVINGS ACCOUNTS

Savings accounts usually allows

Low or zero balance

Deposits or withdrawals anytime

Interest to be earned

Unlimited withdrawals without penalties

SAFETY AND INCOME INVESTMENTS

US Treasury Securities

Conservative Corporate Bonds

State and Municipal Bonds

Income and Utility Stocks

Requires longer commitment, can’t just take money out of these investments

Slightly higher risk = increased return on investment

*FACE VALUE: the amount of $ received at maturity (due date)

WHAT IS A MONEY MARKET ACCOUNT?

Money market account requires a minimum deposit

Interest :

varies based on various government and corporate securities.

paid reflects current rate of interest paid in money markets

Usually withdrawals are allowed without penalties

Earns higher interest than traditional savings account

video clip: money market accounts utube

CATEGORIES OF INVESTING OPTIONS

Riskier than financial institution savings plans

Not insured No guaranteed return on

investment (yield)

Stocks

Bonds

Mutual Funds and Exchange-traded Funds

Real Estate

Commodities

CollectiblesVIdeo link: What is difference between stocks & bonds?

STOCK INVESTMENTS

Stock- shares of ownership in a corporation

Two main categories of stock:

Preferred

Common

REVIEW: What are the major similarities and differences between preferred and common stocks?

STOCK: PREFERRED VS. COMMON

Both:

Represent ownership in the corporation

May receive dividends

Are uninsured investment options Higher risk

Opportunity for higher return

video clip- What's is a dividend?

PREFERRED VS. COMMON STOCK

Preferred stock Is not required issue

Pays dividends at a set rate before common stockholders are paid

Is first in line when assets distributed if corporation dissolves

Is less risky than common stock for investor

Does not have voting rights

• Common stock Required to be issued by all

corporations

Eligible for dividends

Common Stockholders:

have voting powers, 1 vote per share of stock

are invited to annual stockholders meeting

GROWTH INVESTMENTS

Income and Growth Stocks

Mutual Funds

Real Estate

Convertible Bonds

Individual investor does not control items in mutual fund.

RISKIER

Video- what is Dow Jones Industrial average?

SPECULATION INVESTMENTS (HIGH RISK)

Options/Futures contracts

Commodities

Precious Metals and Gems

Speculative Stocks

Junk Bonds

Collectibles

Speculative stocks- may be low priced, but very big gamble

Junk bonds- may be low priced, very big gamble, sometimes connected to illegal activities-fraud

COMMODITIES/FUTURES MARKET

Commodities market

video link- what are futures?

FACTORS THAT AFFECT THE RATE OF RETURN ON AN INVESTMENT

Risk - Chance of loss

Rate of Return (yield)

Amount of money the investment earns

Compounding frequency is the interest computed on the amount saved plus the interest previously earned.

Liquidity

Ease with which an investment can be changed into cash.

Resistance to inflation-Hedge against inflation

Will rate of return keep up with inflation?

Tax considerations

Some government securities are tax exempt

WHAT IS LIQUIDITY?

RETURN ON INVESTMENT

DIVIDENDS

Corporations issue dividends to stockholders

Dividends - % of profit distributed by corporation as income to shareholders

CAPITAL GAINS

When an stock sells for more than its original purchase price, the stockholder has a capital gain

Can be capital loss if stock value<price paid

Essential Question:How do stock investors get a return on their investments?

Question Number

A. Amount B. Interest Earned

Rate of Return“Yield”=B /A

P/E Ratio=A/B

Example $100 $12 12%

1 $500 $29

2 $300 $78

3 $7,000 $1,200

4 $560 $41

5 $12,000 $3,000

6 $56 $4.24

7 $300 $5.90

8 $12,300 $4509 $30 $.90

10$100 $3.50

WHAT ARE STOCKBROKERS?

Licensed professionals who buy/sell stock and bonds at a set price for a commission

Stock exchanges

The stock exchange is where the trading of securities take place

NYSE, Amex, Nikkei, London Exchange

http://www.nyse.com

Over the Counter (OTC) – traded through telephone & computer, not a traditional stock exchange

video link: are you bullish or bearish?

STOCK TABLEA B C D E F G H I

52 Week Sales

High Low Stock Div Yld PE Vol100s

High Low Last Chg

12 1/8 8 AAR .44 6.2 15 6 6 3/4 6 5/8 6 1/2 -1/8

49 1/2 31 1/4 ACF 1.76 7.4 7 477 36 1/4 37 5/8 37 +3/4

26 1/2 16 AMF 1.36 6.7 7 133 17 1/2 17 1/2 17 1/2 -3/8

6 1/8 3 1/8 ARA 2 7 8 10 33 7/8 33 7/8 33 -1

See stock table key on next slide for additional information.

STOCK TABLE KEY A-Highest & lowest price of stock during past 52 weeks

B-Symbol used to represent the company & current dividend expressed as dollars per share of stock

C-Dividend yield based on current selling price

D-Price-earning ratio

E-Number of shares exchanged on trading day. The amount is listed in 100’s.

F-Highest price of a share on trading day

G-Lowest price of a share on trading day

H-Last price of traded stock

I-Amount of change from previous day closing price as fraction of a dollar

STOCK MARKET

What is market value of stock?

the price for which a share of stock can be purchased

Requires a willing buyer and willing seller

What factors to consider when selecting stocks

Economic Factors

Company Factors

THE ECONOMIC SELECTION FACTOR

Factors that could influence investors in selecting stock:

Economic Inflation Interest rates Consumer spending Employment

THE COMPANY SELECTION FACTOR

Factors that could influence investors in selecting stock:

Company Dividend yield Dividend yield is the amount

paid per share for stock. Price-earnings ratio Price-earnings ratio is the

relationship between a stock’s selling price and its yield.

