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Study Guide (cont.) Key Terms saving  bill consolidation loan 
premium  mutual fund  pension  real estate investment trust (REIT) savings  certificate of deposit  Click the mouse button or press the Space Bar to display the information. Section 1 begins on page 313 of your textbook. Section 1-2

Introduction To the economist, saving means the absence of spending, while savings refers to the dollars that become available when people abstain from consumption. Click the mouse button or press the Space Bar to display the information. Section 1-5

Financial Assets People can save in a number of ways. 
They can purchase a certificate of deposit – a receipt showing that an investor has made an interest-bearing loan to a bank – or a government or corporate bond.  In each case, the savers obtain receipts for the funds they save.  These receipts are assets because they are property that has value. Click the mouse button or press the Space Bar to display the information. Section 1-11

Finance Companies (cont.)
Many consumer finance companies offer bill consolidation loans.  A bill consolidation loan is a loan used to pay off other debts.  This type of loan is typically used to reduce the interest rate of an individuals debt or lower their monthly payment obligations. Click the mouse button or press the Space Bar to display the information. Section 1-17b

Life Insurance Companies
One financial institution that does not get its funds through deposits is the life insurance company.  The head of a family, for example, purchases a life insurance policy to leave money for a spouse and children in case of his or her death.  The premium is the price the insured pays for this policy and is usually paid monthly, quarterly, or annually for the length of the protection.  Because insurance companies collect cash on a regular basis, they often lend surplus funds to others. Click the mouse button or press the Space Bar to display the information. Section 1-18

Mutual Funds A mutual fund is a company that sells stock in itself to individual investors and then invests the money it receives in stocks and bonds issued by other corporations.  Mutual funds allow people to play the market without risking all they have in one or a few companies.  The net asset value (NAV)–the net value of the mutual fund divided by the number of shares issued by the mutual fund–is the market value of a mutual fund share. Click the mouse button or press the Space Bar to display the information. Section 1-19

Pension Funds Another nondepository financial institution is the pension fund.  A pension is a regular payment intended to provide income security to someone who has worked a certain number of years, reached a certain age, or suffered a certain kind of injury.  A pension fund is a fund set up to collect income and disburse payments to those persons eligible for retirement, old-age, or disability benefits. Click the mouse button or press the Space Bar to display the information. Section 1-20

Pension Funds (cont.) In the case of private pension funds, employers regularly withhold a percentage of workers’ salaries to deposit in the fund.  During the 30- to 40-year lag between the time the savings are deposited and the time the workers generally use them, the money is usually invested in corporate stocks and bonds.  Government pension funds are similar to private ones in that the government makes regular contributions to the fund that will pay benefits later. Click the mouse button or press the Space Bar to display the information. Section 1-21

Real Estate Investment Trusts
Still another nonbank financial institution is the real estate investment trust (REIT) –a company organized primarily to make loans to construction companies that build homes.  REITs help provide billions annually for home construction. Click the mouse button or press the Space Bar to display the information. Section 1-22

Click the mouse button to return to the Contents slide.
End of Section 1

Study Guide (cont.) Key Terms risk  Treasury bond  Treasury bill 
Individual Retirement Account (IRA)  Roth IRA  401(k) plan  maturity  municipal bond  tax-exempt  savings bond  Treasury note  Click the mouse button or press the Space Bar to display the information. Section 2 begins on page 318 of your textbook. Section 2-2

Introduction Before you invest in a financial asset, it helps to have a basic understanding of investment considerations.  Possessing this information will help you make your own investment goals and decide whether a plan like the 401(k) is right for you. Click the mouse button or press the Space Bar to display the information. Section 2-4

Basic Investment Considerations
It is important to consider several factors when you invest in financial assets.  The first concerns the relationship between risk and return.  The second has to do with the investor’s personal investment goals.  The third deals with avoiding some types of investments, and the last deals with the consistency of investing. Click the mouse button or press the Space Bar to display the information. Section 2-5

The Risk-Return Relationship
One of the most important relationships in the market is the relationship between risk and return.  Figure 12.2 The relationship Between Risk and Return Risk is a situation in which the outcome is not certain, but probabilities for each possible outcome can be estimated. Click the mouse button or press the Space Bar to display the information. Section 2-6

