Essential Standard 4.00

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

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

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

4. Forbes Richest 400 • www.forbes.com/wealth/forbes-400/list Complete Forbes 400 Wealthiest Individuals Activity

5. Saving and investing basics

6. Saving and Investing Basics • Reasons money is borrowed by the following: • Individuals: to purchase large ticket items such as homes and cars • Businesses: to operate or expand their business; purchase a building, replace old equipment or offering new products • Government: to improve or expand transportation, schools or other public services

7. Saving and Investing Basics • What is saving? • Putting away money for future use • Where? • What is investing? • Using savings to earn more money for future financial security • Where?

8. Saving and Investing Basics • Saving influences on economic activity • makes more money available to be used by individuals, businesses and government • When the borrowed money is spent, the demand for goods and services increases which creates more jobs and spending for workers

9. Saving and Investing Basics continued • Main goals of savers and investors include making available immediate income and long-term growth

10. Saving and Investing Basics continued • Growth of savings is interest earned when other borrow your money • Simple interest is the amount of $$ paid to saver on the amount deposited for a period of time • Compound interest is the amount of $$ paid to saver on the amount deposited AND interest previously earned for a period of time

11. Saving and Investing Basics continued • Impact of compound frequency on savings growth rate: the more times the interest is compounded the more growth in savings

12. How is simple interest calculated? • I = P*R*T P = Principal (initial amount you borrow or deposit) R= Rate T = Time I = Interest Rate

13. How is compound interest calculated? • A=P(1+r/n)nt A = Amount P = Principal (initial amt. you borrow or deposit) r = Annual rate of interest n = Number of times interest is compounded t = time in years

14. 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?

15. DO THE MATH BEFORE CONTINUING….

16. Savings Growth Simple Interest $1,000 * .10 = $100 $1,200 + $100 = $1,300 Compound Interest $1,210 * .10 = $121 $1,210 + $121 = $1,331

17. Savings Growth End of 3 Years • Simple Interest I = P*R*T 1,000*.10*3 = 300 1,000 + 300 = $1,300 • Compound Interest A=P(1+r/n)nt 1,000(1+.1/1)1*3 1,000(1.1)3 = $1,331

18. Savings Growth • Calculate simple interest on $5,000 after 5 years at 10% interest • Calculate compound interest on $5,000 after 5 years compounded monthly at 10% interest

19. DO THE MATH BEFORE CONTINUING….

20. SERIOUSLY, DO THE MATH BEFORE CONTINUING….. • REMEMBER: THE PERSON DOING THE WORK IS DOING THE LEARNING AND I EXPECT YOU TO LEARN

21. Savings Growth • Simple interest $5,000*.10*5 = $2,500 • $5,000 + $2,500 = $7,500 • Compound interest $5,000(1+.1/12)5*12= • $8,226.55

22. Saving and investing options

23. Saving Options – Savings Plans • Savings account: usually allows a low or zero balance, deposit or withdrawals (without penalties) anytime and pays low interest rate. • Certificates of deposit (CDs): a minimum deposit remains for a set period of time; penalty is withdrawn early • Money market account: a minimum deposit, interest earned based on gov’t and corp securities; pays slightly higher interest than savings account

24. Complete How Savings Grow Activity Sheet

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

27. Stock Investments • Two main categories of stock: • Preferred stock pays dividends at a set rate • Common stock represents general ownership in the company and sharing of profits • What are the major similarities and differences between preferred and common stocks?

28. Stock Investments Preferred Stock Common Stock Investment risk and pays dividends Invited to annual corporate meetings and one vote per share owned • Investment risk and pays dividends • No voting power • Pays dividend before common stock • Less risky than common

29. Stock Investments • What are stockbrokers? • People who buy and sell stocks and bonds at a set price for a commission • Stock exchange • Where the trading of securities takes place • What is market value of stock? • The price for which a share of stock can be purchased

30. NYSE – New York Stock Exchange • Located in New York City on Wall Street in lower Manhattan • www.nyse.com • Buyers and sellers of securities meet and compete for the best price for their customers. A trade takes place when the best bid meets the lowest offer to sell. Stock prices are determined by supply and demand.

