Activator Chapter 11
What would be the disadvantage of
putting your savings under your
mattress?
2. What are some places that you could
invest your money that might cause it
to gain interest/grow.
1.
Money makes money. And the money
that money makes more money. —
Benjamin Franklin
Chapter 11 – Saving and Investing
 Saving – the absence of spending
 Savings – dollars that become
available to borrowers/investors
 Financial Investment – The action
or process of investing money for
future profit or material result
 Financial System – the institutions
that allow the transfer of money
between savers and borrowers
 Financial Assets – a claim on the
property or income of a borrower
 Savings account, certificate of
deposit (CD), government or
corporate bond
Financial Institution

Financial Institutions – entity that channel funds from people who have extra money
(savers) to those who do not have enough money to carry out a desired activity
(borrowers).
 Banks, credit unions, finance companies, life insurance companies, pension funds, etc.

Mutual Funds – sell shares, pools money from investors into a portfolio of investments
(stocks, bonds, commodities, etc.) to reduce risk

Diversification – strategy of spreading out investments to reduce risk
 “don’t put all your eggs in one basket”
Risk and Return
 Risk – the level of uncertainty in any
financial investment
 Risk-return trade-off – potential return
rises with an increase in risk
 Low risk, low return (bonds, savings
accounts, certificates of deposit, fixed
interest accounts, etc.)
 High risk, high potential returns (stocks,
real estate, art and collectibles, etc.)
Risk vs. Return
The
Bond
Market
Bond – IOU, certificate of indebtedness that specifies
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the obligations of the borrower to the holder of the
bond
 Corporate, municipal, U.S. Federal
Principal – (par value) initial amount borrowed , $1000
Rate – the interest rate that the bond issuer will pay to
the bondholder
 Interest – rate at which the bond will be repaid, 6%
Term – length of time until the bond matures, 30 years
Date of maturity – time at which the loan will be repaid,
10-2030
Credit risk – the risk or loss by an investor arising from
a borrower that does not pay some interest or principal
Default – failure to repay a borrowed loan
Municipal bonds – bonds offered by local or state
government
Federal bonds – U.S. Treasury bonds are offered by
the federal government
Corporate – bonds offered by firms
What is a bond video
Simple and Compounding Interest
 Simple Interest - calculated only on the
principal amount.
 Formula for Simple Interest = P x R x T
 Principal = P
 Interest rate = R
 Time = T
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Compound interest – Earning interest on
the principal PLUS SIMPLE NTEREST.
Both Interest and principal earn interest

“The most powerful force in the
universe is compound interest”
Albert Einstein n
Simple vs. Compounding Interest
The Stock Market
 Stock – partial ownership of a firm
through the purchase of a share
 Disney, Microsoft, Babies ‘r Us, etc.
 Shares – issued to represent a portion
of stock in the company
 1 share of a company, company has
1,000,000 shares, you own
1/1,000,000 of the business
 Difference between Stocks and Bonds
 Owner of shares in a company is a
part owner of the company
 Owner of bonds is a creditor of the
company/institution
 Stockholders enjoy benefits of
profits while bondholders receive
interest on their bonds
 Stocks have a higher risk than
bonds, but a potentially higher return
The Markets for Insurance
 One way to deal with risk is to buy insurance
 Auto, fire, health, dental, annuity, flood, car etc.
 Insurance – transfer of the risk of a loss, from one entity
to another, in exchange for payment.
 Geico, Progressive, State Farm, All State, etc.
 Person facing a risk pays a fee to insurance company
to absorb all or part of risk
 Insurer is a company selling the insurance; an insured,
or policyholder, is the person or entity buying the
insurance policy.
 Premium - an amount to be paid for an insurance policy
 Deductible - The amount you have to pay out-of-pocket
for expenses before the insurance company will cover
the remaining costs
 Coverage - the total amount and type of insurance
carried
 Why have insurance?
 You may not face the risk (may never be in a car
accident, get sick, house flood, etc.)
 Pay the insurance premium to receive peace of mind
THE MARKETS FOR INSURANCE
 Role of insurance - not to eliminate the risks, but to spread the
risks around more efficiently
 Insurance price is reflective in risk of the individual and market
 Auto insurance in SFLA is higher than in SGA
CREDIT
 Credit - A contractual agreement in which a borrower receives something of value now and
agrees to repay the lender at some later date.
 Mortgages, credit cards, car financing, personal loans, business loans, student loans,
etc.
 Finance - the management of money; borrowing, lending and the profit’s made and paid in
interest based on credit.
 Lender - A private , public or institutional entity which makes funds available to others to
borrow
 Secured Loans - a loan in which the borrower pledges some asset (e.g. a car or property) as
collateral for the loan
 Unsecured Loans - unsecured debt refers to any type of debt or general obligation that is
not collateralized
CREDIT
 Finance Charges – interest and fees accumulated through the use of credit
 Credit Report - A report containing detailed information on a person's credit
history, including identifying information, credit accounts and loans, bankruptcies
and late payments, and recent inquiries. It can be obtained by prospective lenders
with the borrower's permission, to determine his or her creditworthiness.
 Credit Score - A credit score in the United States is a number representing the
creditworthiness of a person, the likelihood that person will pay his or her debts.
 Credit Bureau - consumer credit reporting agency, a company that collects
information from various sources and provides consumer credit information on
individual consumers for a variety of uses
 Equifax, Trans Union, Experian
Essential Questions 4 + 5
4. What are the important elements of insurance?
 Insurance helps to cover our _______.
The total money you pay to the
risks
premium
insurer for coverage is called the __________.
The money that you must
come out of pocket on before the insurance kicks in is called the
deductible
_________.
5. What is credit and examples?
contractual
lender
 Credit is a ____________
agreement between a ___________
and
mortgage for a car is
a borrower. Borrowing for a home is called a _________,
interest
called ____________.
The cost of credit is ____________.
financing