C

HAPTER

M

ARKETS

11: F

INANCIAL

BW: Grab folders/3-hole punch packet from back Complete Page 97: Chapter Warm-up

11.1

  “What are benefits and risks of saving and investing?” Objectives to know:     How investing contribute to free-enterprise How the financial system brings together savers and borrowers Role of financial intermediaries in financial system Trade-offs among liquidity, return, and risk

I

NTRODUCTION  What are benefits/risks of saving/investing?

 Savings you deposit in a bank will grow w/little risk  Investing, while riskier, may earn larger return for same investment; or prove devastating.

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NVESTING AND

F

REE

E

NTERPRISE  Investing is essential to free enterprise system  Promotes economic growth and contributes to nations wealth   Deposits by people into savings are loaned to businesses Allows businesses to increase production  Leading to expansion/growth

T

HE

F

INANCIAL

S

YSTEM    Est.d so investments can take place Saving money= loaning it to other people Savers receive reciept as confirmation  Statements or bonds  Represent the claims, or financial assets, of the borrower  Financial systems bring savers/investors together    Fuels economic growth Savers include:  Households  Individuals  Businesses Investors include:  Businesses  Government

F

INANCIAL

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NTERMEDIARIES  Include banks and other financial institutions  Accept funds from savers to make loans to investors

S

HARING

R

ISK  Dealing w/financial intermediaries offers 3 advantages  Sharing Risk   Providing Information Providing Liquidity  Sharing Risk  Diversification allows you to spread out investments and not “all eggs in one basket”   Sharing risk helps ward against losing everything on one bad investment Types  Read/answer 11.2 Chart (pg. 280)

P

ROVIDING

I

NFO AND

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IQUIDITY  They provide both lenders/borrowers vital data that saves them the time/money of gathering selves.

 EX: Portfolios or prospectus.

 Also allows people to get access to their money with they need it, depending on how liquid it is.

R

ETURN AND

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ISK    Some investments, like CDs, are very safe b/c insured by govt.

Investing in a new business is far riskier, but can have larger gains General info:   Higher potential return = higher the risk Evaluating investments try to balance risks with expected rewards

L

ESSON

C

LOSING  98, 54, and 58 in workbook    58 will have a little time for BW tomorrow Watch Case Study Video Get marker and Check Multiple Choice of test

C

HAPTER

11.2

BW: Finish S.1 Quiz: Answer Case study on pg.281

C

HAPTER

11.2

 “Why are bonds bought and sold?”  Objectives to know  Characteristics of bonds as financial assets    Different types of bonds Characteristics of other types of financial assets 4 different types of financial asset markets  Key Terms (3)  http://www.pearsonsuccessnet.com/snpapp/iText/prod ucts/0-13-369833 5/Flash/Ch11/Econ_OnlineLectureNotes_ch11_s2.swf

I

NTRODUCTION  Why are bonds bought and sold?

 Bonds are sold by govts and/or corporations to finance projects  Bonds offer a higher return than savings accounts, although generally riskier than savings accounts

B

ONDS AS

F

INANCIAL

A

SSETS   Bonds are loans that represent debt that the seller must repay to the investor 3 Basic components    Coupon Rate: interest rate that bond issuer will pay Maturity: Time which payment to holder is due Par Value: Amount paid to holder at maturity

D

ISCOUNTS FROM

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AR  Investors can not only earn money from the interest on their bonds but also by buying bonds at a discount  Read and Answer 11.3

B

OND

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ATINGS  In order to decide which bonds to buy, investors can check bond quality through independent firms that issue credit ratings  Rate bonds on the issue’s financial strength, ability to make interest payments, and ability to repay principle when bond matures  High grade, such as AAA, means safe investment

A

DVANTAGES V

D

ISADVANTAGES

Advantages

  Once bond is sold, coupon rate remains same Company does not have to share profits w/holders if doing well

Disadvantages

  Company must make fixed interest payments and cannot change its interest payments Firm’s bonds may be given a low bond rating and be harder to sell when not doing well

T

YPES OF

B

ONDS

Savings Bond

 Low denominations   Issued by U.S. govt.

Govt. pays interest

Treasury Bonds, Bills, Notes

  U.S. treasury issues bonds, bills, and notes Among safest investments

Municipal Bonds

 State/local govt.s issue bonds to finance projects  Highways, libraries, parks, and schools  Relatively save and attractive long-term investments

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ORPORATE AND

J

UNK

B

ONDS  Corporate bonds are issues by a corporation to raise money to expand business  Moderate risk, bc investors depend on corporation  Junk bonds  High risk and potentially high return  Investors face strong possibility that some of firms may default on their debt

O

THER TYPES OF

F

INANCIAL

A

SSETS

Certificates of Deposit

 CDs through banks  Lend out funds deposited in CDs for a fixed amount of time

Money Market Mutual Funds

  Investors receive higher interest on a MMMF than savings account Higher interest b/c not covered by FDIC insurance

