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C HAPTER 11: F INANCIAL M ARKETS BW: Grab folders/3-hole punch packet from back Complete Page 97: Chapter Warm-up.

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Presentation on theme: "C HAPTER 11: F INANCIAL M ARKETS BW: Grab folders/3-hole punch packet from back Complete Page 97: Chapter Warm-up."— Presentation transcript:

1 C HAPTER 11: F INANCIAL M ARKETS BW: Grab folders/3-hole punch packet from back Complete Page 97: Chapter Warm-up

2 11.1 “What are benefits and risks of saving and investing?” Objectives to know: How investing contribute to free-enterprise How the financial system brings together savers and borrowers Role of financial intermediaries in financial system Trade-offs among liquidity, return, and risk

3 I NTRODUCTION What are benefits/risks of saving/investing? Savings you deposit in a bank will grow w/little risk Investing, while riskier, may earn larger return for same investment; or prove devastating.

4 I NVESTING AND F REE E NTERPRISE Investing is essential to free enterprise system Promotes economic growth and contributes to nations wealth Deposits by people into savings are loaned to businesses Allows businesses to increase production Leading to expansion/growth

5 T HE F INANCIAL S YSTEM Est.d so investments can take place Saving money= loaning it to other people Savers receive reciept as confirmation Statements or bonds Represent the claims, or financial assets, of the borrower Financial systems bring savers/investors together Fuels economic growth Savers include: Households Individuals Businesses Investors include: Businesses Government

6 F INANCIAL I NTERMEDIARIES Include banks and other financial institutions Accept funds from savers to make loans to investors

7 S HARING R ISK Dealing w/financial intermediaries offers 3 advantages Sharing Risk Providing Information Providing Liquidity Sharing Risk Diversification allows you to spread out investments and not “all eggs in one basket” Sharing risk helps ward against losing everything on one bad investment Types Read/answer 11.2 Chart (pg. 280)

8 P ROVIDING I NFO AND L IQUIDITY They provide both lenders/borrowers vital data that saves them the time/money of gathering selves. EX: Portfolios or prospectus. Also allows people to get access to their money with they need it, depending on how liquid it is.

9 R ETURN AND R ISK Some investments, like CDs, are very safe b/c insured by govt. Investing in a new business is far riskier, but can have larger gains General info: Higher potential return = higher the risk Evaluating investments try to balance risks with expected rewards

10 L ESSON C LOSING 98, 54, and 58 in workbook 58 will have a little time for BW tomorrow Watch Case Study Video Get marker and Check Multiple Choice of test

11 C HAPTER 11.2 BW: Finish S.1 Quiz: Answer Case study on pg.281

12 C HAPTER 11.2 “Why are bonds bought and sold?” Objectives to know Characteristics of bonds as financial assets Different types of bonds Characteristics of other types of financial assets 4 different types of financial asset markets Key Terms (3) http://www.pearsonsuccessnet.com/snpapp/iText/prod ucts/0-13-369833- 5/Flash/Ch11/Econ_OnlineLectureNotes_ch11_s2.swf http://www.pearsonsuccessnet.com/snpapp/iText/prod ucts/0-13-369833- 5/Flash/Ch11/Econ_OnlineLectureNotes_ch11_s2.swf

13 I NTRODUCTION Why are bonds bought and sold? Bonds are sold by govts and/or corporations to finance projects Bonds offer a higher return than savings accounts, although generally riskier than savings accounts

14 B ONDS AS F INANCIAL A SSETS Bonds are loans that represent debt that the seller must repay to the investor 3 Basic components Coupon Rate: interest rate that bond issuer will pay Maturity: Time which payment to holder is due Par Value: Amount paid to holder at maturity

15 D ISCOUNTS FROM P AR Investors can not only earn money from the interest on their bonds but also by buying bonds at a discount Read and Answer 11.3

16 B OND R ATINGS In order to decide which bonds to buy, investors can check bond quality through independent firms that issue credit ratings Rate bonds on the issue’s financial strength, ability to make interest payments, and ability to repay principle when bond matures High grade, such as AAA, means safe investment

17 A DVANTAGES V D ISADVANTAGES Once bond is sold, coupon rate remains same Company does not have to share profits w/holders if doing well Company must make fixed interest payments and cannot change its interest payments Firm’s bonds may be given a low bond rating and be harder to sell when not doing well AdvantagesDisadvantages

18 T YPES OF B ONDS Low denominations Issued by U.S. govt. Govt. pays interest U.S. treasury issues bonds, bills, and notes Among safest investments Savings Bond Treasury Bonds, Bills, Notes Municipal Bonds State/local govt.s issue bonds to finance projects Highways, libraries, parks, and schools Relatively save and attractive long-term investments

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20 C ORPORATE AND J UNK B ONDS Corporate bonds are issues by a corporation to raise money to expand business Moderate risk, bc investors depend on corporation Junk bonds High risk and potentially high return Investors face strong possibility that some of firms may default on their debt

