E SSENTIAL S TANDARD 4.00
O BJECTIVE 4.03
TOPICS

Saving and investing basics

Saving and investing options

Evaluation factors for savings and investing
options
W HO B ORROWS M ONEY & W HY ?

Who Borrows Money?

Individual consumers

Businesses

Governments

Why Borrow Money?



Immediate purchase of goods and
services
Emergencies
Can buy now and pay later
H OW S AVING I NFLUENCES
E CONOMIC A CTIVITY

By making more money available to be used by
individuals, businesses, and the government the
economy grows

When borrowed money is spent, the demand for
goods and services is increased, which creates
more jobs and spending for workers
S AVINGS P LAN -R EVIEW

Putting money aside in a systematic order.

Ways to put money aside:

Regular deposit

Automatic deposit

Electronic funds transfer
W HAT IS S AVING & WHY SAVE ?

Putting away money for future use

Use for emergency situations

Use as backup for regular budget

Start fund for special purpose

Big ticket items-furniture, vacation, electronics

Down payment on car, house
A savings plan should be the first element of every budget!
As a consumer, you must be your own best advocate…take
care of yourself by planning for your future.
W HAT

IS I NVESTING ?
Investing is using savings to earn
more money for future financial
security
IF THE INVESTMENT SEEMS TOO GOOD TO
BE TRUE, WATCH OUT..IT PROBABLY
ISN’T TRU!
G OALS OF S AVERS & I NVESTORS

Main goals of savers and investors include

Earning immediate income and

Creating long-term growth
Brainstorm: What factors are critical to investors ?
What if I need my money immediately?
Is my money safe invested this way?
What other questions might be important?
F INANCIAL L IFE C YCLE
E VENTS A CTIVITY
People in certain age groups tend to have similar financial life
cycle needs. Plans change based on the individual’s situation.
Adult with
or
without
children:
25-34
High
school:
13-17
Young
adult: 1824
Retired:
65 and
older
Midlife:
45-54
Working
parent or
adult: 3544
Preretiremen
t: 55-64
How do you think financial planning
changes for each age group?
I NVESTMENT D ECISION
M AKING

Depends on these factors:
Time periods required


How long will $ have to
stay?

When is maturity date of
bond?


Risk tolerance of saver/investor



Yield

Is investor willing to accept
high/low risk level?
Process of spreading your
assets among several different
types of investments to lessen
risk.
Safety of investment


Diversity

Amount earned by the
investment as % of
investment
Liquidity


How safe is money
invested? Insured?
If investor needs money,
can he get cash quickly?
Tax considerations

Income tax deferred,
exempt, or deductible?
S AVINGS G ROWTH

Growth of savings is measured by

Simple interest

Compound interest

Compound frequency impacts savings growth rate

*

Interest –cost of money
Review Calculations of each type of interest
Interest EARNED is when others borrow your money and pay you.
You deposit $ at bank, bank loans $ to others, bank earns more
interest and can pay you interest for using your money
Interest PAID is when you borrow money from other s and pay them.
H OW IS S IMPLE I NTEREST
C ALCULATED ?
 Simple interest is the
amount of money paid to
saver on amount deposited
for a period of time.
 The more times that interest
is compounded the more
growth of savings.
 Simple interest is calculated
by using the formula
(P=Principal, R=Rate,
T=Time and I=Interest
Earned)
I
= P * R * T.
Linda borrowed $5000 for one year
@7% APR from Wachovia Bank.
How much interest will Linda owe
Wachovia for using their money?
How much will Linda have to pay
back in total?

$5000 principal

7% interest rate

1 year

Calculation of simple interest
$5000 x .07 x 1 = $350 interest
$5350 is owed to Wachovia to
pay back loan with interest
S IMPLE I NTEREST C ALCULATION

Full Year Calculation Example:

If time is in months, use fractional # of
months divided by 12 months in year.

Fran borrowed $5000 for 1 year from
Wachovia Bank at 12% APR. Calculate the
amount of interest she will pay.

If time is in days, use fractional # of days
divided by 365 days in year.

$5000 x 12% X 1 = $600

Multiple Year Calculation:

Fran had a 3 year simple interest loan on
$5000 at 12% APR.

Partial Year Calculation Examples:

If Fran paid back the loan early, how
much interest does she owe for the
following time periods?

A. 4 months?
$5000 x 12% x 3 = $1800


5000 x 12% x 4/12 = $200.00
B. 245 days?

5000 x 12 x 245/365 = $402.74
H OW IS C OMPOUND
I NTEREST C ALCULATED ?

Compound interest is the amount of
money paid to saver on money deposited
and interest previously earned for a
period of time.

