Understand the role of finance in business. Essential Standard 4.00 Understand the role of finance in business.

Understand saving and investing options for clients. Objective 4.03 Understand saving and investing options for clients.

Topics Saving and investing basics Saving and investing options Evaluation factors for savings and investing options

Saving and investing basics

Saving and Investing Basics 3 Reasons money is borrowed by the following: People usually borrow money to purchase large ticket items such as homes and cars. Businesses usually borrow money to operate or expand their business, which may include purchasing a building, replacing old equipment, or offering new products. Government may borrow money to improve or expand transportation, schools, or other public services. People usually borrow money to purchase large ticket items such as homes and cars. Businesses usually borrow money to operate or expand their business, which may include purchasing a building, replacing old equipment, or offering new products. The Government may borrow money to improve or expand transportation, schools, or other public services. Saving is putting away money for future use. Investing is using savings to earn more money for future financial security. Saving influences the economy by making more money available to be used by individuals, businesses, and the government. When the borrowed money is spent, the demand for goods and services is increased, which creates more jobs and spending for workers.

Saving and Investing Basics continued What is saving? Putting away money for future financial security. What is investing? Is using savings to earn more money for future financial security. Saving influences economic activity by making more money available to be used by individuals, businesses, and the government. When the borrowed money is spent, the demand for goods and services is increased, which creates more jobs and spending for workers. People usually borrow money to purchase large ticket items such as homes and cars. Businesses usually borrow money to operate or expand their business, which may include purchasing a building, replacing old equipment, or offering new products. The Government may borrow money to improve or expand transportation, schools, or other public services. Saving is putting away money for future use. Investing is using savings to earn more money for future financial security. Saving influences the economy by making more money available to be used by individuals, businesses, and the government. When the borrowed money is spent, the demand for goods and services is increased, which creates more jobs and spending for workers.

Saving and Investing Basics continued Main goals of savers and investors include making available immediate income and long-term growth. Growth of savings Simple interest is the amount of money paid to saver on amount deposited for a period of time. Compound interest is the amount of money paid to saver on money deposited and interest previously earned for a period of time. Main goals of savers and investors include making available immediate income and long-term growth. Growth of savings is interest earned when others borrow your money. Simple interest is the amount of money paid to saver on amount deposited for a period of time. Compound interest is the amount of money paid to saver on money deposited and interest previously earned for a period of time. The more times that interest is compounded the more growth of savings. Simple interest is calculated by using the formula (P=Principal, R=Rate, T=Time and I=Interest Rate) I=P * R * T. Compound interest is calculated by using the formula (A=Amount, P=Principal amount/the initial amount you borrow or deposit, r=Annual rate of interest and n=Number of times interest is compounded) A=P(1+r/n)nt.

Saving and Investing Basics continued Impact of compound frequency on savings growth rate? The more times that interest is compounded the more growth of savings. How is simple interest calculated? (P=Principal, R=Rate, T=Time and I=Interest Rate) I=P * R * T. Main goals of savers and investors include making available immediate income and long-term growth. Growth of savings is interest earned when others borrow your money. Simple interest is the amount of money paid to saver on amount deposited for a period of time. Compound interest is the amount of money paid to saver on money deposited and interest previously earned for a period of time. The more times that interest is compounded the more growth of savings. Simple interest is calculated by using the formula (P=Principal, R=Rate, T=Time and I=Interest Rate) I=P * R * T. Compound interest is calculated by using the formula (A=Amount, P=Principal amount/the initial amount you borrow or deposit, r=Annual rate of interest and n=Number of times interest is compounded) A=P(1+r/n)nt.

Saving and Investing Basics continued How is compound interest calculated? (A=Amount, P=Principal amount/the initial amount you borrow or deposit, r=Annual rate of interest and n=Number of times interest is compounded) A=P(1+r/n)nt. Main goals of savers and investors include making available immediate income and long-term growth. Growth of savings is interest earned when others borrow your money. Simple interest is the amount of money paid to saver on amount deposited for a period of time. Compound interest is the amount of money paid to saver on money deposited and interest previously earned for a period of time. The more times that interest is compounded the more growth of savings. Simple interest is calculated by using the formula (P=Principal, R=Rate, T=Time and I=Interest Rate) I=P * R * T. Compound interest is calculated by using the formula (A=Amount, P=Principal amount/the initial amount you borrow or deposit, r=Annual rate of interest and n=Number of times interest is compounded) A=P(1+r/n)nt.

