1. Financial Markets
Chapter Eleven

2. Savings and the Financial System
Objective – To learn how the components of a financial system work together to transfer savings to investors

3. Quote of the Day
“Very often a change of self is needed more than a change of scenery”
A.C. Benson

4. Savings and the Financial System
In your groups…..
Identify and describe methods of investing and savings that you are familiar with
Create a table listing each method and also how they work
Why do you think the governments and institutions would want participants in a market to save and invest their money?

5. Savings and the Financial System
What is saving?
Savings is the action of not spending
While savings is what is accumulated by not spending

6. Savings and Economic Growth
Savers and Financial Assets
How can you save?
Savings account, bonds, CD(Certificate of Deposit) – Investor has made a loan, interest paying, to the bank
All of these are called Financial assets – claims on the property and the income of the borrower
Stocks can also be purchased…..ownership claims on a company

7. The Circular Flow of Finance
We need a financial system to use the savings of others –
A network of savers, investors, and financial institutions that work together to transfer savings to investors

8. The Circular Flow of Finance
Financial system has three parts
1. Funds that a saver transfers to a borrower
2. Financial assets that certifies conditions of the loan
3. The organizations that bring the surplus funds and financial assets together

9. The Circular Flow of Finance
Financial Intermediaries
-Are the institutions that lend the funds that the savers provide
-Inter = Between or among
-Mediate = To work between two parties
-Banks, credit unions, life insurance companies, pension funds, or any other funds that channel savings to borrowers.
-Help the small savers – limited funds to deposit

10. The Circular Flow of Finance
Financing Capital Formation
Any sector of the economy can borrow
Sector = Government, businesses, households, individuals
Corporations borrows from savers or through financial intermediaries Corporation issues bonds or other financial assets to lender
Government borrows issues government bonds or other financial assets to lender

12. The Circular Flow of Finance
Financing Capital Formation
In terms of savings, households and businesses are the biggest source
Capital formation depends on saving and borrowing
When households borrow invest some of money in homes
When businesses borrow funds invested in tools, machinery, equipment
When governments borrow funds invested in hospitals, highways, universities, etc.

13. The Circular Flow of Finance
Financing Capital Formation
Answer this question in your groups…..
How does the financial system benefit both the borrowers and the savers?

14. Nonbank Financial Intermediaries
These are non-depository institutions that also channel savings to borrowers
Three prime examples
Finance companies
Life Insurance Companies
Pension Funds

15. Nonbank Financial Intermediaries
Finance Companies
A firm that specializes in making loans to consumers.
Buys installment contracts from merchants that sell goods on credit.
Easy for company to sell products
FC assumes risk with loan
Makes direct loans – some risky, higher interest rates to consumer.

16. Nonbank Financial Intermediaries
Life Insurance Companies
Provide financial protection for insured people
Collects a lot of cash
Premium – money paid on a regular basis for policy
Can also act as lenders as well

17. Nonbank Financial Intermediaries
Pension Funds
Basic security for when you retire from the workforce.
Pension is the payment, a pension fund is used for monetary disbursement.
Can be company pensions or private pension funds.

18. Basic Investment Considerations
Four basic considerations
Consistency
Invest over long length of time
Simplicity
Keep it simple
Ignore anything too complicated
Go with what you know
Risk-Return Relationship
Risk is degree to which outcome is uncertain
All investments have risk although degrees vary
Investment Objectives
What is reason for investing?
Retirement vs. more immediate funds….

19. Question?????
In what type of situation might an investor seek an investment with a high level of risk?

20. Financial Assets and their Markets
Bonds as Financial Assets
Most are long term investments
Government Bonds
$ US Saving Bond
Purchase Price - $50.00
Maturity – 20 years
Money accrued – Predetermined interest from time of purchase to maturity + the Par Value of bond (total value at Purchase)
Corporate Bonds
Example – 20 year, $ Par Value 6% interest
Interest paid semi-Annually
.06 x 1000/2 = $30.00 paid twice a year for length of maturity
After 20 years – Par Value is paid back to investor
60 x 20 = $ $ (par value) = $

21. Financial Assets and their Markets
Bonds yields
Comparing bonds = computing current yield
Annual interest divided by purchase price
$60.00/$ = 6.32%
$60.00/$ = 5.45%
Interest received and price paid determine the actual current yield
All bonds have ratings – Great companies = great ratings & vice versa
Standard and Poor's and Moody’s publish bond ratings
Using your phones…as a group, look up the top and bottom 5 bond rated companies from each of the above mentioned bond rating companies

22. Financial Assets and their Characteristics
Certificates of Deposit (CD’S)
Most common form of investment
As low as $500 - $1000
Investor can select length of maturity, tailored for just about anything…college, car, house, etc.
FDIC insured as well!
Corporate Bonds
Long term investments
$1,000 - $10,000 – Prices are lower than par value
Use bond ratings to decide which to invest in
Junk Bonds, very risky, can produce a high yield, but high possibility of default

