Essential Standard 4.00 Objective 4.03

1. Essential Standard 4.00Objective 4.03 Understand the role of finance in business. Understand saving and investing options for clients.

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

3. 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

4. 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

5. Savings Plan-Review • Putting money aside in a systematic order. • Ways to put money aside: • Regular deposit • Automatic deposit • Electronic funds transfer

6. 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.

7. 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 PROBABLY ISN’T TRU!

8. 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?

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

10. 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?

11. 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.

12. 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

13. 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

14. 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?

15. 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? Video clip: What is compound interest?

16. Compound Interest Table

17. 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?

18. 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

19. 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

20. Savings Accounts • Savings accounts usually allows • Low or zero balance • Deposits or withdrawals anytime • Interest to be earned • Unlimited withdrawals without penalties

21. 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)

22. 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

23. 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 • Collectibles VIdeo link: What is difference between stocks & bonds?

24. 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?

25. 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?

26. 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

27. Growth Investments RISKIER • Income and Growth Stocks • Mutual Funds • Real Estate • Convertible Bonds • Individual investor does not control items in mutual fund. Video- what is Dow Jones Industrial average?

28. Speculation Investments(high risk) Speculative stocks- may be low priced, but very big gamble • Options/Futures contracts • Commodities • Precious Metals and Gems • Speculative Stocks • Junk Bonds • Collectibles Junk bonds- may be low priced, very big gamble, sometimes connected to illegal activities-fraud

29. Commodities/Futures market Commodities market video link- what are futures?

30. 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

31. What is liquidity?

32. Return on Investment Essential Question: How do stock investors get a return on their investments? 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

34. What are Stockbrokers? video link: are you bullish or bearish? • 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

35. Stock Table See stock table key on next slide for additional information.

36. 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

37. 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

38. The Economic Selection Factor Factors that could influence investors in selecting stock: • Economic • Inflation • Interest rates • Consumer spending • Employment

39. 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

40. 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%

41. 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%

42. 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%

43. 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

44. YouTube Bond Info http://www.youtube.com/watch?v=ct3OsJacTSs John Wayne http://www.youtube.com/watch?v=e3ORoX0_iXs

45. 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.

46. 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

47. 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

48. 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

49. 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

50. 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