21 O THER TYPES OF F INANCIAL A SSETS CDs through banks Lend out funds deposited in CDs for a fixed amount of time Investors receive higher interest on a MMMF than savings account Higher interest b/c not covered by FDIC insurance Certificates of Deposit Money Market Mutual Funds

22 F INANCIAL A SSETS M ARKETS Bonds, CDs, and MMMFs are traded on financial asset markets One way to classify markets is according to length of time funds are lent Capital Markets Money is lent for periods longer than a year (CDs) Money Markets Money is lent for periods of a year or less Include treasury bills and money market mutual funds

23 F INANCIAL A SSETS M ARKETS Markets may also be classified according to whether or not assets can be resold to other buyers Primary Markets Financial assets can be redeemed only by original holder Savings bonds and small CDs Secondary Markets Financial assets can be resold, which provides liquidity to investors

24 L ESSON C LOSING Pearson Video How Economy Works Exit Card Questions What are 2 ways of classifying financial asset markets? What type of bond might have been used to fund construction of your school? HW: Workbook: Pgs. 99,, 61, 65 65=Quiz, little time to work on tomorrow

25 C HAPTER 11: F INANCIAL M ARKETS S ECTION 3 Finish up S.2 Quiz

26 11.1 “How does the stock market work?” Objectives to know Benefits/risks of buying stocks How stocks are traded How stock performance is measured Great Crash of 29’ and recent events Key Terms (3) http://www.pearsonsuccessnet.com/snpapp/iText/prod ucts/0-13-369833- 5/Flash/Ch11/Econ_OnlineLectureNotes_ch11_s3.swf http://www.pearsonsuccessnet.com/snpapp/iText/prod ucts/0-13-369833- 5/Flash/Ch11/Econ_OnlineLectureNotes_ch11_s3.swf

27 I NTRODUCTION How does the Stock Market Work? Stock, or shares in company, are bought/sold on the stock market Brokers help individuals/businesses invest their money in the stock market Investors keep track of the stock market by checking local paper. When doing well people may see large returns on investments Vice-versa when market doing poorly

28 B ENEFITS OF B UYING S TOCK In addition to selling bonds, corporations can raise money by selling stock shares Benefits of buying stocks: Dividends Sharing in part of firms profits Usually paid four times/year (quarterly) Larger the profit of company, larger the dividend Capital Gains Selling the stock for more than paid for it Loss=selling for less (you’ve all seen both in game)

29 T YPES OF S TOCK Stocks may be classified by whether or not it pays dividends Income stock Provides investors w/income by paying dividends Growth Stock Pays few or no dividends and earnings are reinvested in the company

30 T YPES OF S TOCK Classified by whether or not the holder has a voice in company Common stock Holders are voting members of the company Preferred Stock Holders are nonvoting members of company Common Stock owners may initiate a stock split when stock price becomes to high. Berkshire did this in game!

31 R ISKS OF B UYING S TOCK Buying stock is risky B/C dividends are determined by how well a company is doing B/C of laws of bankruptcy Stocks end up riskier than bonds since bondholders are paid before stockholders in case of company bankruptcy

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33 H OW S TOCKS ARE T RADED If you want to buy stock contact a stock-broker Gives advise on stocks to guy You buy stocks on a secondary market known as a stock exchange NYSE is country’s largest and most powerful Handle top stock/bond exchanges in U.S. and world Nasdaq is 2 nd largest securities market and largest electronic market

34 F UTURES AND O PTIONS Futures are contracts to buy/sell commodities at a particular date in the future at a specified price today Grain and livestock Options are contracts that give investors the choice to buy or sell stock and other financial assets Most people who buy stock hold their investment for a significant period Day traders trade stocks daily, which is very risky

35 M EASURING S TOCK P ERFORMANCE Bull Market When stock market rises steadily or a period of time Bear Market When stock market falls or is stagnant for period Dow Jones Industrial Average Measure stock performance Represents the average value of a set of stocks Reported in points

36 G REAT C RASH : R EAD G REAT C RASH : 296 In the 1920s, stock market was soaring Speculation and buying on margin (credit) led to crash that killed economy Dow fell steadily in Sept. 1929 People began selling shares Companies couldn’t keep up. Oct. 1929 16.4 million shares sold and market crashed Aftermath: Crash led to Great Depression Now people saw stocks as risky and avoided them By 1980s, w/new mutual funds Americans gained confidence Crashed again in 1987 but recovered much faster

37 S CANDALS AND M ARKET T ODAY By 1990s people began to buy more stocks Investors began to worry that companies could not make enough money to justify high priced stocks Enron scandal causes investors to question knowledge of companies investing in 2008, stock markets begins fall Causes major economic crisis in U.S.

38 L ESSON C LOSING Pearson Videos Visual Glossary Action Graphs Case Study Video Workbook All unfinished 100-104 Section quizzes Quiz Tuesday Sub Monday: Will give you practice Test to take I will not provide answers to it though.


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