interest rates

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Economics
Personal Finance
Personal Finance Economics SSEPF1 The
student will apply rational decision making
to personal spending and saving choices.
a. Explain that people respond to positive and
negative incentives in predictable ways.
b. Use a rational decision making model to
select one option over another.
c. Create a savings or financial investment
plan for a future goal.
SSEPF1a. Explain that people respond to positive and
negative incentives in predictable ways.
• Acting as consumers, producers,
workers, savers, investors, and
citizens, people respond to
incentives in order to allocate their
scarce resources in ways that provide
the highest possible returns to them.
SSEPF1 a. Explain that people respond to positive
and negative incentives in predictable ways.
(continued)
• Small and large firms, labor unions and
educational, and other not-for-profit
organizations have different goals and face
different rules and constraints. These goals,
rules, and constraints influence the benefits
and costs of those who work with or for those
organizations, and, therefore, their behavior.
Question: Why do people respond to positive
and negative incentives in predictable ways?
• Positive and negative incentives make people
predictable because they are designed to
motivate or discourage people from doing
things. (people seek positive outcomes and
avoid negative ones.) For example, people
generally do what is required at their jobs to
stay employed.
SSEPF1b. Use a rational decision making
model to select one option over another.
• Steps in the rational decision-making model.
– Define the problem or situation.
– Identify criteria for process and results.
– Consider all possible solutions.
– Calculate consequences against likelihood of
satisfaction.
– Choose best decision.
SSEPF2 The student will explain that banks
and other financial institutions are businesses
that channel funds from savers to investors.
a. Compare services offered by different
financial institutions.
b. Explain reasons for the spread between
interest charged and interest earned.
c. Give examples of the direct relationship
between risk and return.
d. Evaluate a variety of savings and investment
options; include stocks, bonds, and mutual
funds.
SSEPF2a. Compare services offered by
different financial institutions.
SSEPF2a What Banks and Credit
Unions offer (continued)
•
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•
•
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Loans
Credit accounts
Savings accounts
Checking accounts
Certificates of deposit (CDs)
• instant credit companies, title loans, payday loan
companies --- offer quick money at high rates.
•
Types of Financial Loans and Associated Terms
•
1. MORTGAGE (HOME) LOAN: Since the cost of a house is often quite high, many people
receive a loan called a mortgage to pay for a house. Mortgages are loans that are usually
paid out over a considerable length of time, such as ten, fifteen, or thirty years. Most
mortgages are fixed; the interest rate is set at the time of the loan and does not change.
The fixed rate allows households to know how much payments will be for the life of the loan;
if the loan was at a variable rate, fluctuations in the interest rate might cause financial
turmoil for the household.
•
2. CONSUMER LOAN: Sometimes people just need a little extra money. The money might be
used to buy a new car, for some type of home repair, or just to throw a really, really great
birthday party. Consumer loans are not as large as most home loans, and they often have an
interest rate that is a little higher than a home loan. Also, the duration of most of these loans
is relatively short, averaging around 1-5 years in length.
•
3. CREDIT CARD: Credit cards allow people to purchase goods and services easily. When
traveling, you can carry these strips of plastic instead of a great deal of currency that could be
stolen. Although credit cards are convenient, consumers pay for this convenience with high
interest rates. Interest rates around 18% are not uncommon, and the rates are variable, so
consumers often find themselves holding a large amount of high-interest credit card debt if
they are not careful with their spending habits. Interest on a credit card typically accrues on a
monthly basis.
•
4. CREDIT UNIONS: A non-profit financial institution that is owned and operated entirely by
its members. Credit unions provide financial services for their members at discounted rates.
Services include savings, checking, and lending. To join a credit union, a person must
ordinarily belong to a participating organization, such as a college alumni association, labor
union, or large company.
SSEPF2b. Explain reasons for the spread
between interest charged and interest earned.
What is the difference between interest
charged and interest earned?
