Essential Standard 4.00 Objective 4.03
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Transcript of Essential Standard 4.00 Objective 4.03
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Understand the role of finance in business.Understand saving and investing options for clients.
ESSENTIAL STANDARD 4.00OBJECTIVE 4.03
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TOPICS
Saving and investing basics
Saving and investing options
Evaluation factors for savings and investing options
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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
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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
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SAVINGS PLAN-REVIEW
Putting money aside in a systematic order.
Ways to put money aside:
Regular deposit
Automatic deposit
Electronic funds transfer
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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.
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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!
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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?
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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?
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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?
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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.
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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
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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
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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?
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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?
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Compound Interest TableYear Beginning Balance 9% Interest Ending Balance
1 $3,000
________ ________
2
________ ________ ________
3
________ ________ ________
4
________ ________ ________
5
________ ________ ________
Total Amount of Interest ________
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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?
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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
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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
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SAVINGS ACCOUNTS
Savings accounts usually allows
Low or zero balance
Deposits or withdrawals anytime
Interest to be earned
Unlimited withdrawals without penalties
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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)
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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
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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?
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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?
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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?
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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
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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?
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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
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COMMODITIES/FUTURES MARKET
Commodities market
video link- what are futures?
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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
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WHAT IS LIQUIDITY?
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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?
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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
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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?
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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.
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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
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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
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THE ECONOMIC SELECTION FACTOR
Factors that could influence investors in selecting stock:
Economic Inflation Interest rates Consumer spending Employment
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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
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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%
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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%
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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%
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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
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YOUTUBE BOND INFO
http://www.youtube.com/watch?v=ct3OsJacTSsJohn Wayne
http://www.youtube.com/watch?v=e3ORoX0_iXs
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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.
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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
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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
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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
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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
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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
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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.
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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
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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
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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:
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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
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How do investors make investment decisions?
Common evaluation factors for savings
and investments:
Investment Safety
Potential return on investment - yield
Liquidity
Taxes
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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?
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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
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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.
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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.
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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