1. Copyright 2007 Thomson South-Western Chapter 11 Saving and Investing Options

2. Good Morning Please go to the SchoolSpace Lessons Tab Ch 11 Guided Notes Please begin by defining the vocabulary Slide 2

3. Slide 3 Savings Saving is setting aside money to meet future needs (accumulation) Some savings should be liquid to handle short-term needs Accounts insured by the FDIC are low-risk –Savings accounts –Money market accounts –Certificates of Deposit 11-1 Low-Risk Investment Options

4. Slide 4 Savings Certificates of deposit –The money is set aside for a set time –The money earns a set interest rate – A CD is low-risk (insured by the FDIC) –A CD is not a liquid investment –A CD with a longer time frame & large amount usually pays more interest 11-1 Low-Risk Investment Options

5. Slide 5 Withdrawal Penalty Example 11-1 Low-Risk Investment Options Certificate of Deposit Amount Deposited: $5,000.00 Interest Rate: 5% yearly Term: 5 years Penalty for Early Withdrawal If the money is withdrawn before 5 years, the penalty imposed will equal 365 days’ interest, whether earned or not. Sample Scenario The money is withdrawn after 180 days. $5,000.00 x 0.05 x 180 / 365 = $123.29 Interest Earned $5,000.00 x 0.05 x 365 / 365 = $250.00 Penalty $5,000.00 Amount Deposited + 123.29 Interest Earned $5,123.29 – 250.00 Penalty $4,873.29 Amount Received

6. Good Morning Please complete the Risk Assessment on the following website: http://njaes.rutgers.edu/money/riskquiz/ Slide 6

7. Investing Investing is attempting to make your money grow –Stocks and bonds –Real estate

8. Slide 8 Investments Investments vary in term, risk, and return rates Low-risk options typically pay lower rates than those with higher risk –Savings bonds –Corporate bonds –Government bonds –Stocks –Real Estate –Options –Collectibles 11-1 Low-Risk Investment Options

9. Bonds Bond –Promise to pay a definite amount of money at a stated interest rate on a specified maturity date. Bondholder –Individual who lends money. Face Value –Amount being borrowed by the seller of the bond. Coupon Rate –Rate of interest on the bond. Slide 9

10. Government Bonds Municipal Bonds –Issued by local and state governments. –No Federal or State taxes paid on the income received from municipal bonds –Used to finance schools, roads, airports, etc. Treasury Bonds –Issued by federal government. –No State taxes paid on the income received from Treasury Bonds –Known as Savings or Federal Bonds Slide 10

11. Treasury Bonds Types: –Series EE Bonds Cost half the face value. After a specified number of years the bond becomes worth the face value. –Treasury Bills Issued for three months to one year. –Treasury Notes Issued for two to ten years. –Treasury Bonds Issued for ten or more years. Slide 11

12. Corporate Bonds –Issued by corporations –Used to finance buildings and equipment. –Risk depends on the issuing company’s ability to make interest payments and repay the bond Investment Grade Bonds: high ratings and considered fairly low-risk High-Yield (Junk) Bond: speculative bonds with lower ratings and high risk –Maturity Time Periods 2-3 yrs. Short Term 4-10 yrs. Medium Term 10+ yrs. Long Term Slide 12

13. Slide 13 Stocks Share of ownership in the business Stock Certificate Proof of ownership in a corporation Common stocks shares of stocks that represent ownership interest and give stockholders voters rights Preferred stocks share of stock that pay guaranteed dividends.

14. Slide 14 Mutual Funds Mutual funds –Operated by professional investment firms –Invests in a variety of stocks, bonds, and other investments –A form of indirect investing –Investors can select the asset allocation or specific investment strategy 11-2 Medium-Risk Investment Options

15. Slide 15 Sample Asset Allocation 11-2 Medium-Risk Investment Options

16. Slide 16 Real Estate Family home –Long-term investment –Not liquid –Fairly safe investment –Typically grows in value faster than inflation Rental Property –Returns come in the form of rent and increased property value –Apartments –Duplexes –Vacation properties

17. Slide 17 Real Estate Investment Trusts A real estate investment trust (REIT) is a corporation A REIT owns or operates income- producing property Investors can buy shares in a REIT (similar to shares in a mutual fund) 11-3 High-Risk Investment Options

18. Slide 18 Collectibles Collectibles are items bought for their investment value Examples –Art objects –Coins –Decorative plates –Books –Baseball cards 11-3 High-Risk Investment Options

19. Slide 19 Futures Contracts and Commodities Futures contract –An agreement to buy or sell a specific commodity or currency –A price is set –A date in the future is set for buying or selling Investing in futures contracts and commodities is very risky 11-3 High-Risk Investment Options

20. Slide 20 Retirement Accounts Saving & investments held in retirement accounts are not taxed until the money is withdrawn (tax- deferred) Money can be withdrawn after 59½ yrs old Withdrawals Prior to 59½ are subject to 10% penalty plus taxes Penalties are waived for certain exceptions such as medical expenses or education

21. Individual Retirement Plans Individual Retirement Account (IRA) –Contributions are made with pre-tax dollars and taxes- deferred until withdrawals are made Roth IRA –Contributions are made with after-tax dollars and withdrawals are made tax free –Contributions are limited based on your Income SEP (Simplified Employer Plan) –Similar to IRA, it is for self-employed small business owners and their employees. Keogh –Similar to SEP; more complex and higher contribution limits Slide 21

22. Employer-Sponsored Plans –401(k) Tax-deferred plan for employees; contributions through pretax payroll deductions Limit to amount an employee can contribute annually Company can match employee contributions –403(b) Retirement plan for employees of nonprofits or educational institutions –Pension Retirement plan that are paid for entirely by the employer (sometimes) Based on the number of years of service Slide 22

23. Slide 23 Portability A portable account can be taken with you when you leave a job You must be vested to move the account Rollover is the process of moving an investment balance to another qualified account 11-2 Medium-Risk Investment Options

24. Slide 24 Focus on... Day Traders Day traders attempt to make money by buying and selling securities They hold investments just long enough to make a profit They must be very knowledgeable about market conditions and trends 11-3 High-Risk Investment Options