Savings Growth Simple interest $1,000 at 10% $1,000 * .10 = $100 Year 1: $1,000 * .10 = $100 $1,000 + $100 = $1,100 Year 2: $1,100 + $100 = $1,200 What would the value be at the end of year 3? Compound interest $1,000 at 10% Year 1: $1,000 * .10 = $100 $1,000 + $100 = $1,100 Year 2: $1,100 * .10 = $110 $1,100 + $110 = $1,210 What would the value be at the end of year 3?

Saving and investing options

Saving Options Savings Plans Savings account Usually allows low or zero balance, deposit or withdrawals anytime and interest to be earned. Usually withdrawals are allowed without penalties. Certificates of deposit (CDs) Requires a minimum deposit, money to remain deposited for a period of time without penalties. Penalties may be assessed if money is withdrawn before specified time. A savings account usually allows low or zero balance, deposit or withdrawals anytime and interest to be earned. Usually withdrawals are allowed without penalties. Certificates of deposits (CDs) requires a minimum deposit, money to remain deposited for a period of time without penalties. Penalties may be assessed if money is withdrawn before specified time. Money market account requires a minimum deposit and interest is earned based on government and corporate securities. Usually withdrawals are allowed without penalties.

Saving Options continued Savings Plans Money market account Requires a minimum deposit and interest is earned based on government and corporate securities. Usually withdrawals are allowed without penalties. A savings account usually allows low or zero balance, deposit or withdrawals anytime and interest to be earned. Usually withdrawals are allowed without penalties. Certificates of deposits (CDs) requires a minimum deposit, money to remain deposited for a period of time without penalties. Penalties may be assessed if money is withdrawn before specified time. Money market account requires a minimum deposit and interest is earned based on government and corporate securities. Usually withdrawals are allowed without penalties.

Main Categories of Investing Options Stocks Bonds Mutual Funds and Exchange-traded Funds Real Estate Commodities Collectibles

Stock Investments Two main categories of stock: Preferred Pays dividends at a set rate. Common Represents general ownership in company and sharing of profits. What are the major similarities and differences between preferred and common stocks? Major similarities between preferred and common stock are: Both have investment risks and pay dividends Preferred stock pays dividends at a set rate. Common stock represents general ownership in company and sharing of profits. Major similarities between preferred and common stock are: Both have investment risks and pay dividends Major differences between preferred and common stock are: Preferred stock Preferred stock pays dividends before common stock is paid. Preferred stockholders do not have voting powers; but common stockholders are invited to annual corporate meetings and permitted to one vote per share of stock owned. Preferred stock is less risky than common stock. Stockbrokers buy and sell stock and bonds at a set price for a commission for stockholders. The stock exchange is where the trading of securities take place. The market value of stock is the price for which a share of stock can be purchased.

Stock Investments continued What are the major similarities and differences between preferred and common stocks? Major differences between preferred and common stock are: Preferred stock pays dividends before common stock is paid. Preferred stockholders do not have voting powers; but common stockholders are invited to annual corporate meetings and permitted to one vote per share of stock owned. Preferred stock is less risky than common stock. Preferred stock pays dividends at a set rate. Common stock represents general ownership in company and sharing of profits. Major similarities between preferred and common stock are: Both have investment risks and pay dividends Major differences between preferred and common stock are: Preferred stock Preferred stock pays dividends before common stock is paid. Preferred stockholders do not have voting powers; but common stockholders are invited to annual corporate meetings and permitted to one vote per share of stock owned. Preferred stock is less risky than common stock. Stockbrokers buy and sell stock and bonds at a set price for a commission for stockholders. The stock exchange is where the trading of securities take place. The market value of stock is the price for which a share of stock can be purchased.

Stock Investments continued What are stockbrokers? They buy and sell stock and bonds at a set price for a commission for stockholders. What is the purpose of a stock exchange? Where the trading of securities take place. What is market value of stock? Is the price for which a share of stock can be purchased. Preferred stock pays dividends at a set rate. Common stock represents general ownership in company and sharing of profits. Major similarities between preferred and common stock are: Both have investment risks and pay dividends Major differences between preferred and common stock are: Preferred stock Preferred stock pays dividends before common stock is paid. Preferred stockholders do not have voting powers; but common stockholders are invited to annual corporate meetings and permitted to one vote per share of stock owned. Preferred stock is less risky than common stock. Stockbrokers buy and sell stock and bonds at a set price for a commission for stockholders. The stock exchange is where the trading of securities take place. The market value of stock is the price for which a share of stock can be purchased.

