Splash Screen. Chapter Menu Chapter Introduction Section 1:Section 1:Savings and the Financial System Section 2:Section 2:Financial Assets and Their Markets.
Dec 16, 2015
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Splash Screen
Chapter Menu
Chapter Introduction
Section 1: Savings and the Financial System
Section 2: Financial Assets and Their Markets
Section 3: Investing in Equities and Options
Visual Summary
Chapter Intro 1
You have just been hired as a financial planner to provide advice on how to invest wisely and effectively. Miguel, your client, is a widower raising two young children. He wants to be sure that (1) he will have enough money to send his children to college, and (2) he will be financially secure in his retirement. What advice would you give Miguel? Read Chapter 11 to learn more about how people can accomplish their financial goals.
Chapter Intro 2
Governments and institutions help participants in a market economy accomplish their financial goals.
Section 1-Preview
Section Preview
In this section, you will learn how the components of a financial system work together to transfer savings to investors.
Section 1-Key Terms
Content Vocabulary
• saving
• savings
• certificate of deposit
• financial asset
• financial system
• financial intermediary
• nonbank financial institution
• finance company
• premium
• pension
• pension fund
• risk
Academic Vocabulary• sector • compensation
A. A
B. B
C. C
Section 1
Have you ever thought about what your financial goals are and what steps you need to take to reach them?
A. Yes, often
B. Occasionally
C. Never
A B C
0% 0%0%
Section 1
Savings and the Financial System
• Saving—absence of spending
• Savings—dollars that are available once you abstain from consumption
Section 1
Saving and Economic Growth
The financial system brings savers and borrowers together and helps the economy grow.
Section 1
Saving and Economic Growth (cont.)
• Saving makes economic growth possible.
• Individuals save by
– Opening a savings account
– Purchasing a bond
– Purchasing a certificate of deposit
Overview of the Financial System
Section 1
Saving and Economic Growth (cont.)
• Documents are given in each case showing money saved—financial assets.
• The economy has a financial system to transfer savings to investors.
Overview of the Financial System
Section 1
• Three parts to the financial system
Saving and Economic Growth (cont.)
– Funds a saver transfers to a borrower
– Financial assets that certify conditions of the loan
– Organizations that bring the surplus funds and financial assets together
Overview of the Financial System
Section 1
• Financial intermediaries—institutions that lend funds savers provide
• Governments and businesses are the largest sector of borrowers.
• Households and businesses are the biggest sources of funds.
Saving and Economic Growth (cont.)
Overview of the Financial System
A. A
B. B
C. C
D. D
Section 1
A B C D
0% 0%0%0%
In the financial system, who really benefits?
A. Savers
B. Borrowers
C. Everyone
D. No one
Section 1
Nonbank Financial Intermediaries
Organizations other than banks can transfer money from savers to borrowers.
Section 1
• Another group of financial intermediaries are the nonbank financial institutions.
– Finance company
– Life insurance companies—charge a premium
– Pension fund—pays a pension to specified individuals for specific reasons
Nonbank Financial Intermediaries (cont.)
Profiles in Economics:Sallie Krawcheck
A. A
B. B
C. C
D. D
Section 1
A B C D
0% 0%0%0%
Which entity would charge you a higher interest rate for your car loan?
A. Bank
B. Credit union
C. Finance company
D. Relative
Section 1
Basic Investment Considerations
Investors should consider several factors before investing their money.
Section 1
• Before investing, consider the following
– Consistency
– Simplicity
Basic Investment Considerations (cont.)
The Power of Compound Interest
Section 1
– The risk-return relationship
Basic Investment Considerations (cont.)
Risk and Return
– Investment objectives
• Risk—degree to which outcome is uncertain but a probable outcome can be estimated
A. A
B. B
Section 1
An investment that appears too good to be true probably is worth the risk.
A. True
B. False
A B
0%0%
Section 2-Preview
Section Preview
In this section, you will learn about the characteristics of various investments to help with your investments.
Section 2-Key Terms
Content Vocabulary
• bond
• coupon rate
• maturity
• par value
• current yield
• junk bond
• municipal bond
• tax-exempt
• savings bond
• beneficiary
• Treasury note
• Treasury bond
• Treasury bill
• Individual Retirement Account (IRA)
• capital market
• money market
• primary market
• secondary market
A. A
B. B
C. C
Section 2
What determines the price and yield of a bond?
A. Risk of investment
B. Supply and demand
C. Current interest rates
A B C
0% 0%0%
Section 2
Bonds as Financial Assets
A bond is a long-term investment, with the price determined by supply, demand, and the buyer’s assessment of repayment risk.