– Interest charged- money you have to pay for
borrowing money
– Interest earned- money you are paid for keeping
your money with the bank
SSEPF2b. Explain reasons for the spread between
interest charged and interest earned. (continued)
• There is a spread between interest earned and
interest charged because banks make money
off of charging interest on loan to people….
and they have to have to limit the amount the
pay out in interest to maintain profit.
((Banks also used deposited funds to invest and
loan out))
SSEPF2c. Give examples of the direct
relationship between risk and return.
• What is the relationship between risk and return?
– Higher the risk, higher the gain, higher the loss.
– Lower the risk, lower the gain, lower the loss.
• Stocks are the most risky,,,but also the most
profitable.
• While Government Bonds are not risky at all but
do not profit fast or at an extremly high rate.
SSEPF2c. Give examples of the direct relationship
between risk and return. (continued)
There are five basic types of investments.
• They are listed below from LEAST RISK to MOST RISK.
•
•
•
•
•
1. U.S. GOVERNMENT BONDS: When you invest in a US Government bond, you are loaning
the government a sum of money in return for income. In return for the loan, you get an
interest rate payment and a promise to pay the loan back. And because the government
gives you a promise to pay it back, a bond is still considered a conservative investment.
2. CERTIFICATES OF DEPOSIT (CDs): An investment whereby you lend a bank a set amount of
money, which is then invested insecurities or used for loans. For the use of your money, you
are ensured the return of your principal at maturity and interest over the life of the CD. CDs
are ensured by the Federal Depositor’s Insurance Corporation (FDIC). CDs work like bonds.
3. CORPORATE BONDS: Same as above, except a company issued the bond instead of the
government.
4. MUTUAL FUNDS: A professionally managed, DIVERSIFIED investment that enables
investors to pool money with other investors. A diversified investment such as a mutual fund
may reduce risk since not all your ―eggs‖ are in one basket.
5. STOCKS: Types of securities representing ownership in a corporation. Stocks carry the
most risk because if a company begins to lose business, or investors lose faith in the
company, then the stock value decreases and the investor lose part or all of the original
investment.
SSEPF2c. Give examples of the direct relationship
between risk and return. (Continued)
SSEPF2d. Evaluate a variety of savings and
investment options; include stocks, bonds, and
mutual funds.
• What are stocks, bonds and mutual funds?
– Stocks- dividends or ownership in a corporation
– Bonds- promise of payment on borrowed money
with interest. These are issued by the gov.
– Mutual funds- stock grouping/investment
grouping- investments that places money and risk
in multiple areas (or stocks)
– (detailed in slide 14)
• SSEPF3 The student will explain how changes
in monetary and fiscal policy can have an
impact on an individual’s spending and saving
choices.
• a. Give examples of who benefits and who
loses from inflation.
• b. Define progressive, regressive, and
proportional taxes.
• c. Explain how an increase in sales tax affects
different income groups
SSEPF3a. Give examples of who benefits and
who loses from inflation.
Groups that Benefit from Inflation:
1. People that owe the banks money.
2. Collectors of rare items because they become
even more valuable.
3. People that rent a house or apartment with a
fixed lease.
4. Professionals that sell much needed services
because they can set outrageous rates….ex:
doctors, lawyers.
SSEPF3a. Give examples of who benefits
and who loses from inflation. (continued)
Losers:
• 1. Savers---people saving money the value of it is
getting lower. ((they could have spent it…oh well))
• 2. People on fixed incomes– oh no…I don’t have
enough $ to meet my needs because gas is to
X!?%#[email protected]# high.
• 3. Lenders:: banks now the money the have loaned
out is losing value as they are getting paid pieces of
it.
• 4. Landlords: Now I need to raise the rent, but the
tenants are on a fixed lease…also my tenants may
not be able to afford paying more.
SSEPF3b. Define progressive,
regressive, and proportional taxes.
• What are the kinds of taxes?