Stock Table A B C D E F G H I 52 Week Sales High Low Stock Div Yld PE Vol 100s Last Chg 12 1/8 8 AAR .44 6.2 15 6 6 3/4 6 5/8 6 1/2 -1/8 49 1/2 31 1/4 ACF 1.76 7.4 7 477 36 1/4 37 5/8 37 +3/4 26 1/2 16 AMF 1.36 6.7 133 17 1/2 -3/8 6 1/8 3 1/8 ARA 2 10 33 7/8 33 -1 A-Highest and lowest price of stock during the past 52 weeks B-Symbol used to represent the company and current dividend as dollars per share of stock C-Dividend yield based on current selling price D-Price-earning ratio E-Number of shares exchanged on trading day. The amount is listed in 100’s. F-Highest price of a share on trading day G-Lowest price of a share on trading day

Selecting Stock Factors that could influence investors in selecting stock: Economic Inflation Interest rates Consumer spending Employment Company Dividend yield is the amount paid per share for stock. Price-earnings ratio is the relationship between a stock’s selling price and its yield. Dividend yield is the amount paid per share for stock. Price-earnings ratio is the relationship between a stock’s selling price and its yield.

current value – original value = yield Yield Calculations Yield is usually calculated in the following way: current value – original value = yield original value Current value=closing price for the day Original price=price paid for stock Yield=Interest earned For example: a stock is bought at $40 and valued at $43: $43 – $40 $40 yield = 7.5%

Yield Calculations Dividends also may be added to the calculation. For example: a stock is bought at $40 and sold at $43, but also earned a $2 dividend during that time: $43 + $2 – $40 $40 yield = 12.5%

Bond Investments What is a bond? Main Categories of Bonds Promissory note to pay back a specified amount of money at a stated rate on a specific date. Bonds are issued to lend funds to the organization selling the bond. Main Categories of Bonds Government bonds Municipal bonds are issued by local and state governments for public service projects. U.S. savings bonds are issued by the federal government issues Series EE bonds, HH bonds, and I bonds The EE bond interest is paid once the bond is cashed. The HH bond interest is paid twice a year, which may be considered income. A bond is a promissory note to pay back a specified amount of money at a stated rate on a specific date. Bonds are issued to lend funds to the organization selling the bond. Municipal bonds are issued by local and state governments for public service projects. The federal government issues Series EE bonds, HH bonds, and I bonds. Also the federal government issues Treasury bills and notes. The EE bond interest is paid once the bond is cashed. The HH bond interest is paid twice a year, which may be considered income. The treasury bills and notes differ by their maturity time frame. Treasury bills may reach maturity between 91 days to a year; where as treasury notes take one to ten years. Purchasing corporate bonds is a means of loaning money to a company. The stated interest rate usually determines the price investors want to pay for a bond. If a bond’s stated interest rate is lower than similar ones, investors will most likely want to pay less for the bond. If the stated interest rate is higher than similar ones, the seller will most likely want to be paid more than its face value.

Bond Investments continued Government bonds continued Treasury bills and notes Treasury bills may reach maturity between 91 days to a year Treasury notes take one to ten years. Corporate bonds Means of loaning money to a company. A bond is a promissory note to pay back a specified amount of money at a stated rate on a specific date. Bonds are issued to lend funds to the organization selling the bond. Municipal bonds are issued by local and state governments for public service projects. The federal government issues Series EE bonds, HH bonds, and I bonds. Also the federal government issues Treasury bills and notes. The EE bond interest is paid once the bond is cashed. The HH bond interest is paid twice a year, which may be considered income. The treasury bills and notes differ by their maturity time frame. Treasury bills may reach maturity between 91 days to a year; where as treasury notes take one to ten years. Purchasing corporate bonds is a means of loaning money to a company. The stated interest rate usually determines the price investors want to pay for a bond. If a bond’s stated interest rate is lower than similar ones, investors will most likely want to pay less for the bond. If the stated interest rate is higher than similar ones, the seller will most likely want to be paid more than its face value.

Bond Investments continued Lenders versus owners as it relates to investing in a company’s stocks and bonds How does stated interest rate impact the value of a bond? The stated interest rate usually determines the price investors want to pay for a bond. If a bond’s stated interest rate is lower than similar ones, investors will most likely want to pay less for the bond. If the stated interest rate is higher than similar ones, the seller will most likely want to be paid more than its face value. A bond is a promissory note to pay back a specified amount of money at a stated rate on a specific date. Bonds are issued to lend funds to the organization selling the bond. Municipal bonds are issued by local and state governments for public service projects. The federal government issues Series EE bonds, HH bonds, and I bonds. Also the federal government issues Treasury bills and notes. The EE bond interest is paid once the bond is cashed. The HH bond interest is paid twice a year, which may be considered income. The treasury bills and notes differ by their maturity time frame. Treasury bills may reach maturity between 91 days to a year; where as treasury notes take one to ten years. Purchasing corporate bonds is a means of loaning money to a company. The stated interest rate usually determines the price investors want to pay for a bond. If a bond’s stated interest rate is lower than similar ones, investors will most likely want to pay less for the bond. If the stated interest rate is higher than similar ones, the seller will most likely want to be paid more than its face value.

