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Activator Chapter 11 What would be the disadvantage of putting your savings under your mattress? What are some places that you could invest your money.

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Presentation on theme: "Activator Chapter 11 What would be the disadvantage of putting your savings under your mattress? What are some places that you could invest your money."— Presentation transcript:

1 Activator Chapter 11 What would be the disadvantage of putting your savings under your mattress? What are some places that you could invest your money that might cause it to gain interest/grow.

2 Money makes money. And the money that money makes more money
Money makes money. And the money that money makes more money. — Benjamin Franklin

3 Chapter 11 – Saving and Investing
Saving – the absence of spending Savings – dollars that become available to borrowers/investors Financial Investment – The action or process of investing money for future profit or material result Financial System – the institutions that allow the transfer of money between savers and borrowers Financial Assets – a claim on the property or income of a borrower Savings account, certificate of deposit (CD), government or corporate bond

4 Financial Institution
Financial Institutions – entity that channel funds from people who have extra money (savers) to those who do not have enough money to carry out a desired activity (borrowers). Banks, credit unions, finance companies, life insurance companies, pension funds, etc. Mutual Funds – sell shares, pools money from investors into a portfolio of investments (stocks, bonds, commodities, etc.) to reduce risk Diversification – strategy of spreading out investments to reduce risk “don’t put all your eggs in one basket”

5 Risk and Return Risk – the level of uncertainty in any financial investment Risk-return trade-off – potential return rises with an increase in risk Low risk, low return (bonds, savings accounts, certificates of deposit, fixed interest accounts, etc.) High risk, high potential returns (stocks, real estate, art and collectibles, etc.)

6 Risk vs. Return

7 The Bond Market Bond – IOU, certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond Corporate, municipal, U.S. Federal Principal – (par value) initial amount borrowed , $1000 Rate – the interest rate that the bond issuer will pay to the bondholder Interest – rate at which the bond will be repaid, 6% Term – length of time until the bond matures, 30 years Date of maturity – time at which the loan will be repaid, Credit risk – the risk or loss by an investor arising from a borrower that does not pay some interest or principal Default – failure to repay a borrowed loan Municipal bonds – bonds offered by local or state government Federal bonds – U.S. Treasury bonds are offered by the federal government Corporate – bonds offered by firms

8 What is a bond video

9 Simple and Compounding Interest
Simple Interest - calculated only on the principal amount. Formula for Simple Interest = P x R x T Principal = P Interest rate = R Time = T Compound interest – Earning interest on the principal PLUS SIMPLE NTEREST. Both Interest and principal earn interest “The most powerful force in the universe is compound interest” Albert Einstein n

10 Simple vs. Compounding Interest

11 The Stock Market Stock – partial ownership of a firm through the purchase of a share Disney, Microsoft, Babies ‘r Us, etc. Shares – issued to represent a portion of stock in the company 1 share of a company, company has 1,000,000 shares, you own 1/1,000,000 of the business Difference between Stocks and Bonds Owner of shares in a company is a part owner of the company Owner of bonds is a creditor of the company/institution Stockholders enjoy benefits of profits while bondholders receive interest on their bonds Stocks have a higher risk than bonds, but a potentially higher return

12 The Markets for Insurance
One way to deal with risk is to buy insurance Auto, fire, health, dental, annuity, flood, car etc. Insurance – transfer of the risk of a loss, from one entity to another, in exchange for payment. Geico, Progressive, State Farm, All State, etc. Person facing a risk pays a fee to insurance company to absorb all or part of risk Insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy. Premium - an amount to be paid for an insurance policy Deductible - The amount you have to pay out-of-pocket for expenses before the insurance company will cover the remaining costs Coverage - the total amount and type of insurance carried Why have insurance? You may not face the risk (may never be in a car accident, get sick, house flood, etc.) Pay the insurance premium to receive peace of mind

13 The Markets for Insurance
Role of insurance - not to eliminate the risks, but to spread the risks around more efficiently Insurance price is reflective in risk of the individual and market Auto insurance in SFLA is higher than in SGA

14 Credit Credit - A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some later date. Mortgages, credit cards, car financing, personal loans, business loans, student loans, etc. Finance - the management of money; borrowing, lending and the profit’s made and paid in interest based on credit. Lender - A private , public or institutional entity which makes funds available to others to borrow Secured Loans - a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan Unsecured Loans - unsecured debt refers to any type of debt or general obligation that is not collateralized

15 Credit Finance Charges – interest and fees accumulated through the use of credit Credit Report - A report containing detailed information on a person's credit history, including identifying information, credit accounts and loans, bankruptcies and late payments, and recent inquiries. It can be obtained by prospective lenders with the borrower's permission, to determine his or her creditworthiness. Credit Score - A credit score in the United States is a number representing the creditworthiness of a person, the likelihood that person will pay his or her debts. Credit Bureau - consumer credit reporting agency, a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses Equifax, Trans Union, Experian

16 Essential Questions 4 + 5 4. What are the important elements of insurance? Insurance helps to cover our _______. The total money you pay to the insurer for coverage is called the __________. The money that you must come out of pocket on before the insurance kicks in is called the _________. risks premium deductible 5. What is credit and examples? Credit is a ____________ agreement between a ___________ and a borrower. Borrowing for a home is called a _________, for a car is called ____________. The cost of credit is ____________. contractual lender mortgage financing interest

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