1. Splash Screen

2. Section 1: Savings and the Financial System
Chapter Introduction
Section 1: Savings and the Financial System
Section 2: Financial Assets and Their Markets
Section 3: Investing in Equities and Options
Visual Summary
Chapter Menu

3. Governments and institutions help participants in a market economy accomplish their financial goals.
Chapter Intro 2

4. Section Preview
In this section, you will learn how the components of a financial system work together to transfer savings to investors.
Section 1-Preview

5. Have you ever thought about what your financial goals are and what steps you need to take to reach them?
A. Yes, often
B. Occasionally
C. Never A B C
Section 1

6. Savings and the Financial System
Saving—absence of spending
Savings—dollars that are available once you abstain from consumption
Section 1

7. Saving and Economic Growth
The financial system brings savers and borrowers together and helps the economy grow.
Section 1

8. Saving and Economic Growth (cont.)
Saving makes economic growth possible.
Individuals save by
Opening a savings account
Purchasing a bond
Purchasing a certificate of deposit
Overview of the Financial System
Section 1

9. Saving and Economic Growth (cont.)
Documents are given in each case showing money saved—financial assets.
The economy has a financial system to transfer savings to investors.
Overview of the Financial System
Section 1

10. Saving and Economic Growth (cont.)
Three parts to the financial system
Funds a saver transfers to a borrower
Financial assets that certify conditions of the loan
Organizations that bring the surplus funds and financial assets together
Overview of the Financial System
Section 1

11. Saving and Economic Growth (cont.)
Financial intermediaries—institutions that lend funds savers provide
Governments and businesses are the largest sector of borrowers.
Households and businesses are the biggest sources of funds.
Overview of the Financial System
Section 1

12. Nonbank Financial Intermediaries
Organizations other than banks can transfer money from savers to borrowers.
Section 1

13. Nonbank Financial Intermediaries (cont.)
Another group of financial intermediaries are the nonbank financial institutions.
Finance company
Life insurance companies—charge a premium
Pension fund—pays a pension to specified individuals for specific reasons
Profiles in Economics: Sallie Krawcheck
Section 1

14. Which entity would charge you a higher interest rate for your car loan?
A. Bank
B. Credit union
C. Finance company
D. Relative A B C D
Section 1

15. Basic Investment Considerations
Investors should consider several factors before investing their money.
Section 1

16. Basic Investment Considerations (cont.)
Before investing, consider the following
Consistency
Simplicity
The Power of Compound Interest
Section 1

17. Basic Investment Considerations (cont.)
The risk-return relationship
Risk—degree to which outcome is uncertain but a probable outcome can be estimated
Investment objectives
Risk and Return
Section 1

18. An investment that appears too good to be true probably is worth the risk.
A. True
B. False A B
Section 1

19. Section 1-End

20. Section Preview
In this section, you will learn about the characteristics of various investments to help with your investments.
Section 2-Preview

21. Bonds as Financial Assets
A bond is a long-term investment, with the price determined by supply, demand, and the buyer’s assessment of repayment risk.
Section 2

22. Bonds as Financial Assets (cont.)
Governments and businesses issue a bond when they need to borrow funds for long periods.
Bonds have three main components:
Coupon rate
Maturity
Par value
Bond Ratings
Section 2

23. Bonds as Financial Assets (cont.)
To compare bonds, investors compute the bond’s current yield.
Interest received and price paid determines the actual current yield of each bond.
Bond ratings are published by Standard & Poor’s and Moody’s.
Bond Ratings
Section 2

24. Bonds as Financial Assets (cont.)
Bonds rated on
Basic financial health of the issuer
Expected ability to make future coupon and principal payments
Issuer’s past credit history
Bonds with higher ratings sell at higher prices than bonds with lower ratings.
Bond Ratings
Section 2

25. Which of the following rated bonds has the greatest risk?
A. BBB or Baa
B. CCC or Caa
C. CC or Ca A B C
Section 2

26. Financial Assets and Their Characteristics
Investments include CDs, bonds, bills, and IRAs, all of which vary in cost, maturity, and risk.
Section 2

27. Financial Assets and Their Characteristics (cont.)
Investors today have many choices.
Certificates of deposit—loans investors make to financial institutions
Corporate bonds—IRS considers interest and payments as taxable income.
Junk bonds—offer high rate of return due to exceptionally high risk
Section 2

28. Financial Assets and Their Characteristics (cont.)
Municipal bonds—issued by state and local governments, generally tax exempt
Government Savings Bonds—savings bonds are paper-based or paperless
Bonds can be purchased for investor’s heirs by designating a beneficiary.
Section 2

29. Financial Assets and Their Characteristics (cont.)
Treasury notes—U.S. government borrows funds for 2 to 10 years
Treasury bonds—U.S. government borrows funds for 10 to 30 years
Treasury bills—(T-bills) short term obligations, maturity of 4, 13, or 26 weeks
Individual Retirement Account (IRAs)
Section 2