Investment Objectives
Another factor to consider is the reason for investing.  If your goal is to save for retirement, you might want to purchase assets that simply appreciate in value rather than generate current income.  If your purpose is to accumulate reserves to fund a vacation or to cover living expenses during periods of unemployment, a strategy that focuses on the accumulation of assets that are highly liquid, or easily converted into cash, might be better. Click the mouse button or press the Space Bar to display the information. Section 2-7

Investment Objectives (cont.)
The source of income used for investment may help determine which assets are purchased.  If you receive a steady salary and almost no other income, a payroll deduction plan that puts money into a special retirement fund like a 401(k) or government bonds might be best.  If you receive bonuses, royalties, or other occasional payments, corporate bonds or some other large-denomination financial asset might be preferable. Click the mouse button or press the Space Bar to display the information. Section 2-8

Investment Objectives (cont.)
In the end, each investor must consider his or her own circumstances and personal investment goals.  Investors have a large number of financial assets, equities, and other investments from which to choose.  The investor’s knowledge of his or her own needs is important in making these decisions. Click the mouse button or press the Space Bar to display the information. Section 2-9

Simplicity Most analysts advise investors to stay with what they know. If that is the case, you are limiting your chances of success if you don’t know much .  Thousands of investments are available, and many are complicated.  Although you do not have to understand them all to be a good investor, knowing a few fundamentals can help you make good choices.  One rule that many investors follow is this: If an investment seems too complicated, then ignore it and invest in something else.  Another often-cited rule is that any investment that seems too good to be true probably is. Click the mouse button or press the Space Bar to display the information. Section 2-10

Simplicity (cont.) A few investors do get lucky, but most build wealth because they invest regularly, and they avoid the investments that seem too far out of the ordinary. Click the mouse button or press the Space Bar to display the information. Section 2-11

Consistency Most successful investors invest consistently over long periods of time.  In many cases, the amount invested is not as important as investing on a regular basis. Figure 12.3 The Power of Compound Interest Click the mouse button or press the Space Bar to display the information. Section 2-12

401(k) Plans A program that has become increasingly popular among investors is the 401(k) plan – a tax-deferred investment and savings plan that acts as a personal pension fund for employees.  To contribute to the plan, employees authorize payroll deductions, which are invested in mutual funds or other investments approved by their companies.  Click the mouse button or press the Space Bar to display the information. Section 2-13

401(k) Plans (cont.) Contributing to a plan lowers your taxable income because you don’t have to pay income taxes on the money you contribute until you withdraw it. Section 2-14

Note: These tax rate schedules are provided for tax planning purposes
Note: These tax rate schedules are provided for tax planning purposes. To compute your actual income tax, please see the 2006 instructions for Form 1040, 1040A, or 1040EZ as appropriate. Single Filing Status 10% on income between $0 and $7,550 15% on the income between $7,550 and $30,650; plus $755.00 25% on the income between $30,650 and $74,200; plus $4,220.00 28% on the income between $74,200 and $154,800; plus $15,107.50 33% on the income between $154,800 and $336,550; plus $37,675.50 35% on the income over $336,550; plus $97,653.00

Married Filing Jointly or Qualifying Widow(er) Filing Status
10% on the income between $0 and $15,100 15% on the income between $15,100 and $61,300; plus $1,510.00 25% on the income between $61,300 and $123,700; plus $8,440.00 28% on the income between $123,700 and $188,450; plus $24,040.00 33% on the income between $188,450 and $336,550; plus $42,170.00 35% on the income over $336,550; plus $91,043.00

Married Filing Separately Filing Status
10% on the income between $0 and $7,550 15% on the income between $7,550 and $30,650; plus $755.00 25% on the income between $30,650 and $61,850; plus $4,220.00 28% on the income between $61,850 and $94,225; plus $12,020.00 33% on the income between $94,225 and $168,275; plus $21,085.00 35% on the income over $168,275; plus $45,521.50

Head of Household Filing Status
10% on the income between $0 and $10,750 15% on the income between $10,750 and $41,050; plus $1,075.00 25% on the income between $41,050 and $106,000; plus $5,620.00 28% on the income between $106,000 and $171,650; plus $21,857.50 33% on the income between $171,650 and $336,550; plus $40,239.50 35% on the income over $336,550; plus $94,656.50

