Transcript Bonds & Other Financial Assets

Credit Cards & Debt
Topic 2 Day 1
What is a Credit Card?
Cards that entitle their holders to buy
goods & services based on the
cardholder’s promise to pay for these
goods & services
Factors Considered when
Granting Credit
Income; ability to pay
Debt
Bill Payment or Credit History
Credit Card Facts
There are more than 292 million credit cards in use in
the United States
76 percent of undergraduates have credit cards, and
the average undergrad has $2,200 in credit card.
Most Americans have credit card debt, and the average
American owes more than $9,000 to credit card
companies.
Financial Jargon
let's go over some important
terms you'll encounter in creditcard brochures or discussions
with potential lenders:
<<
•Annual fee - A flat, yearly charge similar to a
membership fee.
•Finance charge - The dollar amount you pay to
use credit. Besides interest costs, this may
include other charges such as cash-advance fees,
which are charged against your card when you
borrow cash from the lender.
•Grace period - A time period, usually about
25 days, during which you can pay your
credit-card bill without paying a finance
charge.
•Annual percentage rate (APR) - The yearly
percentage rate of the finance charge
•Interest rates on credit-card plans change over time.
•Fixed rate - A fixed annual percentage rate of the finance
charge
•Variable rate - Prime rate (which varies) plus an added
percentage (For example, your rate may be PR + 3.9
percent.)
•Introductory rate - A temporary, lower APR that usually
lasts for about six months before converting to the normal
fixed or variable rate (This is a hot topic -- more about it
later.)
http://www.cnn.com/video/#/video/politics/2007/12/04/cafferty.file.debt.cnn?iref=videosearch
http://www.cnn.com/video/#/video/bestoftv/2008/01/11/me.howard.single.mom.tips.cnn?iref=videosearch
http://www.cnn.com/video/#/video/business/2009/01/06/bts.velshi.calls.cnn?iref=videosearch
http://www.cnn.com/video/#/video/bestoftv/2008/01/29/howard.debt.cnn?iref=videosearch
Other Types of Credit
Outside of credit card, there are
many other ways to obtain credit.
Both public and private lenders
offer loans with varying rates of
interest.
Gen Debt?
Average credit card debt for people
under age 35:
1998: $1,879
2000: $2,748
2006: $8,000
Pay it off? It will cost you $400 per
month for the next 5 years.
Mortgages
When buying a house, most people
choose to take out a mortgage.

Length of mortgages range from 10 to 40
years.
 20- and 30- year mortgages are most popular.

Mortgage interest rates are largely
dependent on the strength of the national
economy.
http://www.cnn.com/video/#/video/business/2009/02/03/dcl.cr.mortgage.debt.cnn?iref=videosearch
http://www.cnn.com/video/#/video/bestoftv/2008/10/13/soros.financial.crisis.1.cnn?iref=videosearch
Student Loans
Nearly half of all college students
receive some form of federal
financial aid.
Over two thirds of all student loans
are lent by the government.
http://www.fafsa.ed.gov/index.htm
Student Loans
Most student loans are have very low
interest, around five percent.
Loans are determined based on need.
Repayment of loans begins when the student
has finished or stopped attending college.
Student loans can sometimes be forgiven for
people entering the military and careers in
education and public service.
Gen Debt?
Ave. Student Loan Debt:
1994:
•Undergraduate: $15,700.
2007:
•Undergraduate: $30,000
•Graduate/Professional Degrees: $30,000$114,000
1994: 46% of graduating seniors took out
college loans.
2000: 70%
Average Loan Debt Per Student
$30,000
$25,000
$20,000
$15,000
Loan Amount
$10,000
$5,000
$0
1987
1991
1997
2002
Average Annual Tuition
http://www.cnn.com/video/#/video/bestoftv/2009/04/28/nbnb.student.loans.cnn?iref=videosearch
Bonds & Other
Financial Assets
Topic 2 Day 2
What are they?
pay investor a fixed amount of interest
at regular intervals for a fixed amount
of time
Three Components of Bonds
interest rate that the bond issuer will
pay the bondholder
time at which payment to the
bondholder is due
amount that an investor pays to
purchase the bond & that will be repaid
to the investor at maturity
Not all bonds are held to maturity
Some may be bought or sold, & their
price may change
Yield is the annual rate of return on the
bond if the bond were held to maturity
Advantages to the Issuer
relatively safe
Once the bond is sold, the coupon rate
doesn’t change
do not own a part of the company
Disadvantages
Company must make fixed interest
payments, even in bad years when it
does not make money
firm maintains financial health, its
bonds may be downgraded to a lower
bond rating & thus may be harder to
sell unless they are offered at a
discount
Savings Bonds
Low denomination bonds issued by the
U.S. government
help pay for public works
no risk of default
Treasury Bonds, Bills, & Notes
U.S. Treasury Department
Offer different lengths of maturity
Safest investments in terms of default
risk
Municipal Bonds
finance such improvements as
highways, state buildings, libraries,
parks, & schools
Interest paid on these is not subject to
income taxes at the federal level or
issuing state
Corporate Bonds & Junk
Bonds
Issued by corporations to help raise
money to expand their businesses
Junk Bond: high-yield securities, are
lower-rated, & potentially higher paying
Financial Asset Markets
Classified according to the length of
time for which bonds are lent
Capital Markets