Mergers Lawsuits pending

YIELD CALCULATIONS Yield is the % of gain (return) on an investment

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%

DIVIDEND 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%

CALCULATING RATE OF RETURN

Rate of Return = Total Interest Earned divide by Original Deposit

Example:

If you deposited $100 in account that paid $6.18 interest for one year. What is the rate of return?

$6.18/$100 = .0618 = 6.18%

BOND INVESTMENTS What is a bond?

A bond is a promissory note (loan) to pay back a specified amount of money at a stated rate on a specific date (maturity date).

Bonds are issued to lend funds to the organization selling the bond.

Bond Investors are lenders (versus owners -stockholders) as it relates to investing in a company’s or government’s bonds

YOUTUBE BOND INFO

http://www.youtube.com/watch?v=ct3OsJacTSsJohn Wayne

http://www.youtube.com/watch?v=e3ORoX0_iXs

BOND INTEREST RATES

How does stated interest rate impact the value of a bond?

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.

MAIN CATEGORIES OF BONDS

Government bonds

Municipal bonds (munies)

Municipal bonds are issued by local-city county and state governments for public service projects

Uses-schools, airports, parks, libraries Corporate bonds

Purchasing corporate bonds is a means of loaning money to a company.

Issued by corporations to finance growth

Blue chip vs. junk bonds

FEDERAL BONDS

Federal government issues: US Savings Bonds: Series EE , HH bonds, I bonds and

Treasury bills, notes & bonds (aka t-bill, t-note, t-bond).

The EE bond interest is paid once the bond is cashed in on maturity date. The HH bond interest is paid twice a year. Interest is taxed as income.

Treasury debt instruments T-Bills – mature in 91 days to a year

T-Notes- mature in 1-10 years

T-Bonds- mature in over 10-30 years, large $ minimum

MUTUAL FUNDS

A diversified investment fund set up and managed by companies that receive money from many investors

Companies’ major task is assisting investors of mutual funds

Companies assist investors of mutual funds by studying companies’ stocks and bonds, and then buying a variety of stocks and bonds to meet the requirements of the fund

Mutual funds vary in purpose

MUTUAL FUND CATEGORIES

Some examples of mutual fund options

Aggressive Growth Fund

Income funds

International funds

Sector funds

Bond funds

Balanced funds

Investor reviews personal goals and determines which fund best meets goals

MUTUAL FUND CATEGORIES

Aggressive-growth stock funds - look for quick growth, have a higher risk than other stock

Income funds - concentrate on stocks that pay regular dividends

International funds - invest in a variety of company stock from 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

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.

OTHER INVESTMENTS

Real Estate - Land & anything attached

Examples: a house, condominium, a mobile home park, or an office building

Personal property - property not permanently attached to land

Examples: furniture, vehicles, electronic equipment, clothing, jewelry

REAL ESTATE INVESTMENTS

Advantages

Tax benefits

Increased equity

Stability

Increase in value

Disadvantages

Property taxes

Interest payments

Property insurance

Maintenance

Not liquid asset

Purchasing a home to live in provides stability, security and pride of ownership

Investment in income producing property hoping the value ofProperty increases while renter helps to pay the property cost

COMMODITIES AND FUTURES

Agricultural products grain, livestock

Precious metals Gold, silver, other precious metals

Commodity investors usually agree to buy and sell for an amount at a specified price in the future.

Examples include rice, cattle, and gold.

SPECULATIVE-VERY RISKY!!

check out the NYSE website:

OTHER INVESTMENTS

Collectibles

Collectibles are items collected over time that may increase in value

Very risky investment

Examples: stamp collections, coin collections, art work, antique furniture, autographed items, Beanie babies, jewelry, baseball cards

* Antiques Roadshow, American Pickers

How do investors make investment decisions?

Common evaluation factors for savings

and investments:

Investment Safety

Potential return on investment - yield

Liquidity

Taxes

SAFETY & RISK

Can the investment lose value? If so, how much?

Is the investment insured? financial institutions insured by FDIC

International stocks uninsured - lose everything

Real estate - can’t insure value

Essential question for the investor or investment counselor: How much risk tolerance does investor have?

How much of a financial risk taker are you?

IMPACT OF LIFE CYCLE

How does risk tolerance in investing change with the stages of the life cycle?

Young single adult

Adult with family dependents

Middle age

Retirees

POTENTIAL YIELD

Every investment should earn a reasonable yield

Yield aka rate of return, annual yield

Higher risk = higher yield

Lower risk = lower yield

Example: Federal government investments are safe; therefore, the return is low. Riskier corporate bonds may pay more.

LIQUIDITY

The ease with which investments can be quickly turned into cash without losing its value

If investor needs money right away, liquidity is important.

Ex: Real estate is a stable investment but is not a liquid asset since it may be difficult to turn into cash without reducing price.

TAXES

Investors consider tax consequences

Tax deferred (tax owed later)

Tax exempt (no tax owed)

Subject to tax breaks - tax deductions

Return is reduced by amount of taxes owed on earnings

Example- a tax exempt government bond may pay less interest, but yield may be higher comparable taxable investment