Economics 10/31/11
http://mrmilewski.com
• OBJECTIVE: Demonstration of Chapter#11 and begin
examination of the circular flow. MCSS E-2.2.8
• I. Administrative Stuff
-attendance & distribution of test
• II. Chapter#11 Test
• III. Journal #31 pt.A
-Read the Business Week “Newsclip” p.306
-Answer questions (1-2) p.306
• IV. Journal #31 pt.B
-notes on savings & investing
Administrative Stuff
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•
•
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Changes to test dates:
Chapter#12 Test Wednesday 11/9
Chapter#13&14 Test Tuesday 11/15
Chapter#15 Test Tuesday 11/22
Capital
• “The New York Stock Exchange generates
the capital that makes capitalism work.”
• Capital – the equipment, tools, and
machinery used in the production process.
• Financial Capital - savings
• Saving – absence of spending
• Savings – dollars that become available
when people abstain from consumption
The Financial System
• It is a network of savers, investors, &
financial institutions that work together to
transfer savings to investors.
• This results in the circular flow, which is
the way funds are transferred from savers
to borrowers.
As a saver you are:
• Categorized as a household and can save
the following ways:
1.) Open a savings account
2.) Buy a CD (certificate of deposit) which is a
receipt showing that an investor has made an
interest bearing loan to a bank
3.) Buy a bond from the government or corporation
in which you receive a receipt for the funds you
loaned them.
Receipts
• Are the claims on the property and the
income of the borrower.
• They are assets because they are property
that has value.
• It specifies how much was loaned, for how
long, and the terms (interest rate) in which
the loan was made.
Circular Flow
Circular Flow
• A circular flow takes place when funds are
transferred from savers to borrowers
• i.e. Banks (Savings banks, credit unions,
commercial banks, and savings
associations) obtain funds when their
customers or members make regular
deposits.
Economics 11/1/11
http://mrmilewski.com
• OBJECTIVE: Examine investment strategies and
financial assets. MCSS E-4.1.6
• I. Journal #32 pt.A
-Read Business Week “Newsclip” p.327
-Answer questions (1-2) p.327
• II. Quiz#17
• III. Return of Chapter#11 Test
• IV. Journal #32 pt.B
-notes on types of investments
• NOTICE: Progress Report Due Friday!
Administrative Stuff
•
•
•
•
Changes to test dates:
Chapter#12 Test Wednesday 11/9
Chapter#13&14 Test Tuesday 11/15
Chapter#15 Test Tuesday 11/22
Risk
• Risk – a situation in which the outcome is
not certain, but probabilities for each
outcome can be estimated.
• Low risk – low return on investment, high
degree of safety
• High risk – possibility of high return, little
degree of safety
p. 319
Bonds
• Bonds are long term obligations that pay a
defined interest rate for a specific number of
years
• The 3 components of a Bond:
*coupon – the interest rate
*maturity – the length of time
*par value – the amount borrowed (MUST
be repaid when the bond matures)
Example of a Bond
• You have $1000 to invest. The Milewski Corporation is
offering a ten year bond at a 10% interest rate paid
annually. If you decide to invest in the Milewski Corp.
today, what is the coupon, maturity, and par value on the
bond you purchase?
• Coupon
10% or .10
• Maturity
11/4/2020
• Par value
$1000.00
• Annual Interest Paid
$100.00
Was it a good investment?
• To determine if you made a good
investment you should:
• 1.) Determine the bond yield
annual interest / purchase price = current yield
$100.00 / $1000.00 = .10
• 2.) Check the Bond Rating
• 3.) Compare it to other similar bonds
Organized Stock Exchanges
• NYSE – oldest, largest, and most prestigious in
the U.S. Located on Wall Street in NYC
• AMEX – smaller stocks, those who can’t quite
make it to the NYSE are traded here. (the JV
team) Also located in NYC
• Regional Stock Exchanges – originally listed
small companies and new companies. Now, they
trade local stocks and better meets the needs of
smaller companies. Located in: Chicago, Pacific,
Philadelphia, Boston, and Memphis
Over-the-Counter Market
• OTC – most stocks in the U.S. are not
traded on organized exchanges. They are
traded electronically using NASDAQ
• NASDAQ – National Association of
Securities Dealers Automated Quotation
• Few OTC stocks pay dividends. Most are
small and new companies
Bull v. Bear
• Bull market – when stocks are strong and
stock prices are rising
• Bear Market – when stock prices are
falling
Measuring the Market
• Question: How do you know if stock
market is a bull or a bear?