– Proportional- everyone pays the same %
regardless of income
– Regressive- higher the income, lower the % paid in
taxes
– Progressive- higher the income, higher the % paid
in taxes
SSEPF3c. Explain how an increase in sales
tax affects different income groups
High income groups are affected the most by
sales taxes because they spend more money.
Ex..more expensive house=higher sales
tax….more expensive car=higher sales tax…more
clothes…etc.
Lower income groups are less affected because
of the limited amount of spending in the 1st
place.
SSEPF3c Explain how an increase in sales
tax affects different income groups.
(continued)
• Higher incomes pay more sales tax – they buy
more.
• Lower income pays less sales tax – they buy
less.
•
• SSEPF4 The student will evaluate the costs
and benefits of using credit.
• a. List factors that affect credit worthiness.
• b. Compare interest rates on loans and credit
cards from different institutions.
• c. Explain the difference between simple and
compound interest rates.
SSEPF4a. List factors that affect credit
worthiness.
SSEPF4a List factors that affect credit
worthiness. (continued)
• What are the factors that affect credit
worthiness?
– Credit score
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Income
Payment history
Savings
Number of loans
Assets
Property
Investments
Amount of debt
SSEPF4c. Explain the difference between simple and
compound interest rates.
INTEREST RATES: The interest rate is the percentage
amount of payment by borrowers to the lender. It
can also be the amount paid to bank customers by
the bank.
• SIMPLE interest rate= determined annually with
the original loan amount.
– Simple interest is only on the principal
– Simple - $2000 at 3% quarterly 2000x.03=$60x4=$240
Compound interest is interest on the
principal and other interest.
–Compound - $2000 at 3% quarterly
2000x.03=60 ;
–2060x.03= 61.80 ;
– 2121.80x.03= 63.65 ;
– 2185.45x.03= 65.56=
–$2251.01 balance after compounded 4
times.
Types of Insurance and Associated
Terms
• Insurance is a necessity in today’s society. Life is very
unpredictable, from death to job-loss- Insurance is a way to
safe guard ourselves and those around us. The following are
the most common types of insurance:
• 1. DISABILITY INSURANCE: these policies provide financial
support in the event the policyholder is unable to work
because of disabling illness or injury. It provides monthly
support to help pay such payment as mortgages and credit
cards.
Insurance (continued 2)
• 2. HEALTH INSURANCE: these policies will
often cover the cost of private medical
treatments. This is the most important of all
insurance types. Without this, one trip to
the emergency room for a broken arm
could cost in excess of $2,000. A major
accident could cost in excess of $50,000.
Insurance (continued 3)
• 3. LIABILITY INSURANCE: liability coverage which protects the
insured in the event of a claim brought by someone who slips and
falls on the property; automobile insurance also includes an aspect
of liability insurance that indemnifies against the harm that a
crashing car can cause to others' lives, health, or property.
•
The protection offered by a liability insurance policy is twofold: a
legal defense in the event of a lawsuit commenced against the
policyholder and payment on behalf of the insured with respect to
a settlement or court verdict.
•
Liability policies typically cover only the negligence of the
insured, and will not apply to results of willful or intentional acts
by the insured.
Insurance (Continued 4)
• 4. LIFE INSURANCE = benefits to someone due to a death of
another. Life insurance policies often allow the option of having the
proceeds paid to the beneficiary either in a lump sum cash
payment or an annuity. (Annuities provide a stream of payments
that have to be managed.)
• Types of Life Insurance:
• Term Life: provides a benefit in the event of death for a certain
term of years (EX: 20 or 30 years). After which the policy lapses and
the person is no longer covered in the event of death. The person
will have to renew the policy later in life. One cannot withdraw
money put into a term life policy.
• Whole Life: the insurance policy does not end and the premiums
paid each month gain value (like a savings account) so you can
withdraw from it in later years. The premiums are more expensive
than term life, but the policy has no end and you have access to
extra cash later in life.
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