Tax Calculation Example
Mary is a single taxpayer with $350,000 of taxable income. Her income is taxed in each of the tax brackets, as follows: $ (tax on the first $7,550 of Mary's income, taxed at the 10% rate), plus $3, (tax on the income between $7,550 and $30,650, taxed at the 15% rate), plus $10, (tax on the income between $30,650 and $74,200, taxed at the 25% rate), plus $22, (tax on the income between $74,200 and $154,800, taxed at the 28% rate), plus $59, (tax on the income between $154,800 and $336,550, taxed at the 33% rate), plus $4, (tax on the income over $336,550, taxed at the 35% rate), for a grand total tax of $102,

Mary's income tax is $102,361 (rounding up)
Mary's income tax is $102,361 (rounding up). This tax consists of $4, tax on the amount over $336,550 (the income in the 35% tax bracket) plus $97, (the tax on income in the lower tax brackets). Mary's marginal tax rate is 35%. The next dollar Mary earns will be taxed at 35%. However, Mary's average tax rate is 29% (total tax divided by taxable income). On average Mary is paying only 29 cents for every dollar of taxable income she earns. Mary's average tax rate is lower than her marginal tax rate because most of her income is taxed at lower tax rates. We can compare the changes in the marginal tax rates by comparing Mary's total tax using 2005 tax rates and 2004 tax rates. If Mary had the same taxable income of $350,000 in 2006, 2005, and 2004, her total tax liability would have been $102,970 in 2005 and $103,408 in Mary's taxes are lower in 2006 because of changes in the income tax brackets. Source: Internal Revenue Service, Revenue Procedure

Capital Gains Tax Rates
Type of Capital Asset Holding Period Tax Rate Short-term capital gains (STCG) One year or less Ordinary income tax rates up to 35% Long-term capital gains (LTCG) More than one year 5% for taxpayers in the 10% and 15% tax brackets 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets

401(k) Plans (cont.) Figure 12.4 How Much Will You Have at Retirement?
Section 2-15

401(k) Plans (cont.) Returns on a 401(k) are especially high when the employer provides matching funds.  The 401(k) is popular because it provides a simple, consistent, and relatively safe way for employees to save – and you can take the 401(k) with you if you change jobs.  In addition, you can borrow against the money before you retire at a substantially reduced rate.  You will, however, have to pay taxes on the earnings when you withdraw the money at retirement. Click the mouse button or press the Space Bar to display the information. Section 2-16

Bonds as Financial Assets
When the government or firms need to borrow funds for long periods, they often issue bonds.  Bonds are long-term obligations that pay a stated rate of interest for a specified number of years. Click the mouse button or press the Space Bar to display the information. Section 2-17

Bond Components A bond has three main components: the coupon, or the stated interest on the debt; the maturity, or the life of the bond; and the par value – the principal or the total amount initially borrowed that must be repaid to the lender at maturity.  Suppose, for example, a corporation sells a 6 percent, 20-year, $1,000 par value bond that pays interest semiannually.  The coupon payment to the holder is $30 semiannually (.06 times $1,000, divided by 2). Click the mouse button or press the Space Bar to display the information. Section 2-18

Bond Components (cont.)
When the bond reaches maturity after 20 years, the company retires the debt by paying the holder the par value of $1,000. Section 2-19

Bond Prices The investor views the bond as a financial asset that will pay $30 twice a year for 20 years, plus a final par value payment of $1,000. Click the mouse button or press the Space Bar to display the information. Section 2-20

Bond Ratings Fortunately, investors have a way to check the quality of bonds.  Two major corporations, Standard & Poor’s and Moody’s, publish bond ratings.  The bond ratings use letters scaled from AAA, which represents the highest investment grade, to D, which generally stands for default.  These ratings are widely publicized, and investors can find the rating of any bond they plan to purchase. Click the mouse button or press the Space Bar to display the information. Section 2-23

Bond Ratings (cont.) Bonds with high ratings sell at higher prices than do bonds with lower ratings.  A 6 percent, 20-year, $1,000 par value bond with an AAA-grade rating may sell for $1,100 and have a current yield of 5.45 percent.  Another 6 percent, 20-year, $1,000 par value bond issued by a different company may have a BBB rating, and may therefore only sell for $950 because of the higher risk.  The second bond, however, has a higher current yield of 6.32 percent.  Click the mouse button or press the Space Bar to display the information. Section 2-24

Bond Ratings (cont.) This points out the basic nature of the risk-return relationship – riskier investments require higher returns to offset the risk. Section 2-25