F

INANCIAL

A

SSETS

M

ARKETS   Bonds, CDs, and MMMFs are traded on financial asset markets One way to classify markets is according to length of time funds are lent   Capital Markets  Money is lent for periods longer than a year (CDs) Money Markets  Money is lent for periods of a year or less  Include treasury bills and money market mutual funds

F

INANCIAL

A

SSETS

M

ARKETS  Markets may also be classified according to whether or not assets can be resold to other buyers   Primary Markets  Financial assets can be redeemed only by original holder  Savings bonds and small CDs Secondary Markets  Financial assets can be resold, which provides liquidity to investors

L

ESSON

C

LOSING  Pearson Video  How Economy Works  Exit Card Questions   What are 2 ways of classifying financial asset markets?

What type of bond might have been used to fund construction of your school?

 HW:  Workbook: Pgs. 99,, 61, 65  65=Quiz, little time to work on tomorrow

C

HAPTER

M

ARKETS

S

ECTION

3 11: F

INANCIAL Finish up S.2 Quiz

11.1

 “How does the stock market work?”  Objectives to know  Benefits/risks of buying stocks    How stocks are traded How stock performance is measured Great Crash of 29’ and recent events  Key Terms (3)  http://www.pearsonsuccessnet.com/snpapp/iText/prod ucts/0-13-369833 5/Flash/Ch11/Econ_OnlineLectureNotes_ch11_s3.swf

I

NTRODUCTION  How does the Stock Market Work?

   Stock, or shares in company, are bought/sold on the stock market Brokers help individuals/businesses invest their money in the stock market Investors keep track of the stock market by checking local paper.   When doing well people may see large returns on investments Vice-versa when market doing poorly

B

ENEFITS OF

B

UYING

S

TOCK   In addition to selling bonds, corporations can raise money by selling stock shares Benefits of buying stocks:   Dividends    Sharing in part of firms profits Usually paid four times/year (quarterly) Larger the profit of company, larger the dividend Capital Gains   Selling the stock for more than paid for it Loss=selling for less (you’ve all seen both in game)

T

YPES OF

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TOCK  Stocks may be classified by whether or not it pays dividends   Income stock  Provides investors w/income by paying dividends Growth Stock  Pays few or no dividends and earnings are reinvested in the company

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YPES OF

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TOCK   Classified by whether or not the holder has a voice in company  Common stock   Holders are voting members of the company Preferred Stock  Holders are nonvoting members of company Common Stock owners may initiate a stock split when stock price becomes to high.  Berkshire did this in game!

R

ISKS OF

B

UYING

S

TOCK  Buying stock is risky   B/C dividends are determined by how well a company is doing B/C of laws of bankruptcy  Stocks end up riskier than bonds since bondholders are paid before stockholders in case of company bankruptcy

H

OW

S

TOCKS ARE

T

RADED  If you want to buy stock contact a stock-broker  Gives advise on stocks to guy  You buy stocks on a secondary market known as a stock exchange   NYSE is country’s largest and most powerful  Handle top stock/bond exchanges in U.S. and world Nasdaq is 2 nd largest securities market and largest electronic market

F

UTURES AND

O

PTIONS    Futures are contracts to buy/sell commodities at a particular date in the future at a specified price today  Grain and livestock Options are contracts that give investors the choice to buy or sell stock and other financial assets Most people who buy stock hold their investment for a significant period  Day traders trade stocks daily, which is very risky

M

EASURING

S

TOCK

P

ERFORMANCE  Bull Market  When stock market rises steadily or a period of time  Bear Market  When stock market falls or is stagnant for period  Dow Jones Industrial Average  Measure stock performance   Represents the average value of a set of stocks Reported in points

G

REAT

C

RASH

: R

EAD

G

REAT

C

RASH

: 296

   In the 1920s, stock market was soaring  Speculation and buying on margin (credit) led to crash that killed economy Dow fell steadily in Sept. 1929  People began selling shares   Companies couldn’t keep up.

Oct. 1929 16.4 million shares sold and market crashed Aftermath: Crash led to Great Depression  Now people saw stocks as risky and avoided them  By 1980s, w/new mutual funds Americans gained confidence  Crashed again in 1987 but recovered much faster

S

CANDALS AND

M

ARKET

T

ODAY  By 1990s people began to buy more stocks  Investors began to worry that companies could not make enough money to justify high priced stocks   Enron scandal causes investors to question knowledge of companies investing in 2008, stock markets begins fall  Causes major economic crisis in U.S.

L

ESSON

C

LOSING  Pearson Videos   Visual Glossary Action Graphs  Case Study Video  Workbook  All unfinished 100-104  Section quizzes   Quiz Tuesday Sub Monday: Will give you practice Test to take  I will not provide answers to it though.