Section 2
Bonds as Financial Assets (cont.)
• Governments and businesses issue a bond when they need to borrow funds for long periods.
• Bonds have three main components:
– Coupon rate
– Maturity
– Par value
Bond Ratings
Section 2
• To compare bonds, investors compute the bond’s current yield.
• Interest received and price paid determines the actual current yield of each bond.
• Bond ratings are published by Standard & Poor’s and Moody’s.
Bonds as Financial Assets (cont.)
Bond Ratings
Section 2
• Bonds rated on
– Basic financial health of the issuer
– Expected ability to make future coupon and principal payments
– Issuer’s past credit history
Bonds as Financial Assets (cont.)
• Bonds with higher ratings sell at higher prices than bonds with lower ratings.
Bond Ratings
A. A
B. B
C. C
Section 2
Which of the following rated bonds has the greatest risk?
A. BBB or Baa
B. CCC or Caa
C. CC or Ca
A B C
0% 0%0%
Section 2
Financial Assets and Their Characteristics
Investments include CDs, bonds, bills, and IRAs, all of which vary in cost, maturity, and risk.
Section 2
• Investors today have many choices.
– Certificates of deposit—loans investors make to financial institutions
– Corporate bonds—IRS considers interest and payments as taxable income.
• Junk bonds—offer high rate of return due to exceptionally high risk
Financial Assets and Their Characteristics (cont.)
Section 2
– Municipal bonds—issued by state and local governments, generally tax exempt
• Bonds can be purchased for investor’s heirs by designating a beneficiary.
– Government Savings Bonds—savings bonds are paper-based or paperless
Financial Assets and Their Characteristics (cont.)
Section 2
– Treasury notes—U.S. government borrows funds for 2 to 10 years
– Treasury bonds—U.S. government borrows funds for 10 to 30 years
– Treasury bills—(T-bills) short term obligations, maturity of 4, 13, or 26 weeks
– Individual Retirement Account (IRAs)
Financial Assets and Their Characteristics (cont.)
A. A
B. B
C. C
D. D
Section 2
A B C D
0% 0%0%0%
Which of the following could you invest in today?
A. Savings bonds
B. IRA
C. T-bill
D. 401(k) plan
Section 2
Markets for Financial Assets
Financial assets are grouped into different markets depending on their maturity and liquidity.
Section 2
• Markets for financial assets
– Capital market—money is loaned for more than one year.
– Money market—money is loaned for periods less than one year.
Markets for Financial Assets (cont.)
Financial Assets and Their Markets
Section 2
– Primary market—original issuer can sell or repurchase a financial asset.
– Secondary market—existing financial assets can be resold to new owners.
Markets for Financial Assets (cont.)
Financial Assets and Their Markets
A. A
B. B
C. C
D. D
Section 2
A B C D
0% 0%0%0%
Under which financial market(s) would Disney bonds with maturity in 5 years be classified?
A. Money market
B. Capital market
C. Primary market
D. Secondary market
Section 3-Preview
Section Preview
In this section, you will learn more about the equities, or stocks, that are traded in markets.
Section 3-Key Terms
Content Vocabulary
• equities
• stockbroker
• Efficient Market Hypothesis (EMH)
• portfolio diversification
• mutual fund
• net asset value (NAV)
• 401(k) plan
• stock exchange
• securities exchange
• over-the-counter market (OTC)
• Dow Jones Industrial Average (DJIA)
• Standard & Poor’s 500 (S&P 500)
Section 3-Key Terms
Content Vocabulary (cont.)
• bull market
• bear market
• spot market
• futures contract
• option
• call option
• put option
A. A
B. B
Section 3
Do you think investing is a wise decision?
A. Yes
B. No
A B
0%0%
Section 3
Stocks and Efficient Markets
Investors can purchase stock through stockbrokers on exchanges, through mutual funds, or through 401(k) plans.
Stocks and Efficient Markets (cont.)
• Equities or shares of common stock represent another financial asset for investors.
– Stockbroker
– Internet account with discount brokerage firm
A New York Stock Exchange Listing
• Ways to purchase equities
Stocks and Efficient Markets (cont.)
– Mutual funds
• Net asset value (NAV)
– 401(k) plan
A New York Stock Exchange Listing
Section 3
• Value of stock depends on
– Number of outstanding shares to be traded
– Company’s profitability
– Expectations of growth
Stocks and Efficient Markets (cont.)
