Investments
Brian Wassmuth
How they work
First, What is Interest?
• Interest is ‘The Price Paid for the Use of
Money’ -McConnell, Brue
• Remember, money is NOT an economic
resource.
– It cannot produce goods or services.
Money as a Tool
• However, it is a useful tool that can be used
to acquire goods and resources.
•Example
If you needed to rent
a truck to move your
company’s supplies
from one place to
another, you would
have to pay
someone to use that
truck for that time
period.
•
Money as a Tool
• Now, if a business needs money to expand, they
can pay someone to use their money for a
certain time period.
• What a person pays to rent money from
someone is what we call?
INTEREST
Read Passage Pg. 303
When to use your MoneyTool
• When borrowing money, it is key for a
business to make sure that the return on
their investment is greater that the cost.
• Example:
– The annual interest rate on a $1000 loan is
10%.
– A company anticipates a return of $95 per
year on a $1000 investment
– What will the company do?
When to Invest
• The company’s cost of making the $1000
investment is $100 per year.
– The company would need a return of more
than 10%, or $100, to benefit from the
investment.
• Example: If the interest rate on a $1000
loan drops to 6%, and the Company
expects a return of $95 on a $1000
investment, what should the Company do?
Federal Funds Rate
• This is the amount of interest that the
Federal Reserve charges banks to borrow
money from the government.
• The current Federal Funds Rate is:
5.25%
Importance
• The Importance of the Federal Funds Rate
is for a bank or investment firm to be
profitable, it must make a return that is
higher than the Federal funds rate.
Your Project
• The goal of your investment proposal
should be a return of over 5.25%
– Why?
• To be sure of a return at this rate, an
investor should diversify.
Diversify
• Why Diversify?
– So if one investment underperforms or fails,
other investments can take up the slack
• There are many ways to invest your
money.
Options
•
What are some common investment
options that you have:
1.
2.
3.
4.
5.
6.
•
Commercial Property investment: retail centers, franchises,
commercial vacant land.
Residential Property Investment: town homes, condos,
residential homes.
Precious Metal : Platinum, Silver, Gold.
Conservative Investments : Bonds, Treasury Bills, Corporate
Bonds, Savings, CD’s.
Stock Market : Indexes, Ritz Indexes, Individual Stocks,
Mutual Funds.
Art and Antiques
These are the investment options you will need to
research and report on. Now go to this Link for a basic
overview of investment strategies.
Contents
• Link – Yahoo Finance
– http://finance.yahoo.com/education/begin_investing
• Brue, Stanley and McConnell, Campbell. Economics:
Principals, Problems, and Policies. 6th Ed. McGraw-Hill.
New York 2005
– http://books.google.com/books?id=hObpeG6v1VsC&pg=PA303&lpg=PA303&dq=i
rving+fisher+time+value+of+money+masseur&source=web&ots=7DcFA9w0sL&si
g=TBKYTdBDcU4BwFjToFDdiSLtpzs#PPA261,M1
• Various Google Image searches and Google Book Searches