Chapter 11SectionMain Menu Saving and Investing Investment – saving today for future benefits. Interest – the cost to borrow money. Promotes economic growth.

Chapter 11SectionMain Menu A system that allows the transfer of money between savers and borrowers. The Financial System

Chapter 11SectionMain Menu Institutions that help channel funds from savers to borrowers. Financial Intermediaries

Chapter 11SectionMain Menu Financial intermediaries accept funds from savers and make loans to investors. Financial Intermediaries Commercial banks Savings & loan associations Savings banks Mutual savings banks Credit unions Financial Institutions that make loans to… Life insurance companies Mutual funds Pension funds Finance companies Investors Savers make deposits to… The Flow of Savings and Investments

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Chapter 11SectionMain Menu What is Credit? Credit is an arrangement through which you may receive cash, goods, or services now and pay for them in the future.Credit is an arrangement through which you may receive cash, goods, or services now and pay for them in the future. What is the cost of using someone else’s money called?What is the cost of using someone else’s money called?INTEREST There are two types of credit: Open-end credit - credit that can be increased by the debtor by continuing to purchase goods or services on credit, up to a certain limit. Closed-end credit – credit for a certain amount of money that cannot be increased – secured with collateral.

Chapter 11SectionMain Menu How do I earn a good credit score (FICO)? By using credit in a responsible manner! By paying credit card bills on time. 5 main categories that determine your final FICO score: –35% - Payment history – How you have paid your bills in the past –30% - Amounts owed – Measures debt against credit –15% - Length of credit History – Don’t open account after account. Keep a couple of credit cards for a long period of time. –10% - Type of credit used – Lenders like to see a good mix of credit, used responsibly –10% - New credit inquiries – Too many inquiries will lower your credit score! Average American Credit Score = 651

Chapter 11SectionMain Menu Credit Statistics Total amount of U.S. credit card debt in $800 billion Number of different credit cards in the average family—8 Outstanding credit card debt of the average household—$15,956 Percent interest paid on that outstanding debt— 12.78% Average late fee on a credit card - $ facts-statistics.html

Chapter 11SectionMain Menu Advantages of Credit Cards Advantages: Able to buy needed items now Reduce a need to carry cash Creates a record of purchases More convenient than writing checks Consolidates bills into one payment Established credit history

Chapter 11SectionMain Menu Disadvantages of Credit Cards Disadvantages: Interest (higher cost of items) May require additional fees Financial difficulties may arise if one loses track of how much has been spent each month Increased impulse buying

Chapter 11SectionMain Menu FICO Score

Chapter 11SectionMain Menu How do I earn a good credit score (FICO)? By using credit in a responsible manner! By paying credit card bills on time. 5 main categories that determine your final FICO score: –35% - Payment history – How you have paid your bills in the past –30% - Amounts owed – Measures debt against credit –15% - Length of credit History – Don’t open account after account. Keep a couple of credit cards for a long period of time. –10% - Type of credit used – Lenders like to see a good mix of credit, used responsibly –10% - New credit inquiries – Too many inquiries will lower your credit score! Average American Credit Score = 651

Chapter 11SectionMain Menu FICO Example

Chapter 11SectionMain Menu Credit Agencies

Chapter 11SectionMain Menu Return - money received from investment Risk and Return Return and Liquidity –More liquid, less return Return and Risk Higher potential return, greater the risk involved.

Chapter 11SectionMain Menu Risk Reward Pyramid

Chapter 11SectionMain Menu Where to Invest?

Chapter 11SectionMain Menu Bonds Basically loans, or IOUs. 3 basic components: 1. Coupon rate — interest rate the issuer will pay. 2. Maturity — the time when payment is due. 3. Par value — amount paid to purchase the bond and that will be repaid to the investor at maturity.

Chapter 11SectionMain Menu Bond Ratings Standard & Poor’s Highest investment grade High grade Upper medium grade Medium grade Lower medium grade Speculative Vulnerable to default Subordinated to other debt rated CCC Subordinated to CC debt Bond in default AAA AA A BBB BB B CCC CC C D Moody’s Best quality High quality Upper medium grade Medium grade Possesses speculative elements Generally not desirable Poor, possibly in default Highly speculative, often in default Income bonds not paying income Interest and principal payments in default Aaa Aa A Baa Ba B Caa Ca C D Bond Ratings Standard & Poor’s and Moody’s rate bonds.