Section 3
• Efficient Market Hypothesis (EMH) states that each stock is analyzed constantly by many professional analysts. Any observations result in buying or selling of the stock immediately.
• Portfolio diversification—investors offset losses of one stock with increases in other stocks.
Stocks and Efficient Markets (cont.)
How Much Money Will You Have at Retirement?
A. A
B. B
C. C
D. D
A B C D
0% 0%0%0%
Section 3
Which is not an advantage of investing in a 401(k)?
A. Analysts on staff to monitor market conditions
B. Highly diversified
C. Employers typically match a portion of employee’scontribution
D. Penalties for early withdrawal
Section 3
Stock Markets and Their Performance
Several different stock markets exist, and each is organized in a different way
Section 3
• Historically, stocks were traded at a stock or securities exchange.
– New York Stock Exchange (NYSE) is the oldest exchange in the United States.
– American Stock Exchange (AMEX) is also in New York City.
Stock Markets and Their Performance(cont.)
Section 3
– Regional exchanges located in several big cities across the United States
– The NASDAQ is the world’s largest electronic stock market.
– Exchanges in major Cities throughout the world
Stock Markets and Their Performance(cont.)
• Majority of stocks, however, are traded in an over-the-counter market (OTC).
Section 3
• Stock performance can be monitored by several popular indicators.
– Dow Jones Industrial Average (DJIA)
– Standard & Poor’s 500 (S&P 500)
– NASDAQ Composite
Stock Markets and Their Performance(cont.)
Section 3
• Bull market—“strong,” prices moving up
• Bear market—“mean” or “nasty” market with prices falling sharply
Stock Markets and Their Performance(cont.)
A. A
B. B
C. C
Section 3
Is it more advantageous to purchase stocks in a bear or bull market?
A. Bear
B. Bull
C. Does not matter
A B C
0% 0%0%
Section 3
Trading in the Future
Financial assets can be bought and sold in the future as well as the present.
Section 3
• Most buying and selling takes place immediately, a spot market.
• Exchanges that take place later in time are a futures contract.
Trading in the Future (cont.)
– Option—buyer has the right to cancel futures contract.
• Call option—purchase
• Put option—sell
A. A
B. B
C. C
Section 3
The total number of stocks listed on the NASDAQ
A. is less than the total on the NYSE but greater than the total on the AMEX.
B. is greater than the total on the NYSE and the AMEX.
C. is less than the total on the AMEX but greater than the total on the NYSE.
A B C
0% 0%0%
Financial System Households and businesses invest their surplus funds to earn interest. Governments and businesses invest this money for economic growth.
VS 1
VS 2
Investment Risk and Return Investors must weigh the risks of their investments against the returns they expect. Generally, the higher the risk of an investment, the higher the return investors require.
VS 3
Equities and Futures The riskiest investments consist of equities and futures. Equities can be purchased as individual stocks, or as a part of a mutual fund or 401(k) plan. Futures allow investors to speculate on future prices of commodities.
Figure 1
Figure 2
Figure 3
Figure 4
Figure 5
Figure 6
Figure 7
Profile
Sallie Krawcheck (1965– )
• chief financial officer for Citigroup Inc., the world’s largest financial institution
• ranked number 6 on Forbes’s top 100 of “The World’s Most Powerful Women” for 2006
DFS Trans 1
DFS Trans 2
DFS Trans 3
Vocab1
saving
absence of spending that frees resources for use in other activities or investments
Vocab2
savings
the dollars that become available for investors to use when others save
Vocab3
certificate of deposit
document showing that an investor has made an interest-bearing loan to a financial institution
Vocab4
financial asset
a stock or other document that represents a claim on the income and property of the borrower, such as a CD, bond, Treasury bill, or mortgage
Vocab5
financial system
network of savers, investors, and financial institutions working together to transfer savings for investment uses
Vocab6
financial intermediary
institution that channels savings to investors
Vocab7
nonbank financial institution
nondepository institution that channels savings to investors
Vocab8
finance company
firm that makes loans directly to consumers and specializes in buying installment contracts from merchants who sell on credit
Vocab9
premium
price paid at regular intervals for an insurance policy
Vocab10
pension
regular payments to someone who has worked a certain number of years, reached a certain age, or has suffered an injury
Vocab11
pension fund
fund that collects and invests income until payments are made to eligible recipients
Vocab12
risk
situation in which the outcome is not certain, but the probabilities can be estimated
Vocab13
sector
an area of the economy in which businesses offer the same or similar products or services
Vocab14
compensation
something, such as money, given or received as an equivalent for goods or services, injury, debt, or high risk
Vocab15
bond