A=P(1+r/n)nt.

video link: what is compound interest?
Compound interest is calculated by using
the formula (A=Amount, P=Principal
amount/the initial amount you borrow or
deposit, r=Annual rate of interest and
n=Number of times interest is
compounded)
S AVINGS G ROWTH
Simple interest
$1,000 at 10%
Compound interest
$1,000 at 10%
Year 1:
Year 1:
$1,000 * .10 = $100
$1,000 + $100 = $1,100
$1,000 * .10 = $100
$1,000 + $100 = $1,100
Year 2:
Year 2:
$1,000 * .10 = $100
$1,100 + $100 = $1,200
What would the value be at the end of
year 3?
Video clip: What is compound interest?
$1,100 * .10 = $110
$1,100 + $110 = $1,210
What would the value be at
the end of year 3?
Compound Interest Table
Year
1
Beginning Balance
9% Interest
Ending Balance
________
________
________
________
________
________
________
________
________
________
________
________
________
________
$3,000
2
3
4
5
Total Amount of Interest
________
W HAT WOULD HAPPEN IF THE INTEREST
WAS COMPOUNDED MORE THAN
ANNUALLY ?
 Interest would
accumulate quicker.
 Frequency of
compounding
increases interest
earned.
Which method of
calculating interest is best?
 If you are borrowing
money, and paying interest,
which type of loan do you want?
 Compound interest?
 Simple interest?
 If you are saving money,
and earning interest,
which type of loan do you want?
 Compound interest?
 Simple interest?
S AVING & I NVESTMENT
O PTIONS
Savings Plans
 Savings account
 Certificates of deposit (CDs)
 Money market account
 Available through banks, savings banks,
savings and loans, credit unions
 Very safe since insured through FDIC
Low risk = low interest rate
C ERTIFICATES OF D EPOSIT
(CD S )
 CDs require

a minimum deposit

money to remain deposited for a period of
time without penalties

penalties are assessed if money is
withdrawn before specified time (maturity
date)

Available through banks, credit
unions, savings banks, savings and
loans

Very safe

Earns slightly higher rate than savings
due to time commitment
S AVINGS A CCOUNTS

Savings accounts usually allows

Low or zero balance

Deposits or withdrawals anytime

Interest to be earned

Unlimited withdrawals without penalties
S AFETY AND I NCOME
I NVESTMENTS

Requires longer
commitment, can’t just
take money out of these
investments

Slightly higher risk =
increased return on
investment

US Treasury Securities

Conservative Corporate Bonds

State and Municipal Bonds

Income and Utility Stocks
*FACE VALUE: the amount of $
received at maturity (due date)
W HAT IS A M ONEY M ARKET
A CCOUNT ?

Money market account
requires a minimum
deposit

Usually withdrawals are
allowed without
penalties

Interest :

Earns higher interest
than traditional savings
account

varies based on various
government and
corporate securities.

paid reflects current
rate of interest paid in
money markets
video clip: money market accounts utube
C ATEGORIES OF I NVESTING
O PTIONS
Stocks
Riskier than financial
institution savings plans
Not insured
No guaranteed return
on investment (yield)
Bonds
Mutual Funds
and Exchangetraded Funds
Real Estate
Commodities
VIdeo link: What is difference between stocks & bonds?
Collectibles
S TOCK I NVESTMENTS

Stock- shares of ownership in a corporation

Two main categories of stock:


Preferred

Common
REVIEW: What are the major similarities and
differences between preferred and common
stocks?
S TOCK : P REFERRED VS .
C OMMON

Both:

Represent ownership in the corporation

May receive dividends

Are uninsured investment options

Higher risk

Opportunity for higher return
video clip- What's is a dividend?
P REFERRED VS . C OMMON
S TOCK
Preferred stock



•
Common stock

Required to be issued by all
corporations

Eligible for dividends

Common Stockholders:
Is not required issue
Pays dividends at a set rate before
common stockholders are paid
Is first in line when assets
distributed if corporation dissolves

Is less risky than common stock for
investor

have voting powers, 1 vote per
share of stock

Does not have voting rights

are invited to annual
stockholders meeting
G ROWTH I NVESTMENTS
 Income and Growth
Stocks
 Mutual Funds
 Real Estate
 Convertible Bonds
 Individual investor does
not control items in
mutual fund.
Video- what is Dow Jones Industrial average?
S PECULATION I NVESTMENTS
Speculative stocks- may be low
( HIGH RISK )
priced, but very big gamble

Options/Futures contracts

Commodities

Precious Metals and Gems

Speculative Stocks

Junk Bonds

Collectibles
Junk bonds- may be low priced,
very big gamble, sometimes
connected to illegal activities-fraud
C OMMODITIES /F UTURES
MARKET
Commodities market
video link- what are futures?
FACTORS T HAT A FFECT THE
R ATE OF R ETURN ON AN I NVESTMENT

Risk - Chance of loss

Rate of Return (yield)