Financial Assets and Their Characteristics
The modern investor has a wide range of financial assets from which to choose.  These include certificates of deposit, bonds, treasury notes and bills, and individual retirement accounts.  They vary in cost, maturity, and risk. Click the mouse button or press the Space Bar to display the information. Section 2-26

Certificates of Deposit
Certificates of deposit (CDs) are one of the most common forms of investments available.  CDs are attractive to small investors because they can cost as little as $100.  Investors can also select the length of maturity, giving them an opportunity to tailor the expiration date to future expenditures such as college tuition, a vacation, or some other expense. Click the mouse button or press the Space Bar to display the information. Section 2-27

Certificates of Deposit (cont.)
Finally, CDs issued by commercial banks, savings banks, and savings associations are included in the $100,000 FDIC insurance limit.  The National Credit Union Association insures most CDs issued by credit unions. Click the mouse button or press the Space Bar to display the information. Section 2-28

Corporate Bonds Corporate bonds are an important source of corporate funds.  Investors usually decide on the highest level of risk they are willing to accept, and then they try to find a bond that has the best current yield.  “Junk” bonds (also known as “high-yield securities”) – exceptionally risky bonds with a Standard & Poor’s rating of BB or lower, or a Moody’s rating of Ba or lower – carry a high rate of return as compensation for the possibility of default. Click the mouse button or press the Space Bar to display the information. Section 2-29

Corporate Bonds (cont.)
Investors usually purchase corporate bonds as long-term investments, but they can also be liquidated, or quickly sold, if the investor needs cash for other purposes.  The Internal Revenue Service considers the interest, or coupon, payments on corporate bonds as taxable income, a fact investors must consider when they invest in bonds. Click the mouse button or press the Space Bar to display the information. Section 2-30

Municipal Bonds Municipal bonds (or “munis”) are bonds issued by state and local governments.  Municipal bonds are attractive investments for several reasons.  First, they are generally regarded as safe because state and local governments do not go out of business.  More importantly, municipal bonds are generally tax-exempt, meaning that the federal government does not tax the interest paid to investors. Click the mouse button or press the Space Bar to display the information. Section 2-31

Government Savings Bonds
The federal government generates financial assets when it sells savings bonds.  Savings bonds are low-denomination, nontransferable bonds issued by the United States government, usually through payroll-savings plans.  These bonds are usually available in denominations ranging from $50 to $10,000, and they are purchased at a discount from their redemption amount. Click the mouse button or press the Space Bar to display the information. Section 2-32

Government Savings Bonds (cont.)
Savings bonds are attractive because they are easy to obtain and there is virtually no risk of default.  They cannot be sold to someone else if the investor needs cash, but they can be redeemed early, with some loss of interest, if the investor must raise cash for other purposes.  Most investors tend to hold long-term savings bonds, treating them as a form of automatic savings. Click the mouse button or press the Space Bar to display the information. Section 2-33

Treasury Notes and Bonds
When the federal government borrows funds for periods longer than one year, it issues Treasury notes and bonds.  Treasury notes are United States government obligations with maturities of two to 10 years, while Treasury bonds have maturities ranging from more than 10 to as many as 30 years.  Treasury notes and bonds come in denominations of $5,000 for maturities of two to three years, and denominations of $1,000 for maturities longer than four years. Click the mouse button or press the Space Bar to display the information. Section 2-34

Treasury Notes and Bonds (cont.)
Although these financial assets have no collateral or backing, they are popular because they are generally regarded as the safest of all financial assets.  Due to the trade-off between risk and return, however, these assets also have the lowest returns of all financial assets. Click the mouse button or press the Space Bar to display the information. Section 2-35

Treasury Bills Federal government borrowing generates other financial assets known as Treasury bills.  A Treasury bill, also known as a T-bill, is a short-term obligation with a maturity of 13, 26, or 52 weeks and a minimum denomination of $10,000.  T-bills do not pay interest directly, but instead are sold on a discount basis, much like government savings bonds. Click the mouse button or press the Space Bar to display the information. Section 2-36

Treasury Bills For example, an investor may pay the auction price of $9,300 for a 52-week bill that matures at $10,000.  Section 2-37

Individual Retirement Accounts
Individual Retirement Accounts (IRAs) are long-term, tax-sheltered time deposits that an employee can set up as part of a retirement plan. Click the mouse button or press the Space Bar to display the information. Section 2-38