Mutual Funds Companies’ major tasks in assisting investors of mutual funds by studying companies stocks and bonds, and then buying a variety of stocks and bonds to sell. Some examples of mutual fund categories Aggressive-growth stock funds look for quick growth, but also have an higher risk than other stock. Income funds concentrate on stocks that pay regular dividends. International funds invest in a variety of company stock around the world. Companies assist investors of mutual funds by studying companies stocks and bonds, and then buying a variety of stocks and bonds to sell. Aggressive-growth stock funds look for quick growth, but also have an higher risk than other stock. Income funds concentrate on stocks that pay regular dividends. International funds invest in a variety of company stock around the world. Sector funds purchase stocks of companies in the same industry. Bond funds concentrate in corporate bonds. Balanced funds invest in both stocks and bonds.

Mutual Funds continued Some examples of mutual fund categories continued Sector funds purchase stocks of companies in the same industry. Bond funds concentrate in corporate bonds. Balanced funds invest in both stocks and bonds. Companies assist investors of mutual funds by studying companies stocks and bonds, and then buying a variety of stocks and bonds to sell. Aggressive-growth stock funds look for quick growth, but also have an higher risk than other stock. Income funds concentrate on stocks that pay regular dividends. International funds invest in a variety of company stock around the world. Sector funds purchase stocks of companies in the same industry. Bond funds concentrate in corporate bonds. Balanced funds invest in both stocks and bonds.

Exchange-traded Fund (ETF) An exchange-traded fund (ETF) is a portfolio of stocks, bonds or other investments that trade on a stock exchange like regular stock.

Other Investments Real Estate Advantages Disadvantages Examples Tax benefits Increased equity Pride of ownership Disadvantages Property taxes Interest payments Property insurance Maintenance. Examples House, condominium, and a mobile home park. Real Estate includes land and anything attached to it. Some advantages of investing in real estate are tax benefits, increased equity, and pride of ownership. Some disadvantages of investing in real estate are property taxes, interest payments, property insurance, and maintenance. Real estate examples may include a house, condominium, and a mobile home park. Commodities include grain, livestock, and precious metals. Commodity investors usually agree to buy and sell for an amount at a specified price in the future. Examples may include rice, cattle, and gold. Collectibles are items collected over time that may increase in value. Examples may include art work, antique furniture, and autographed items.

Other Investments Commodities and futures Collectibles Commodity investors usually agree to buy and sell for an amount at a specified price in the future. Examples Rice, cattle, and gold. Collectibles Items collected over time that may increase in value. Examples may include Art work, antique furniture, and autographed items. Real Estate includes land and anything attached to it. Some advantages of investing in real estate are tax benefits, increased equity, and pride of ownership. Some disadvantages of investing in real estate are property taxes, interest payments, property insurance, and maintenance. Real estate examples may include a house, condominium, and a mobile home park. Commodities include grain, livestock, and precious metals. Commodity investors usually agree to buy and sell for an amount at a specified price in the future. Examples may include rice, cattle, and gold. Collectibles are items collected over time that may increase in value. Examples may include art work, antique furniture, and autographed items.

Evaluation factors for savings and investing options

Evaluation Factors Safety and risk Potential yield Safety is the assurance that the money you have invested will be returned to you. Risk is risking losing your investment (money). Potential yield The percentage of money earned on your savings or investment over time. Usually higher risk of loss and higher yields go together. Safety is the assurance that the money you have invested will be returned to you. Risk is risking losing your investment (money). Potential yield is the percentage of money earned on your savings or investment over time. Usually higher risk of loss and higher yields go together. Liquidity is the east with which an investment can be changed into cash without losing its value. Taxes reduce your rate of return because what you have earned in investments can be taxed by the government in most cases. Some earnings may be tax-exempt.

Evaluation Factors continued Liquidity Easiest with which an investment can be changed into cash without losing its value. Taxes Reduce your rate of return because what you have earned in investments can be taxed by the government in most cases. Some earnings may be tax-exempt. Safety is the assurance that the money you have invested will be returned to you. Risk is risking losing your investment (money). Potential yield is the percentage of money earned on your savings or investment over time. Usually higher risk of loss and higher yields go together. Liquidity is the east with which an investment can be changed into cash without losing its value. Taxes reduce your rate of return because what you have earned in investments can be taxed by the government in most cases. Some earnings may be tax-exempt.