Amount of money the investment earns

Compounding frequency is the interest
computed on the amount saved plus the
interest previously earned.
Liquidity


Resistance to inflation-Hedge against inflation


Ease with which an investment can be
changed into cash.
Will rate of return keep up with inflation?
Tax considerations

Some government securities are tax exempt
W HAT
IS LIQUIDITY ?
R ETURN
ON I NVESTMENT
Essential Question:
How do stock investors get a return on their investments?
DIVIDENDS

Corporations issue dividends to
stockholders

Dividends - % of profit distributed by
corporation as income to shareholders
CAPITAL GAINS

When an stock sells for more than its
original purchase price, the
stockholder has a capital gain

Can be capital loss if stock value<price
paid
Question
Number
A. Amount
B. Interest
Earned
Example
$100
$12
1
$500
$29
2
$300
$78
3
$7,000
$1,200
4
$560
$41
5
$12,000
$3,000
6
$56
$4.24
7
$300
$5.90
8
9
$12,300
$30
$450
$.90
$100
$3.50
10
Rate of Return
“Yield”
=B /A
12%
P/E Ratio
=A/B
W HAT ARE S TOCKBROKERS ?
video link: are you bullish or bearish?

Licensed professionals who buy/sell stock and bonds
at a set price for a commission

Stock exchanges

The stock exchange is where the trading of
securities take place

NYSE, Amex, Nikkei, London Exchange

http://www.nyse.com

Over the Counter (OTC) – traded through telephone
& computer, not a traditional stock exchange
S TOCK TABLE
A
B
52 Week
Sales
High
C
D
E
F
G
H
I
Vol
100s
High
Low
Last
Chg
6 1/2
-1/8
Low
Stock
Div
Yld
PE
12 1/8
8
AAR
.44
6.2
15
6
6 3/4
6 5/8
49 1/2
31 1/4
ACF
1.76
7.4
7
477
36 1/4
37 5/8
37
+3/4
AMF
1.36
6.7
7
133
17 1/2
17 1/2
17 1/2
-3/8
ARA
2
7
8
10
33 7/8
33 7/8
33
26 1/2
6 1/8
16
3 1/8
See stock table key on next slide for additional information.
-1
S TOCK TABLE K EY

A-Highest & lowest price of stock during past 52 weeks

B-Symbol used to represent the company & current dividend
expressed as dollars per share of stock

C-Dividend yield based on current selling price

D-Price-earning ratio

E-Number of shares exchanged on trading day. The amount is
listed in 100’s.

F-Highest price of a share on trading day

G-Lowest price of a share on trading day

H-Last price of traded stock

I-Amount of change from previous day closing price as fraction of a
dollar
S TOCK M ARKET


What is market value of stock?

the price for which a share of stock can be
purchased

Requires a willing buyer and willing seller
What factors to consider when selecting stocks

Economic Factors

Company Factors
T HE E CONOMIC S ELECTION
FACTOR
Factors that could influence
investors in selecting stock:

Economic

Inflation

Interest rates

Consumer spending

Employment
T HE C OMPANY S ELECTION
FACTOR

Factors that could influence
investors in selecting stock:

Company

Dividend yield

Dividend yield is the
amount paid per share for
stock.

Price-earnings ratio

Price-earnings ratio is the
relationship between a
stock’s selling price and its
yield.

Mergers

Lawsuits pending
Y IELD C ALCULATIONS

Yield is the % of gain (return) on an investment

Yield is usually calculated in the following way:
current value – original value = yield
original value

Current value=closing price for the day

Original price=price paid for stock

Yield=Interest earned

For example: a stock is bought at $40 and valued at $43:
$43 – $40
$40
yield = 7.5%
D IVIDEND Y IELD
C ALCULATIONS

Dividends also may be added to the calculation.

For example: a stock is bought at $40 and sold at $43, but
also earned a $2 dividend during that time:
$43 + $2 – $40
$40
yield = 12.5%
C ALCULATING R ATE
OF
R ETURN

Rate of Return = Total Interest Earned divide by Original
Deposit

Example:

If you deposited $100 in account that paid $6.18 interest for one
year. What is the rate of return?

$6.18/$100 = .0618 = 6.18%
B OND I NVESTMENTS


What is a bond?

A bond is a promissory note (loan) to pay
back a specified amount of money at a stated
rate on a specific date (maturity date).

Bonds are issued to lend funds to the
organization selling the bond.
Bond Investors are lenders (versus owners
-stockholders) as it relates to investing in a
company’s or government’s bonds
Y OU T UBE B OND I NFO
http://www.youtube.com/watch?v=ct3OsJacTSs
John Wayne
http://www.youtube.com/watch?v=e3ORoX0_iXs
B OND I NTEREST R ATES

How does stated interest rate impact the value of
a bond?

stated interest rate usually determines the price
investors want to pay for a bond.