• Dow Jones Industrial Average (the Dow)
– the average of 30 stocks traded on the
NYSE
• S&P 500 – uses the movement of 500
stocks traded to determine an index number
which shows the direction of the market
Economics 11/2/11
http://mrmilewski.com
• OBJECTIVE: Examine Credit Cards. MCSS E-2.1.3
• I. Administrative Stuff
-Attendance
• II. Film: Frontline, Credit Cards
-questions on film about Credit Cards
• NOTICE: Progress Report Due Friday!
Administrative Stuff
•
•
•
•
Changes to test dates:
Chapter#12 Test Wednesday 11/9
Chapter#13&14 Test Tuesday 11/15
Chapter#15 Test Tuesday 11/22
Economics 11/3/11
http://mrmilewski.com
• OBJECTIVE: Examine investment strategies
and financial assets. MCSS E-4.1.5
• I. Journal #32 pt.A
-Read “The Global Economy” p.323
-Answer questions (1-2) p.323
• II. Quiz#18
• III. Journal #32 pt.B
-notes on market investment strategies
• IV. Film: Modern Marvels: NYSE
-questions on film the New York Stock Exchange
Futures Trading
• Spot – you pay the price something is worth today
• Futures contract – you buy at today’s price and
you sell at a specific date in the future at today’s
price, regardless of the market price at the time of
sale.
• Example: You buy 1 oz of gold at today’s price:
You also agree to sell that gold at today’s price to
your friend six months from today. If gold six
months from now is lower, you make money. If
the price of gold is higher, you lose money.
Futures Market
• Where futures contracts are bought and
sold.
• Most are associated with livestock and
farm products.
• Futures markets are located in NYC,
Chicago, & Kansas City.
Options Markets
• Call option – the right to buy the share of
stock at a specific date and price in the
future.
• Put option – the right to sell a share of
stock at a specific date and price in the
future.
Types of Markets
• Capital market – where money is loaned for
more than one year.
• Money market – where money is loaned for less
than one year.
• Primary market – a market where only the
original issuer can repurchase or redeem a
financial asset.
• Secondary market – is a market in which
existing financial assets can be resold.
Nonbank financial institutions
• Another important group of financial
intermediaries includes:
• nonbank financial institutions–
nondepository institutions that channel
savings to borrowers.
• Finance companies, life insurance
companies, pension funds, and real estate
investment trusts are examples of nonbank
financial institutions.
Finance Companies
• finance company - a firm that specializes in
making loans directly to consumers and in buying
installment contracts from merchants who sell
goods on credit.
• Some finance companies make loans directly to
consumers.
• Because they make some risky loans, and because
they pay more for the funds they borrow, finance
companies charge more than commercial banks for
loans.
Life Insurance Companies
• A financial institution that does not get its
funds through deposits
• The head of a family, for example,
purchases a life insurance policy to leave
money for a spouse and children in case of
his or her death.
Life Insurance Companies
• premium - the price the insured pays for
this policy and is usually paid monthly,
quarterly, or annually for the length of the
protection.
• Because insurance companies collect cash
on a regular basis, they often lend surplus
funds to others.
Mutual Funds
• mutual fund - a company that sells stock in itself
to individual investors and then invests the money
it receives in stocks and bonds issued by other
corporations.
• Mutual funds allow people to play the market
without risking all they have in one or a few
companies.
• net asset value (NAV)–the net value of the mutual
fund divided by the number of shares issued by the
mutual fund–is the market value of a mutual fund
share.
Pension Funds
• pension - a regular payment intended to provide
income security to someone who has worked a
certain number of years, reached a certain age, or
suffered a certain kind of injury.
• pension fund - a fund set up to collect income
and disburse payments to those persons eligible
for retirement, old-age, or disability benefits.
Pension Funds
• During the 30- to 40-year lag between the
time the savings are deposited and the time
the workers generally use them, the money
is usually invested in corporate stocks and
bonds.
Real Estate Investment Trusts
• real estate investment trust (REIT) – a
company organized primarily to make
loans to construction companies that build
homes.
Economics 11/4/11
http://mrmilewski.com
• OBJECTIVE: Examine the History of the
New York Stock Exchange. MCSS E-1.2.3
• I. Administrative Stuff
-Attendance
-Progress Report#2 Due!
• II. Film: Modern Marvels: NYSE
-questions on film the New York Stock Exchange
• NOTICE: Chapter#12 Test Wednesday!