30. Which of the following could you invest in today? A. Savings bonds
B. IRA
C. T-bill
D. 401(k) plan A B C D
Section 2

31. Markets for Financial Assets
Financial assets are grouped into different markets depending on their maturity and liquidity.
Section 2

32. Markets for Financial Assets (cont.)
Capital market—money is loaned for more than one year.
Money market—money is loaned for periods less than one year.
Financial Assets and Their Markets
Section 2

33. Markets for Financial Assets (cont.)
Primary market—original issuer can sell or repurchase a financial asset.
Secondary market—existing financial assets can be resold to new owners.
Financial Assets and Their Markets
Section 2

34. Under which financial market(s) would Disney bonds with maturity in 5 years be classified?
A. Money market
B. Capital market
C. Primary market
D. Secondary market A B C D
Section 2

35. Section 2-End

36. Section Preview
In this section, you will learn more about the equities, or stocks, that are traded in markets.
Section 3-Preview

37. Do you think investing is a wise decision? A. Yes B. No
Section 3

38. Stocks and Efficient Markets
Investors can purchase stock through stockbrokers on exchanges, through mutual funds, or through 401(k) plans.
Section 3

39. Stocks and Efficient Markets (cont.)
Equities or shares of common stock represent another financial asset for investors.
Ways to purchase equities
Stockbroker
Internet account with discount brokerage firm
A New York Stock Exchange Listing
Section 3

40. Stocks and Efficient Markets (cont.)
Mutual funds
Net asset value (NAV)
401(k) plan
A New York Stock Exchange Listing
Section 3

41. Stocks and Efficient Markets (cont.)
Value of stock depends on
Number of outstanding shares to be traded
Company’s profitability
Expectations of growth
Section 3

42. Stocks and Efficient Markets (cont.)
Efficient Market Hypothesis (EMH) states that each stock is analyzed constantly by many professional analysts. Any observations result in buying or selling of the stock immediately.
Portfolio diversification—investors offset losses of one stock with increases in other stocks.
How Much Money Will You Have at Retirement?
Section 3

43. A B C D Which is not an advantage of investing in a 401(k)?
A. Analysts on staff to monitor market conditions
B. Highly diversified
C. Employers typically match a portion of employee’s contribution
D. Penalties for early withdrawal A B C D
Section 3

44. Stock Markets and Their Performance
Several different stock markets exist, and each is organized in a different way
Section 3

45. Stock Markets and Their Performance (cont.)
Historically, stocks were traded at a stock or securities exchange.
New York Stock Exchange (NYSE) is the oldest exchange in the United States.
American Stock Exchange (AMEX) is also in New York City.
Section 3

46. Stock Markets and Their Performance (cont.)
Regional exchanges located in several big cities across the United States
Exchanges in major Cities throughout the world
Majority of stocks, however, are traded in an over-the-counter market (OTC).
The NASDAQ is the world’s largest electronic stock market.
Section 3

47. Stock Markets and Their Performance (cont.)
Stock performance can be monitored by several popular indicators.
Dow Jones Industrial Average (DJIA)
Standard & Poor’s 500 (S&P 500)
NASDAQ Composite
Section 3

48. Stock Markets and Their Performance (cont.)
Bull market—“strong,” prices moving up
Bear market—“mean” or “nasty” market with prices falling sharply
Section 3

49. Is it more advantageous to purchase stocks in a bear or bull market?
B. Bull
C. Does not matter A B C
Section 3

50. Trading in the Future
Financial assets can be bought and sold in the future as well as the present.
Section 3

51. Trading in the Future (cont.)
Most buying and selling takes place immediately, a spot market.
Exchanges that take place later in time are a futures contract.
Option—buyer has the right to cancel futures contract.
Call option—purchase
Put option—sell
Section 3

52. Section 3-End

53. Financial System Households and businesses invest their surplus funds to earn interest. Governments and businesses invest this money for economic growth.
VS 1

54. Investment Risk and Return Investors must weigh the risks of their investments against the returns they expect. Generally, the higher the risk of an investment, the higher the return investors require.
VS 2

55. Equities and Futures The riskiest investments consist of equities and futures. Equities can be purchased as individual stocks, or as a part of a mutual fund or 401(k) plan. Futures allow investors to speculate on future prices of commodities.
VS 3

56. VS-End

57. Figure 1

58. Figure 2

59. Figure 3

60. Figure 4

61. Figure 5

62. Figure 6

63. Figure 7

64. Sallie Krawcheck (1965– )
chief financial officer for Citigroup Inc., the world’s largest financial institution
ranked number 6 on Forbes’s top 100 of “The World’s Most Powerful Women” for 2006
Profile

65. DFS Trans 1

66. DFS Trans 2

67. DFS Trans 3

68. saving
absence of spending that frees resources for use in other activities or investments
Vocab1

69. savings
the dollars that become available for investors to use when others save
Vocab2