If a bond’s stated interest rate is lower than
similar ones, investors will most likely want to pay
less for the bond.

If the stated interest rate is higher than similar
ones, the seller will most likely want to be paid
more than its face value.
M AIN C ATEGORIES OF B ONDS
Government bonds

Municipal bonds (munies)

Municipal bonds are issued by




local-city county and
state governments for public service projects
Uses-schools, airports, parks, libraries
Corporate bonds

Purchasing corporate bonds is a means of loaning money to a company.

Issued by corporations to finance growth

Blue chip vs. junk bonds
F EDERAL B ONDS


Federal government issues:

US Savings Bonds: Series EE , HH bonds, I bonds and

Treasury bills, notes & bonds (aka t-bill, t-note, t-bond).
The EE bond interest is paid once the bond is cashed
in on maturity date. The HH bond interest is paid
twice a year. Interest is taxed as income.

Treasury debt instruments

T-Bills – mature in 91 days to a year

T-Notes- mature in 1-10 years

T-Bonds- mature in over 10-30 years, large $ minimum
M UTUAL F UNDS


A diversified investment fund
set up and managed by
companies that receive money
from many investors

Companies’ major task is
assisting investors of mutual
funds

Companies assist investors of
mutual funds by studying
companies’ stocks and bonds,
and then buying a variety of
stocks and bonds to meet the
requirements of the fund
Mutual funds vary in purpose
M UTUAL F UND C ATEGORIES
Some examples of mutual fund options


Aggressive Growth Fund

Income funds

International funds

Sector funds

Bond funds

Balanced funds
Investor reviews personal goals and determines which
fund best meets goals
M UTUAL F UND C ATEGORIES

Aggressive-growth stock funds - look for quick growth, have a higher risk than other stock

Income funds - concentrate on stocks that pay regular dividends

International funds - invest in a variety of company stock from around the world

Sector funds - purchase stocks of companies in the same industry

Bond funds - concentrate in corporate bonds

Balanced funds - invest in both stocks and bonds
E XCHANGE - TRADED F UND
(ETF)
An exchange-traded fund (ETF) is a portfolio of
stocks, bonds or other investments that trade on
a stock exchange like regular stock.
O THER I NVESTMENTS

Real Estate - Land & anything attached


Examples: a house, condominium, a mobile home
park, or an office building
Personal property - property not permanently
attached to land

Examples: furniture, vehicles, electronic
equipment, clothing, jewelry
R EAL E STATE I NVESTMENTS

Advantages

Disadvantages

Tax benefits

Property taxes

Increased equity

Interest payments

Stability

Property insurance

Increase in value

Maintenance

Not liquid asset
Purchasing a home to live in provides stability, security
and pride of ownership
Investment in income producing property hoping the value of
Property increases while renter helps to pay the property cost
C OMMODITIES AND F UTURES

Agricultural products


Precious metals


grain, livestock
Gold, silver, other precious metals
Commodity investors usually agree to buy and sell for
an amount at a specified price in the future.

Examples include rice, cattle, and gold.
SPECULATIVE-VERY RISKY!!
check out the NYSE website:
O THER I NVESTMENTS

Collectibles

Collectibles are items collected over time that may increase in value

Very risky investment
Examples: stamp collections, coin collections, art work, antique
furniture, autographed items, Beanie babies, jewelry, baseball cards
* Antiques Roadshow, American Pickers
How do investors make investment
decisions?
Common evaluation factors for savings
and investments:

Investment Safety

Potential return on investment - yield

Liquidity

Taxes
S AFETY & R ISK

Can the investment lose value? If so, how
much?

Is the investment insured?

financial institutions insured by FDIC

International stocks uninsured - lose everything

Real estate - can’t insure value

Essential question for the investor or investment
counselor: How much risk tolerance does
investor have?

How much of a financial risk taker are you?
I MPACT
OF
L IFE C YCLE
How does risk tolerance in investing change with the stages of the life
cycle?

Young single adult

Adult with family dependents

Middle age

Retirees
P OTENTIAL Y IELD

Every investment should earn a reasonable yield

Yield aka rate of return, annual yield

Higher risk = higher yield

Lower risk = lower yield
Example: Federal government investments are safe;
therefore, the return is low. Riskier corporate
bonds may pay more.
L IQUIDITY

The ease with which investments can be quickly
turned into cash without losing its value

If investor needs money right away, liquidity is
important.

Ex: Real estate is a stable investment but is not a
liquid asset since it may be difficult to turn into
cash without reducing price.
TAXES


Investors consider tax consequences

Tax deferred (tax owed later)

Tax exempt (no tax owed)

Subject to tax breaks - tax deductions
Return is reduced by amount of taxes owed on
earnings

Example- a tax exempt government bond may
pay less interest, but yield may be higher
comparable taxable investment