CHAPTER 11: FINANCIAL
MARKETS
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

INTRODUCTION

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.

INVESTING AND FREE ENTERPRISE

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
THE FINANCIAL SYSTEM
Est.d so investments
can take place
 Saving money= loaning
it to other people
 Savers receive reciept
as confirmation



Financial systems
bring savers/investors
together
Fuels economic growth
 Savers include:

Households
 Individuals
 Businesses

Statements or bonds

Represent the claims, or
financial assets, of the
borrower

Investors include:
Businesses
 Government

FINANCIAL INTERMEDIARIES
Include banks and other financial institutions
 Accept funds from savers to make loans to investors

SHARING RISK

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)
PROVIDING INFO AND LIQUIDITY

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.
RETURN AND RISK
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

LESSON CLOSING
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

CHAPTER 11.2
BW: Finish S.1 Quiz: Answer Case study on pg.281
CHAPTER 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/0-13-3698335/Flash/Ch11/Econ_OnlineLectureNotes_ch11_s2.swf
INTRODUCTION

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

BONDS AS FINANCIAL ASSETS


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

DISCOUNTS FROM
PAR

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
BOND RATINGS

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

ADVANTAGES V DISADVANTAGES
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

TYPES OF BONDS
Savings Bond
Municipal Bonds
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

State/local govt.s issue
bonds to finance
projects
 Highways,
libraries, parks,
and schools
 Relatively save and
attractive long-term
investments
CORPORATE AND JUNK BONDS

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
OTHER TYPES OF FINANCIAL ASSETS
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

FINANCIAL ASSETS MARKETS
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
FINANCIAL ASSETS MARKETS

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
LESSON CLOSING

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
CHAPTER 11: FINANCIAL
MARKETS
SECTION 3
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/0-13-3698335/Flash/Ch11/Econ_OnlineLectureNotes_ch11_s3.swf
INTRODUCTION

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

BENEFITS OF BUYING STOCK
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)

TYPES OF STOCK

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
TYPES OF STOCK

Classified by whether or not the holder has a
voice in company

Common stock


Preferred Stock


Holders are voting members of the company
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!
RISKS OF BUYING STOCK

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
HOW STOCKS ARE TRADED

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 2nd largest securities market and largest
electronic market
FUTURES AND OPTIONS

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
MEASURING STOCK PERFORMANCE

Bull Market


Bear Market


When stock market rises steadily or a period of time
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

GREAT CRASH: READ GREAT CRASH : 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
SCANDALS AND MARKET TODAY

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.
LESSON CLOSING

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.