Individual Retirement Accounts (cont.)
Taxes on the interest and the principal will eventually have to be paid, but it gives the worker an incentive to save today, postponing the taxes until the worker is retired and in a lower tax bracket. (High to Low) A Roth IRA is an IRA whose contributions are made after taxes so that no taxes are taken out at maturity. (Low to High)  This type of IRA may work well for someone who plans to retire in a high tax bracket. Click the mouse button or press the Space Bar to display the information. Section 2-39

THE END Valid investments
Once money is inside an IRA, the IRA owner can direct the custodian to use the cash to purchase most types of securities, and some non security financial instruments. Some assets cannot be held in an IRA such as collectibles (e.g. art, baseball cards, and rare coins) and life insurance. Some assets are allowed subject to certain restrictions by custodians themselves. For example an IRA cannot own real estate if the IRA owner has any involvement with that real estate, for instance as his personal residence or as a property manager (or if a relative fills one of these roles). The IRS specifically states that custodians may impose their own policies above the rules imposed by the IRS.[1] It should also be noted that custodians cannot provide advice. Most IRA custodians limit available investments to traditional brokerage accounts such as stocks, bonds, and mutual funds, and do not permit real estate in an IRA unless it is held indirectly via a security such as a real estate investment trust (REIT). True self-directed IRA custodians/administrators permit real estate and other non-traditional assets. They may be found via a web search. They typically charge fees based on asset values. There are certain special restrictions on real estate held in an IRA (the IRA owner cannot benefit from the property in any way, i.e. they can not use it). There are many companies who educate clients on the rules for self-directed IRA investors who need assistance. Self directed IRA's are more complicated and may require additional expertise and experience to properly set up. Not all CPAs, attorneys, or other advisors would have that type of experience. An IRA may borrow money but any such loan must not be personally guaranteed by the owner of the IRA, and also the loan must be secured solely by assets in the IRA (in other words, a non-recourse loan). Also, the owner of the IRA may not pledge the IRA as security against a debt. THE END

End of Section 2

Study Guide (cont.) Key Terms equities 
Standard & Poor's 500 (S&P 500)  bull market  bear market  spot market  futures contract  futures market  option  call option  put option  options market Efficient Market Hypothesis (EMH)  portfolio diversification  stockbroker  securities exchange  seat  over-the-counter market (OTC)  Dow-Jones Industrial Average (DJIA)  Click the mouse button or press the Space Bar to display the information. Section 3 begins on page 328 of your textbook. Section 3-2

Introduction In addition to financial assets, investors may buy equities.  Equities are stocks that represent ownership shares in corporations.  Click the mouse button or press the Space Bar to display the information. Section 3-4

Market Efficiency (cont.)
The difficulty facing the investor, is to decide which corporation’s stock to buy–and which to avoid.  The Efficient Market Hypothesis (EMH) – the argument that stocks are always priced about right and that bargains are hard to find because they are followed closely by so many investors–is often used to help explain the pricing of equities. Click the mouse button or press the Space Bar to display the information. Section 3-6

One implication for the investor is that if all stocks are priced about right, it does not matter which ones you purchase.  Because of this, portfolio diversification – the practice of holding a large number of different stocks so that increases in some can offset unexpected declines in others–is a popular strategy.  There are different ways to purchase equities.  Opening an Internet account with a discount brokerage firm is one means. Click the mouse button or press the Space Bar to display the information. Section 3-9

Or, the investor may enlist the assistance of a stockbroker – a person who buys or sells equities for clients.  Click the mouse button or press the Space Bar to display the information. Section 3-10

Organized Stock Exchanges
A number of organized securities exchanges exist – places where buyers and sellers meet to trade securities.  An organized exchange gets its name from the way it conducts business.  Members pay a fee to join, and trades can only take place on the floor of the exchange. Click the mouse button or press the Space Bar to display the information. Section 3-11

The New York Stock Exchange
The oldest, largest, and most prestigious of the organized stock exchanges in the United States is the New York Stock Exchange (NYSE), located on Wall Street in New York City.  The NYSE has about 1,400 seats, or memberships, that allow access to the trading floor.  The members may pay several million dollars for each seat.  The NYSE lists stocks from more than 3,000 companies. Click the mouse button or press the Space Bar to display the information. Section 3-12

The New York Stock Exchange (cont.)
The firms must meet stringent requirements related to profitability and size, which virtually guarantee that the companies will be among the largest, most profitable publicly held companies. Section 3-13

