Presentation on theme: "Splash Screen. Chapter Menu Chapter Introduction Section 1:Section 1:Savings and the Financial System Section 2:Section 2:Financial Assets and Their Markets."— Presentation transcript:
Chapter Menu Chapter Introduction Section 1:Section 1:Savings and the Financial System Section 2:Section 2:Financial Assets and Their Markets Section 3:Section 3:Investing in Equities and Options Visual Summary
Chapter Intro 1 You have just been hired as a financial planner to provide advice on how to invest wisely and effectively. Miguel, your client, is a widower raising two young children. He wants to be sure that (1) he will have enough money to send his children to college, and (2) he will be financially secure in his retirement. What advice would you give Miguel? Read Chapter 11 to learn more about how people can accomplish their financial goals.
Chapter Intro 2 Governments and institutions help participants in a market economy accomplish their financial goals.
Section 1-Preview Section Preview In this section, you will learn how the components of a financial system work together to transfer savings to investors.
Section 1-Key Terms Content Vocabulary saving savings certificate of deposit financial asset financial system financial intermediary nonbank financial institution finance company premium pension pension fund risk Academic Vocabulary sector compensation
A.A B.B C.C Section 1 Have you ever thought about what your financial goals are and what steps you need to take to reach them? A.Yes, often B.Occasionally C.Never
Section 1 Savings and the Financial System Saving—absence of spendingSaving Savings—dollars that are available once you abstain from consumptionSavings
Section 1 Saving and Economic Growth The financial system brings savers and borrowers together and helps the economy grow.
Section 1 Saving and Economic Growth (cont.) Saving makes economic growth possible. Individuals save by –Opening a savings account –Purchasing a bond –Purchasing a certificate of depositcertificate of deposit Overview of the Financial System
Section 1 Saving and Economic Growth (cont.) Documents are given in each case showing money saved—financial assets.financial assets The economy has a financial system to transfer savings to investors.financial system Overview of the Financial System
Section 1 Three parts to the financial system Saving and Economic Growth (cont.) –Funds a saver transfers to a borrower –Financial assets that certify conditions of the loan –Organizations that bring the surplus funds and financial assets together Overview of the Financial System
Section 1 Financial intermediaries—institutions that lend funds savers provideFinancial intermediaries Governments and businesses are the largest sector of borrowers. Households and businesses are the biggest sources of funds. Saving and Economic Growth (cont.) Overview of the Financial System
A.A B.B C.C D.D Section 1 In the financial system, who really benefits? A.Savers B.Borrowers C.Everyone D.No one
Section 1 Nonbank Financial Intermediaries Organizations other than banks can transfer money from savers to borrowers.
Section 1 Another group of financial intermediaries are the nonbank financial institutions.nonbank financial institutions –Finance companyFinance company –Life insurance companies—charge a premium premium –Pension fund—pays a pension to specified individuals for specific reasonsPension fundpension Nonbank Financial Intermediaries (cont.) Profiles in Economics: Sallie Krawcheck
A.A B.B C.C D.D Section 1 Which entity would charge you a higher interest rate for your car loan? A.Bank B.Credit union C.Finance company D.Relative
Section 1 Basic Investment Considerations Investors should consider several factors before investing their money.
Section 1 Before investing, consider the following –Consistency –Simplicity Basic Investment Considerations (cont.) The Power of Compound Interest
Section 1 –The risk-return relationship Basic Investment Considerations (cont.) Risk and Return –Investment objectives Risk—degree to which outcome is uncertain but a probable outcome can be estimatedRisk
A.A B.B Section 1 An investment that appears too good to be true probably is worth the risk. A.True B.False
Section 2-Preview Section Preview In this section, you will learn about the characteristics of various investments to help with your investments.
Section 2-Key Terms Content Vocabulary bond coupon rate maturity par value current yield junk bond municipal bond tax-exempt savings bond beneficiary Treasury note Treasury bond Treasury bill Individual Retirement Account (IRA)Individual Retirement Account (IRA) capital market money market primary market secondary market
A.A B.B C.C Section 2 What determines the price and yield of a bond? A.Risk of investment B.Supply and demand C.Current interest rates
Section 2 Bonds as Financial Assets A bond is a long-term investment, with the price determined by supply, demand, and the buyer’s assessment of repayment risk.
Section 2 Bonds as Financial Assets (cont.) Governments and businesses issue a bond when they need to borrow funds for long periods. bond Bonds have three main components: –Coupon rateCoupon rate –MaturityMaturity –Par valuePar value Bond Ratings
Section 2 To compare bonds, investors compute the bond’s current yield.current yield Interest received and price paid determines the actual current yield of each bond. Bond ratings are published by Standard & Poor’s and Moody’s. Bonds as Financial Assets (cont.) Bond Ratings
Section 2 Bonds rated on –Basic financial health of the issuer –Expected ability to make future coupon and principal payments –Issuer’s past credit history Bonds as Financial Assets (cont.) Bonds with higher ratings sell at higher prices than bonds with lower ratings. Bond Ratings
A.A B.B C.C Section 2 Which of the following rated bonds has the greatest risk? A.BBB or Baa B.CCC or Caa C.CC or Ca
Section 2 Financial Assets and Their Characteristics Investments include CDs, bonds, bills, and IRAs, all of which vary in cost, maturity, and risk.
Section 2 Investors today have many choices. –Certificates of deposit—loans investors make to financial institutions –Corporate bonds—IRS considers interest and payments as taxable income. Junk bonds—offer high rate of return due to exceptionally high riskJunk bonds Financial Assets and Their Characteristics (cont.)