23. Financial Assets and their Characteristics
Municipal Bonds (Munis)
Bonds issued by state and local governments
Finance items at state or local level
Very safe, tax-exempt – no federal taxation
Government Saving Bonds
Low-denomination nontransferable bonds
Paper/Paperless
Paper
$50 - $10,000 – 30 year maturity – Interest + Par Value
Paperless
Purchased directly from treasury via internet
Pay face value
Interest added monthly and compounded semi-annually
Bond will double every 20 years

24. Financial Assets and their Characteristics
Treasury Notes and Bonds
T-Notes
Matures in 2-10 years
T-Bonds
Denominations of $1,000.00
Issued electronically
Periodic interest is added automatically to your account
Safest of all financial assets

25. Financial Assets and their Characteristics
Treasury Bills
T-Bills
Very short-term investment
4,13, or 26 weeks
Do not pay interest directly
Price discounted at purchase – par value at maturity
$ Paid - $ after maturation
Individual Retirement Accounts
IRA’S
Long-term tax sheltered time deposits
All taxes deferred
Will be paid upon withdrawal
Penalties for early withdrawal
Great retirement option

26. Financial Asset Markets
All financial assets are grouped into different markets based on two factors:
Maturity
Liquidity

27. Financial Asset Markets
Money Market < one year
Capital Market > one year
Primary Market – Only original issuer can sell or repurchase a financial asset.
*Money market mutual funds
*Small CDs
*Government saving bonds
*IRAs
Secondary Market-Existing financial assets can be resold to new owners
*Jumbo CDs
*Treasury bills
*Corporate bonds
*International bonds
*Municipal bonds
*Treasury bonds
*Treasury notes

28. Investing in Equities and Options
We know that Government bonds are the safest investment, however, they have the lowest return
Equities and Futures are the riskiest, but could have a large reward.

29. Investing in Equities and Options
Stocks and Efficient markets
Shares of common stock are called Equities
Represent ownership of corporations
Share Values
Can purchase shares via a stockbroker – Buys or sells equities for clients
Internet account can allow investor, you, to buy, sell, and monitor
Value is determined by profitability of the company
Goes up and down daily

30. Investing in Equities and Options
Stocks and Efficient markets
Reading a listing – Page 306
DIV – Annual dividend paid in four equal installments
Yld% - Dividend divided by the closing price
PE – Price-Earnings ratio – Stocks closing price divided by annual earnings of each share of common stock outstanding.
NET CHG – Where the stock closes today versus the day prior

31. Investing in Equities and Options
Stocks and Efficient markets
Using your phone….look up the share price of the following common stocks:
Apple –
Google -
Microsoft –
Alibaba –
GE –
Heinz –
Ebay –
Facebook –
- Then, using your technology, determine which stock would you determine to be the most profitable in your opinion

32. Investing in Equities and Options
Stocks Market Efficiency
Nothing is guaranteed in the market – Rise and fall
Efficient Market Hypothesis (EMH)
Stocks are usually priced correctly and bargains are hard to find due to the competitive nature of investors.
They, investors, constantly analyze the market for any fluctuations
Portfolio Diversification
Being diverse, allows you to make up for losses by gaining in other stocks at the same time
Don’t put all of your money into one stock!!!!!

33. Investing in Equities and Options
Mutual Funds
A company that sells stock in itself to individual investors
Then invests money it receives into other company’s stock and sometimes bonds
Mutual fund stockholders receive dividends from their investments
Net Asset Value NAV – Market value of a mutual fund share
Allows for diversification – invested in many companies
401K
A tax deferred investment and savings plan that acts as a personal pension fund for employees
Contribute via payroll deductions
Lowers your taxable income – do not pay taxes on it until you withdraw

34. Investing in Equities and Options
401K
Simple, safe way for employees to save
Employer usually matches your contribution based on a certain %

35. Investing in Equities and Options
Stock Markets and Performance
Most stocks are traded in a stock exchange (securities)
Members pay a fee to join, then can trade openly
NYSE – New York Stock Exchange – Oldest, largest, exchange in U.S
Wall Street – lists stock from around 2,700 companies
AMEX – American Stock Exchange
New York City
Deals with smaller companies
Regional exchanges as well – Chicago, Philadelphia, etc.

36. Investing in Equities and Options
OTC – Over the Counter Markets
Electronic marketplace for securities not traded in an exchange
Most stocks in world traded this way
NASDAQ – National Association of Security Dealers Automated Quotation
World’s largest automated electronic stock market
Connected to 80 countries

37. Investing in Equities and Options
How stock performance is measured
Dow Jones Industrial Average (DJIA)
Most popular
1884 – Dow Jones Corporation published average closing of 11 active stocks
Basically tells us the % change of stocks that averaged $1.00 of change – Only with the NYSE
Standard and Poor’s 500 (S&P 500)
Uses a representative change of 500 stocks as an indicator of overall market performance.
NYSE, AMEX, OTC markets

38. Investing in Equities and Options
Bull Vs. Bear Market
Bull Market – Term used to describe a strong market with prices moving up for a long period of time
Bear Market – A mean or a nasty market….prices moving downwardly