31. Stock market terms • Initial public offering – the first time a company sells shares of itself to the public to raise capital • Bull market – when the prices of stocks are generally rising • Bear market – when the prices of stocks are generally declining

32. Stock market terms • Stockbroker – a professional who is licensed to buy and sell stock • Stock – A unit of ownership in a company • Dividend – profits paid to a stockholder as a return on investment • Capital – money needed to expand a company

33. Stock market terms • Supply – the quantity or amount of a product that is available • Bond – A loan or IOU that investors make to corporations and governments which pays interest over a fixed period of time • Demand – the quantity or amount of a product that buyers want to purchase

34. DJIA – Dow Jones Industrial Average • One of the best know and most widely cited indicators, the DJIA tracks the stock prices of 30 major “blue chip” companies • Invented by Charles Dow in 1896 as a way to gauge the performance of the stock market

35. DJIA • ALCOA Inc. • American Express • AT&T • Boeing Co • Bank of America • Caterpillar • Cisco Systems • Coca-cola • E.I. du Pont • Exxon Mobile • General Electric • Hewlett-Packard • Home Depot • Intel • IBM • Johnson & Johnson • JPMorgan Chase • Kraft Foods • 3M Company

36. DJIA • McDonald’s • Merck & Co. • Microsoft • Pfizer • Proctor & Gamble • Travelers Co. • United Technologies • Verizon • Wal-Mart Stores • Walt Disney Co.

37. Stock Table

38. Stock table • A – highest and lowest price of stock during the past 52 weeks • B – Symbol used to represent the company and current dividend as dollars per share of stock • C – Dividend yield based on current selling price • D – Price-earning ratio

39. Stock table • 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 – Closing price • I – Change from previous trading day’s closing price

40. Selecting Stock Factors that could influence investors in selecting stock: • Economic • Inflation • Interest rates • Consumer spending • Employment • Company • Dividend yield: dividend per share/mkt price per sh • Price-earnings ratio: stock price/earnings per share

41. 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%

42. 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%

43. Price/Earnings Ratio • Stock price/Earnings per share = P/E ratio • A measure of market valuation (capitalization) • Affected by: growth rate of the company, expectations of future growth rate, earnings, and other risk factors • Should use to compare companies within the same industry

44. Comparing Stocks Activity • Complete “Comparing Stocks Activity” using: www.freestockcharts.com

45. Bond Investments • What is a bond? • A promissory note to pay back a specified amount of money at a stated rate on a specific date; issued to lend funds to the organization selling the bond. • Main Categories of Bonds • Government bonds • Municipal bonds: issued by local and state gov’ts for public service projects • U.S. savings bonds: Series EE, HH and I bonds • Treasury bills (91 days to 1 year) and notes (1 to 10 years) • Corporate bonds: loaning money to a company

46. Bond investments • Lenders versus owners as it relates to investing in a company’s stocks and bonds • Bonds = lender Stocks=owner • How does stated interest rate impact the value of a bond? • Stated interest rate determines the price investors want to pay for a bond

47. Bond investments • Bond sold at par value • Ex. A bond’s stated interest rate is 5% and the current market rate is 5%. • Bond would be sold at par (100) • A $10,000 bond would sell for $10,000

48. Bond investments • Bond sold at a premium • Ex. A 10 year bond sells in 2005 for $10,000 with a stated interest rate of 5% • In 2007, the market interest rate is 3% • Because your bond is paying a higher interest rate than the market rate, you could sell you bond for more than the $10,000 face value (102) in order to realize a yield of 3% • A $10,000 bond would sell for $10,200

49. Bond investments • Bond sold at a discount • Ex. A 10 year bond sells in 2005 for $10,000 with a stated interest rate of 5% • In 2007, the market interest rate is 7% • Because your bond is paying a lower interest rate than the market rate, a buyer would be willing to pay less than face value (98) in order to realize a yield of 7% • A $10,000 bond would sell for $9,800

50. Comparing bond investments • Current yield of a bond = Dollar amount of annual interest income/current market value Ex. Annual interest income = $80 Current Market Value = $998 $80/$998 = 8% • This bond is being sold at a discount because the current market value is less than par (1000).