contract to repay borrowed money and interest on the borrowed money at regular future intervals
Vocab16
coupon rate
stated interest on a corporate, municipal, or government bond
Vocab17
maturity
life of a bond or length of time funds are borrowed
Vocab18
par value
principal of a bond or total amount borrowed
Vocab19
current yield
bond’s annual coupon interest divided by purchase price; measure of a bond’s return
Vocab20
junk bond
bond that carries an exceptionally high risk of nonpayment and a low rating
Vocab21
municipal bond
bond, often tax exempt, issued by state and local governments
Vocab22
tax-exempt
not subject to tax by federal or state governments
Vocab23
savings bond
low-denomination, non-transferable bond issued by the federal government
Vocab24
beneficiary
person designated to take ownership of an asset if the owner of the asset dies
Vocab25
Treasury note
U.S. government bond with a maturity of 2 to 10 years
Vocab26
Treasury bond
U.S. government bond with maturity of 10 to 30 years
Vocab27
Treasury bill
short-term United States government obligation with a maturity of one year or less in denominations of $1,000
Vocab28
Individual Retirement Account (IRA)
retirement account in the form of a long-term time deposit, with annual contributions not taxed until withdrawn during retirement
Vocab29
capital market
market in which financial capital is loaned and/or borrowed for more than one year
Vocab30
money market
market in which financial capital is loaned and/or borrowed for one year or less
Vocab31
primary market
market in which only the original issuer can sell or repurchase a financial asset
Vocab32
secondary market
market in which financial assets can be sold to someone other than the original issuer
Vocab33
offset
to balance higher levels of risk with a larger payoff
Vocab34
presumed
taken for granted; supposed
Vocab35
equities
stocks that represent ownership shares in corporations
Vocab36
stockbroker
person who buys or sells securities for investors
Vocab37
Efficient Market Hypothesis (EMH)
argument that stocks are always priced about right because they are closely watched
Vocab38
portfolio diversification
strategy of holding different investments to protect against risk
Vocab39
mutual fund
company that sells stock in itself and uses the proceeds to buy stocks and bonds issued by other companies
Vocab40
net asset value (NAV)
the market value of a mutual fund share found by dividing the net value of the fund by the number of shares issued
Vocab41
401(k) plan
tax-deferred investment and savings plan that acts as a personal pension fund for employees
Vocab42
stock exchange
physical place where buyers and sellers meet to exchange securities
Vocab43
securities exchange
physical place where buyers and sellers meet to exchange securities
Vocab44
over-the-counter market (OTC)
electronic marketplace for securities not listed on organized exchanges such as the New York Stock Exchange
Vocab45
Dow Jones Industrial Average (DJIA)
measure of stock market performance based on 30 representative stocks
Vocab46
Standard & Poor’s 500 (S&P 500)
measure of stock market performance based on 500 stocks traded on the NYSE, AMEX, and OTC market
Vocab47
bull market
period during which stock market prices move up for several months or years in a row
Vocab48
bear market
period during which stock market prices move down for several months or years in a row
Vocab49
spot market
market in which a transaction is made immediately at the prevailing price
Vocab50
futures contract
an agreement to buy or sell at a specific date in the future at a predetermined price
Vocab51
option
futures contract giving a buyer the right to cancel the contract
Vocab52
call option
futures contract giving a buyer the right to cancel a contract to buy something
Vocab53
put option
futures contract giving a buyer the right to cancel a contract to sell something
Vocab54
prospects
potential or expectations
Vocab55
implication
something suggested to be naturally understood
Help
Click the Forward button to go to the next slide.
Click the Previous button to return to the previous slide.
Click the Home button to return to the Chapter Menu.
Click the Transparency button from the Chapter Menu, Chapter Introduction, or Visual Summary slides to access the Economic Concepts transparencies that are relevant to this chapter. From within a section, click on this button to access the relevant Daily Focus Skills Transparency.
Click the Return button in a feature to return to the main presentation.
Click the Economics Online button to access online textbook features.
Click the Reference Atlas button to access the Interactive Reference Atlas.
Click the Exit button or press the Escape key [Esc] to end the chapter slide show.
Click the Help button to access this screen.
Links to Presentation Plus! features such as Graphs in Motion, Charts in Motion, and figures from your textbook are located at the bottom of relevant screens.
To use this Presentation Plus! product:
End of Custom Shows
This slide is intentionally blank.
Related Documents