The American Stock Exchange
Another prestigious national exchange is the American Stock Exchange (AMEX), which is also located in New York City.  It It has approximately 1,000 listed stocks.  Click the mouse button or press the Space Bar to display the information. Section 3-17

The American Stock Exchange (cont.)
Overall, the companies represented on the AMEX tend to be smaller and more speculative than those listed on the NYSE. Click the mouse button or press the Space Bar to display the information. Section 3-17b

Regional Stock Exchanges
The regional exchanges include the Chicago, Pacific, Philadelphia, Boston, and Memphis exchanges, along with some smaller exchanges in other cities.  Many of these exchanges originally listed corporations that were either too small or too new to be listed on the NYSE or the AMEX.  The regional stock exchanges also meet the needs of the smaller and middle-sized corporations in their regions. Click the mouse button or press the Space Bar to display the information. Section 3-18

Global Stock Exchanges
Stock exchanges can be found throughout the world.  Exchanges operate in such cities as Sydney, Tokyo, Hong Kong, Singapore, Johannesburg, and Frankfurt.  Developments in computer technology and electronic trading have linked these markets so that most major stocks can be traded around the clock, somewhere in the world. Click the mouse button or press the Space Bar to display the information. Section 3-19

The Over-the-Counter Market
Despite the importance of the organized exchanges, the majority of stocks in the United States are not traded on exchanges.  Instead, they are traded on the over-the-counter market (OTC) – an electronic marketplace for securities that are not traded on an organized exchange.  Securities traded over the counter are listed in a sophisticated computer network called the National Market System (NMS). Click the mouse button or press the Space Bar to display the information. Section 3-20

The Over-the-Counter Market (cont.)
The members of the OTC market belong to the National Association of Securities Dealers (NASD).  The main difference between a NASDAQ listing and the NYSE is that few OTC stocks pay dividends, mostly because they are issued by new firms.  The organized exchanges and the OTC market may differ, but this means little to investors. Click the mouse button or press the Space Bar to display the information. Section 3-21

The Over-the-Counter Market (cont.)
An investor who opens an Internet account with a brokerage firm may buy and sell stocks in both markets.  When the investor places an order over the Internet to buy shares, the broker forwards the order to the exchange where the stock is traded and the purchase is made there–whether it be on the NYSE, AMEX, or OTC. Click the mouse button or press the Space Bar to display the information. Section 3-22

Measures of Stock Performance
Because most investors are concerned about the performance of their stocks, they often consult two popular indicators. Section 3-23

The Dow-Jones Industrial Average
The Dow-Jones Industrial Average (DJIA) is the most popular and widely publicized measure of stock market performance on the NYSE.  In 1884, the Dow-Jones corporation published the average closing price of 11 active stocks.  In 1928, coverage was expanded to 30 stocks.  Since then, some stocks have been added, and others deleted, but the sample remains constant at 30. Click the mouse button or press the Space Bar to display the information. Section 3-24

The Dow-Jones Industrial Average (cont.)
Figure 12.8 Tracking Stocks With the DJIA and the S&P 500 Section 3-24b

Standard & Poor’s 500 Another popular benchmark of stock performance is the Standard & Poor’s 500 (S&P 500).  It uses the price changes of 500 representative stocks as an indicator of overall market performance.  Because the sum of 500 stock prices would be very large, it is reduced to an index number.  Unlike the Dow-Jones, the Standard & Poor’s 500 reports on stocks listed on the NYSE, AMEX, and OTC markets. Click the mouse button or press the Space Bar to display the information. Section 3-26

Bull vs. Bear Markets Investors often use colorful terms to describe which way the market is moving.  For example, a bull market is a “strong” market with the prices moving up for several months or years in a row.  A bear market is a “mean” market, with the prices of equities moving sharply down for several months or years in a row.  As you can see, these two terms take their names from the characteristics of the animals they are named after. Click the mouse button or press the Space Bar to display the information. Section 3-27

Trading in the Future Markets are defined according to the life of the financial asset and whether or not it can be resold.  Another attribute of a financial asset is time, which leads to a discussion of spot, futures, and options markets. Click the mouse button or press the Space Bar to display the information. Section 3-28

Spot and Futures Markets
A spot market is a market in which a transaction is made immediately at the prevailing price.  The term spot means “immediate” and is used to distinguish this market from two other markets that trade in the future. Click the mouse button or press the Space Bar to display the information. Section 3-29