Chapter 11SectionMain Menu Types of Bonds Savings Bonds Low-denomination ($50 to $10,000) bonds Issued by the U.S. gov’t Purchased below par value and interest is paid only when the bond matures. Zero-Coupon Bond. Treasury Bonds (long term), Notes (1-10 years), Bills (short term) Issued by the U.S. Treasury Dept. Municipal Bonds Issued by state or local gov’t to finance highways, state buildings, libraries, and schools. Corporate Bonds A bond that a corporation issues to raise money to expand its business. Junk Bonds Junk bonds are lower-rated, potentially higher-paying bonds.

Chapter 11SectionMain Menu Advantages and Disadvantages to Bond Issuers Advantages for issuer: 1. Coupon rate is locked. 2. Bonds are not ownership. Disadvantages to the issuer: 1. Must make payments, even in bad years. 2. Must maintain financial health.

Chapter 11SectionMain Menu How Stocks Are Traded Stock is representative of ownership in a company – also referred to as equity A stockbroker is a person who links buyers and sellers of stock. Stockbrokers work for brokerage firms, or businesses that specialize in trading stock. Some stock is bought and sold on stock exchanges, or markets for buying and selling stock.

Chapter 11SectionMain Menu Stock Exchanges The New York Stock Exchange (NYSE) Country’s largest stock exchange. Only stocks for the largest and most established companies are traded on the NYSE. NASDAQ – National Association of Securities Dealers Automated Quotations Exchange that specializes in high-tech and energy stock. Traded strictly over computer network The Over-the-counter (OTC) Market Electronic marketplace for stock that is not listed or traded on an organized exchange.

Chapter 11SectionMain Menu Measuring Stock Performance Stock Performance Indexes The Dow Jones Industrial Average –The Dow is an index that tracks the performance of 30 of the largest companies. The S & P 500 –An index that tracks the performance of 500 different stocks.

Chapter 11SectionMain Menu “The Dow 30” Dow Jones Industrial Companies

Chapter 11SectionMain Menu Stock Performance from

Chapter 11SectionMain Menu In the Short Term….

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Chapter 11SectionMain Menu Buying Stock Corporations can raise money by issuing stock, which represents ownership in the corporation. A portion of stock is called a share. Stocks are also called equities. Stockowners can earn a profit in two ways: 1. Dividends, which are portions of a corporation’s profits paid to shareholders 2. A capital gain is earned when a stockholder sells stock for more than he or she paid for it. A stockholder that sells stock at a lower price than the purchase price suffers a capital loss.

Chapter 11SectionMain Menu Stocks may be classified either by whether or not they pay dividends or whether or not the stockholder has a say in the corporation’s affairs. Types of Stock Dividend Differences Income stock pays dividends at regular times during the year. Growth stock pays few or no dividends. Instead, the issuing company reinvests earnings into its business. Decision-Making Differences Investors who buy common stock are voting owners of the company. Preferred stock owners are nonvoting owners of the company, but receive dividends before the owners of common stock.

Chapter 11SectionMain Menu Stock Splits and Stock Risks Stock Splits A stock split is the division of a single share of stock into more than one share. Stock splits occur when the price of a stock becomes so high that it discourages potential investors from buying it. Risks of Buying Stock Purchasing stock is risky because the firm selling the stock may encounter economic downturns that force dividends down or reduce the stock’s value. It is considered a riskier investment than bonds.

Chapter 11SectionMain Menu Mutual Funds A collection of stocks – ticker symbol ends in an X Funds in which investment professionals manage your money and decide on the investments Advantages –Simplicity / Professional Management / Diversification / Liquidity / Usually Low Risk Disadvantages –Fees (and lots of them)

Chapter 11SectionMain Menu Other Types of Financial Assets Certificates of Deposit (CD’s) Available through banks Various terms of maturity Must keep money in until maturity (will pay penalty for early withdrawal) Money Market Mutual Funds A mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Higher interest, not FDIC insured

Chapter 11SectionMain Menu Compounding Interest Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on.interest The secret to getting rich slowly, says David Bach, is the miracle of compound interest. Even modest returns can generate real wealth given enough time and dedication. Rule of 72 - The Rule of 72 is a math formula that tells you how long it will take to double the value of the money you invest: Find out your interest rate... Second... do the math! 72 / interest rate = years Example: $ invested at 6% interest rate 72 / 6 = 12 years --> In 12 years $100 will double at 6%!

Chapter 11SectionMain Menu The collapse of the stock market in 1929 is called the Great Crash. The Great Crash Causes of the Crash Many ordinary Americans were struggling financially: many purchased new consumer goods by borrowing money. Speculation, or the practice of making high-risk investments with borrowed money in hopes of getting a big return, was common. Effects of the Great Crash The Crash contributed to a much wider, long-term crisis — the Great Depression during which many people lost their jobs, homes, and farms. Americans also became wary of buying stock. As recently as the early 1980s, only about 25 percent of households in the United States owned stock.