70. certificate of deposit
document showing that an investor has made an interest-bearing loan to a financial institution
Vocab3

71. financial asset
a stock or other document that represents a claim on the income and property of the borrower, such as a CD, bond, Treasury bill, or mortgage
Vocab4

72. financial system
network of savers, investors, and financial institutions working together to transfer savings for investment uses
Vocab5

73. financial intermediary
institution that channels savings to investors
Vocab6

74. nonbank financial institution
nondepository institution that channels savings to investors
Vocab7

75. finance company
firm that makes loans directly to consumers and specializes in buying installment contracts from merchants who sell on credit
Vocab8

76. premium
price paid at regular intervals for an insurance policy
Vocab9

77. pension
regular payments to someone who has worked a certain number of years, reached a certain age, or has suffered an injury
Vocab10

78. pension fund
fund that collects and invests income until payments are made to eligible recipients
Vocab11

79. risk
situation in which the outcome is not certain, but the probabilities can be estimated
Vocab12

80. sector
an area of the economy in which businesses offer the same or similar products or services
Vocab13

81. compensation
something, such as money, given or received as an equivalent for goods or services, injury, debt, or high risk
Vocab14

82. bond
contract to repay borrowed money and interest on the borrowed money at regular future intervals
Vocab15

83. coupon rate
stated interest on a corporate, municipal, or government bond
Vocab16

84. maturity
life of a bond or length of time funds are borrowed
Vocab17

85. par value
principal of a bond or total amount borrowed
Vocab18

86. current yield
bond’s annual coupon interest divided by purchase price; measure of a bond’s return
Vocab19

87. junk bond
bond that carries an exceptionally high risk of nonpayment and a low rating
Vocab20

88. municipal bond
bond, often tax exempt, issued by state and local governments
Vocab21

89. tax-exempt
not subject to tax by federal or state governments
Vocab22

90. savings bond
low-denomination, non-transferable bond issued by the federal government
Vocab23

91. beneficiary
person designated to take ownership of an asset if the owner of the asset dies
Vocab24

92. Treasury note U.S. government bond with a maturity of 2 to 10 years
Vocab25

93. Treasury bond U.S. government bond with maturity of 10 to 30 years
Vocab26

94. Treasury bill
short-term United States government obligation with a maturity of one year or less in denominations of $1,000
Vocab27

95. Individual Retirement Account (IRA)
retirement account in the form of a long-term time deposit, with annual contributions not taxed until withdrawn during retirement
Vocab28

96. capital market
market in which financial capital is loaned and/or borrowed for more than one year
Vocab29

97. money market
market in which financial capital is loaned and/or borrowed for one year or less
Vocab30

98. primary market
market in which only the original issuer can sell or repurchase a financial asset
Vocab31

99. secondary market
market in which financial assets can be sold to someone other than the original issuer
Vocab32

100. offset
to balance higher levels of risk with a larger payoff
Vocab33

101. presumed
taken for granted; supposed
Vocab34

102. equities stocks that represent ownership shares in corporations
Vocab35

103. stockbroker
person who buys or sells securities for investors
Vocab36

104. Efficient Market Hypothesis (EMH)
argument that stocks are always priced about right because they are closely watched
Vocab37

105. portfolio diversification
strategy of holding different investments to protect against risk
Vocab38

106. mutual fund
company that sells stock in itself and uses the proceeds to buy stocks and bonds issued by other companies
Vocab39

107. net asset value (NAV)
the market value of a mutual fund share found by dividing the net value of the fund by the number of shares issued
Vocab40

108. 401(k) plan
tax-deferred investment and savings plan that acts as a personal pension fund for employees
Vocab41

109. stock exchange
physical place where buyers and sellers meet to exchange securities
Vocab42

110. securities exchange
physical place where buyers and sellers meet to exchange securities
Vocab43

111. over-the-counter market (OTC)
electronic marketplace for securities not listed on organized exchanges such as the New York Stock Exchange
Vocab44

112. Dow Jones Industrial Average (DJIA)
measure of stock market performance based on 30 representative stocks
Vocab45

113. Standard & Poor’s 500 (S&P 500)
measure of stock market performance based on 500 stocks traded on the NYSE, AMEX, and OTC market
Vocab46

114. bull market
period during which stock market prices move up for several months or years in a row
Vocab47

115. bear market
period during which stock market prices move down for several months or years in a row
Vocab48

116. spot market
market in which a transaction is made immediately at the prevailing price
Vocab49

117. futures contract
an agreement to buy or sell at a specific date in the future at a predetermined price
Vocab50

118. option
futures contract giving a buyer the right to cancel the contract
Vocab51

119. call option
futures contract giving a buyer the right to cancel a contract to buy something
Vocab52

120. put option
futures contract giving a buyer the right to cancel a contract to sell something
Vocab53

121. prospects
potential or expectations
Vocab54

122. implication
something suggested to be naturally understood
Vocab55

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