Money is lent for periods longer than a
year
Money markets

Money is lent for periods of less than a
year
The Stock Market
Saving & Investing
Topic 2 Day 3
Stock Shock:
Understanding
the Stock Market
You hear
about it any
time it
reaches a
new high or
a new low…
and you also hear about it
daily in statements like "The
Dow Jones Industrial Average
rose 2 percent today, with
advances leading declines by
a margin of..."
The front of the New York
Stock Exchange
The NYSE is a supermarket for
stocks. The NYSE can be thought
of as a big room where everyone
who wants to buy and sell shares
of stocks can go to do their
buying and selling.
Stocks in publicly traded
companies are bought and sold
at a stock market (also known as
a stock exchange). The New York
Stock Exchange is an example of
such a market.
Risk and Return
Return is the money an investor receives above
and beyond the sum of money initially invested.
Return and Liquidity
Savings accounts
have greater
liquidity, but in
general have a
lower rate of
return.
Certificates of
deposit usually
have a greater
return but liquidity
is reduced.
Return and Risk
Investing in a friend’s
Internet company
could double your
money, but there is the
risk of the company
failing.
In general, the higher
potential return of the
investment, the
greater the risk
involved.
Other Types of Financial
Assets
Money Market
Certificates of Deposit
Mutual Funds
Certificates of
deposit (CDs) are
available through
banks, which use the
funds deposited in
CDs for a fixed
amount of time.
CDs have various
terms of maturity,
allowing investors to
plan for future
financial needs.
Money market mutual
funds are special types
of mutual funds.
Investors receive
higher interest on a
money market mutual
fund than they would
receive from a savings
account or a CD.
However, assets in
money market mutual
funds are not FDIC
insured.
What is the FDIC?
Ensures customer deposits if a bank
fails
Insure losses up to $100,000
What is the Federal Reserve?
Influences & controls the money supply
The Flow of Savings and
Investments
Financial intermediaries accept funds from savers
and make loans to investors.
Financial Intermediaries
Savers make deposits to…
Financial Institutions that make loans to…
Commercial banks
Savings & loan associations
Savings banks
Mutual savings banks
Credit unions
Life insurance companies
Mutual funds
Pension funds
Finance companies
Investors
Diversification
Spread your money around to
reduce the risk of losing your
entire investment
Mutual Funds are the best at
this, since the investment can
buy shares of up to 120
different companies
Investment
Considerations
1.Risk v. Return, High
Risk= High Return
2.Objectives: College,
Retire, age
(1) Hi-Lo. The first column is
the highest and lowest prices
at which the stock traded in
the past year (52 weeks). In
our example, the highest price
was $47 and the lowest was
$37
(2) Company Symbol. The second
column is the abbreviated name of
the firm issuing the stock. The
symbol of the company stands next
to the abbreviated name. In our case,
it is "Z." This symbol is sometimes
referred to as the company's "ticker
symbol."
3) Dividends. Dividends are the
amount a company pays to its
stockholders. The third column is the
annual dividend paid per share. In our
example, it is $2.30
4) Volume. The fourth column, titled "VOL," lists
the volume of shares (in hundreds) that were
traded that day. In our example, on August 23,
1999, 33,500 shares were traded by XYZ.
Volume may give you an indication on the size
of the breadth of the market for a company's
shares
5) The YLD column approximates the dividend
yield. The dividend yield is the current return
on invested capital. We can use it to compare
dividend returns for firms that have different
stock prices. We derive the dividend yield by
dividing the current dividend by the closing
stock price. In our case the dividend yield is
5%, calculated as follows:
Dividend
$2.30
= 5.43%
Price (8th column)
$42.375
The sixth column is the price to earnings (P/E)
ratio. The P/E ratio compares the price per
share to the earnings per share. It shows how
much an investor is willing to pay for $1 of
current earnings per share (EPS). The P/E ratio
is calculated by dividing the price by the
earnings per share (EPS). Applying this formula
to our example we get the following:
Price (8th column)
$42.375
= 10
(the stock is selling for 10X the earning ratio)
EPS
$4.23
(7) The seventh column, titled Hi-
The seventh column, titled Hi-Lo, represents the
highest and lowest prices at which trades were
completed during the trading day. In our
example, the high was at $43 and the low was at
$40
-
The eighth column, titled Close, is the last price
at which a trade was made during the trading
day. In our example it is $42 3/8 ($42.375).