Section 2 –Municipal bonds—issued by state and local governments, generally tax exemptMunicipal bonds Bonds can be purchased for investor’s heirs by designating a beneficiary.beneficiary –Government Savings Bonds—savings bonds are paper-based or paperlesssavings bonds Financial Assets and Their Characteristics (cont.)
Section 2 –Treasury notes—U.S. government borrows funds for 2 to 10 yearsTreasury notes –Treasury bonds—U.S. government borrows funds for 10 to 30 yearsTreasury bonds –Treasury bills—(T-bills) short term obligations, maturity of 4, 13, or 26 weeksTreasury bills –Individual Retirement Account (IRAs)Individual Retirement Account (IRAs) Financial Assets and Their Characteristics (cont.)
A.A B.B C.C D.D Section 2 Which of the following could you invest in today? A.Savings bonds B.IRA C.T-bill D.401(k) plan
Section 2 Markets for Financial Assets Financial assets are grouped into different markets depending on their maturity and liquidity.
Section 2 Markets for financial assets –Capital market—money is loaned for more than one year.Capital market –Money market—money is loaned for periods less than one year.Money market Markets for Financial Assets (cont.) Financial Assets and Their Markets
Section 2 –Primary market—original issuer can sell or repurchase a financial asset.Primary market –Secondary market—existing financial assets can be resold to new owners.Secondary market Markets for Financial Assets (cont.) Financial Assets and Their Markets
A.A B.B C.C D.D Section 2 Under which financial market(s) would Disney bonds with maturity in 5 years be classified? A.Money market B.Capital market C.Primary market D.Secondary market
A.A B.B Section 3 Do you think investing is a wise decision? A.Yes B.No
Section 3 Stocks and Efficient Markets Investors can purchase stock through stockbrokers on exchanges, through mutual funds, or through 401(k) plans.
Section 3 Stocks and Efficient Markets (cont.) Equities or shares of common stock represent another financial asset for investors.Equities –StockbrokerStockbroker –Internet account with discount brokerage firm A New York Stock Exchange Listing Ways to purchase equities
Section 3 Stocks and Efficient Markets (cont.) –Mutual fundsMutual funds Net asset value (NAV) –401(k) plan401(k) plan A New York Stock Exchange Listing
Section 3 Value of stock depends on –Number of outstanding shares to be traded –Company’s profitability –Expectations of growth Stocks and Efficient Markets (cont.)
Section 3 Efficient Market Hypothesis (EMH) states that each stock is analyzed constantly by many professional analysts. Any observations result in buying or selling of the stock immediately.Efficient Market Hypothesis (EMH) Portfolio diversification—investors offset losses of one stock with increases in other stocks.Portfolio diversification Stocks and Efficient Markets (cont.) How Much Money Will You Have at Retirement?
A.A B.B C.C D.D Section 3 Which is not an advantage of investing in a 401(k)? A.Analysts on staff to monitor market conditions B.Highly diversified C.Employers typically match a portion of employee’s contribution D.Penalties for early withdrawal
Section 3 Stock Markets and Their Performance Several different stock markets exist, and each is organized in a different way
Section 3 Historically, stocks were traded at a stock or securities exchange.stocksecurities exchange –New York Stock Exchange (NYSE) is the oldest exchange in the United States. –American Stock Exchange (AMEX) is also in New York City. Stock Markets and Their Performance (cont.)
Section 3 –Regional exchanges located in several big cities across the United States –The NASDAQ is the world’s largest electronic stock market. –Exchanges in major Cities throughout the world Stock Markets and Their Performance (cont.) Majority of stocks, however, are traded in an over-the-counter market (OTC).over-the-counter market (OTC)
Section 3 Stock performance can be monitored by several popular indicators. –Dow Jones Industrial Average (DJIA)Dow Jones Industrial Average (DJIA) –Standard & Poor’s 500 (S&P 500)Standard & Poor’s 500 (S&P 500) –NASDAQ Composite Stock Markets and Their Performance (cont.)
Section 3 Bull market—“strong,” prices moving upBull market Bear market—“mean” or “nasty” market with prices falling sharplyBear market Stock Markets and Their Performance (cont.)
A.A B.B C.C Section 3 Is it more advantageous to purchase stocks in a bear or bull market? A.Bear B.Bull C.Does not matter
Section 3 Trading in the Future Financial assets can be bought and sold in the future as well as the present.
Section 3 Most buying and selling takes place immediately, a spot market.spot market Exchanges that take place later in time are a futures contract.futures contract Trading in the Future (cont.) –Option—buyer has the right to cancel futures contract.Option Call option—purchaseCall option Put option—sellPut option
A.A B.B C.C Section 3 The total number of stocks listed on the NASDAQ A.is less than the total on the NYSE but greater than the total on the AMEX. B.is greater than the total on the NYSE and the AMEX. C.is less than the total on the AMEX but greater than the total on the NYSE.
Financial System Households and businesses invest their surplus funds to earn interest. Governments and businesses invest this money for economic growth. VS 1
VS 2 Investment Risk and Return Investors must weigh the risks of their investments against the returns they expect. Generally, the higher the risk of an investment, the higher the return investors require.
VS 3 Equities and Futures The riskiest investments consist of equities and futures. Equities can be purchased as individual stocks, or as a part of a mutual fund or 401(k) plan. Futures allow investors to speculate on future prices of commodities.
Profile Sallie Krawcheck (1965– ) chief financial officer for Citigroup Inc., the world’s largest financial institution ranked number 6 on Forbes’s top 100 of “The World’s Most Powerful Women” for 2006
Vocab55 implication something suggested to be naturally understood
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