Spot and Futures Markets (cont.)
Sometimes the exchange takes place later on, rather than right away.  This can be arranged with a futures contract –an agreement to buy or sell at a specific date in the future at a predetermined price.  For example, a buyer agrees to buy a specified amount of gold at $280 an ounce from a seller, who promises delivery in six months.  When the settlement date arrives, the buyer takes possession of the gold and pays the seller $280–regardless of the market price. Click the mouse button or press the Space Bar to display the information. Section 3-30

Spot and Futures Markets (cont.)
Futures markets are the marketplaces in which futures contracts, or “futures,” are bought and sold.  Many of these markets are affiliated with the grain and livestock exchanges that originated in the Midwest.  Futures markets include the New York Mercantile Exchange, the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Cotton Exchange, and the Kansas City Board of Trade. Click the mouse button or press the Space Bar to display the information. Section 3-31

Options Markets Options are contracts that provide the right to purchase or sell commodities or financial assets at some point in the future at a price agreed upon today.  Options are closely related to futures; however, options give one of the parties the opportunity to back out.  For example, you may pay $5 today for a call option – the right, but not the obligation, to buy a share of stock at a specified price some time in the future. Click the mouse button or press the Space Bar to display the information. Section 3-32

Options Markets (cont.)
If you were interested in selling instead of buying, you would have purchased a put option – the right, but not the obligation, to sell a share of stock at a specified price in the future.  Options markets are the markets in which options are traded.  Most of the exchanges that offer futures also sell options. Click the mouse button or press the Space Bar to display the information. Section 3-33

End of Section 3

Section 1: Savings and the Financial System
Saving is a process that makes savings available for others to invest.  The economy has a financial system that transfers savings to investors.  Financial assets are the receipts savers get when they loan funds to individuals, businesses, and governments.  Financial intermediaries help facilitate the transfer of funds from savers to other investors. Click the mouse button or press the Space Bar to display the information. Chapter Summary 1

Section 1: Savings and the Financial System (cont.)
Financial intermediaries include finance companies, life insurance companies, mutual funds, pension funds, and real estate investment trusts, or REITs. These institutions are part of the financial system, even though they do not take deposits like commercial banks, savings banks, or credit unions. Chapter Summary 2

Section 2: Investment Strategies and Financial Assets
Investors generally require larger returns to compensate for situations with greater risk.  Successful investors analyze their goals, invest consistently, and avoid complexity.  401(k) plans are popular investments that offer simplicity and relatively high returns.  Bonds are popular financial assets. The three components of bonds are the coupon, the maturity, and the par value.  Current yield is a measure of return on bonds. Bond ratings are widely available and can be used as a measure of the bond’s risk. Click the mouse button or press the Space Bar to display the information. Chapter Summary 3

Section 2: Investment Strategies and Financial Assets (cont.)
Financial markets are named for the characteristics of the assets traded in them. Capital markets have financial assets with maturities of more than one year, while money markets have assets with maturities of less than one year.  Assets traded in primary markets are those that have to be redeemed by the issuer. Click the mouse button or press the Space Bar to display the information. Chapter Summary 4

Section 3: Investing in Equities, Futures, and Options
Equities, or stocks, are different from financial assets because equities represent ownership of a corporation rather than a loan to it.  Because equity markets are reasonably efficient, most investors diversify their portfolio to protect against risk.  Many stocks are traded on organized exchanges such as the NYSE, the AMEX, and a number of regional stock exchanges. Click the mouse button or press the Space Bar to display the information. Chapter Summary 5

Section 3: Investing in Equities, Futures, and Options (cont.)
The majority of stocks are traded in a computerized marketplace of organized dealers called the over-the-counter market. These stocks represent newer and sometimes smaller companies that could not get listed on the NYSE. Chapter Summary 6

End of Chapter Summary

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Focus Activity 2.1

Focus Activity 2.2

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Focus Activity 3.1

Focus Activity 3.2

This feature is found on page 317 of your textbook.
Click a picture to learn more about Helen Young Hayes or Edward T. Lewis . Be prepared to answer the questions that appear on the next two slides. Helen Young Hayes 1962– Edward T. Lewis 1940– Continued on next slide. This feature is found on page 317 of your textbook. Profiles in Economics 1.1

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