Understand the role of finance in business. SAVING AND INVESTING. Topics Saving and investing basics Saving and investing options Evaluation factors for savings and investing options WHY BORROW MONEY? People borrow money to purchase large ticket items: homes and cars. Businesses borrow money to operate or expand their business: buildings, replacing old equipment, or offering new products. The Governments borrow money to improve or expand transportation, schools, or other public services. SAVING AND THE ECONOMY Saving is putting away money for future use. Investing is using savings to earn more money for future financial security. Saving influences the economy by making more money available to be used by individuals, businesses, and the government. When the borrowed money is spent, the demand for goods and services is increased, which creates more jobs and spending for workers. SAVING OPTIONS A savings account usually allows low or zero balance, deposit or withdrawals anytime and interest to be earned. Usually withdrawals are allowed without penalties. Certificates of deposits (CDs) requires a minimum deposit, money to remain deposited for a period of time without penalties. Penalties may be assessed if money is withdrawn before specified time. SAVING OPTIONS Money market account requires a minimum deposit and interest is earned based on government and corporate securities. Withdrawals without penalties. MONEY MARKET Securities include: Stock investments Bond investments Mutual funds Exchange-traded funds. SIMPLE INTEREST Simple interest is calculated by using the formula (P=Principal, R=Rate, T=Time and I=Interest Rate) I=P * R * T. COMPOUND INTEREST Compound interest is calculated by using the formula: A=P(1+r/n)nt. (P=, r=Annual rate of interest and n=Number of times interest is compounded) A=Amount, P=Principal amount/the initial amount you borrow or deposit, r=Annual rate of interest n=Number of times interest is compounded) Savings Growth Simple interest $1,000 at 10% Year 1: $1,000 *.10 = $100 $1,000 + $100 = $1,100 Year 2: $1,000 *.10 = $100 $1,100 + $100 = $1,200 What would the value be at the end of year 3? Compound interest $1,000 at 10% Year 1: $1,000 *.10 = $100 $1,000 + $100 = $1,100 Year 2: $1,100 *.10 = $110 $1,100 + $110 = $1,210 What would the value be at the end of year 3? Saving and Investing Basics continued Simple interest is the amount of money paid to saver on amount deposited for a period of time. Compound interest is the amount of money paid to saver on money deposited and interest previously earned for a period of time. The more times that interest is compounded the more growth of savings. Simple interest is calculated by using the formula (P=Principal, R=Rate, T=Time and I=Interest Rate) I=P * R * T. Compound interest is calculated by using the formula (A=Amount, P=Principal amount/the initial amount you borrow or deposit, r=Annual rate of interest and n=Number of times interest is compounded) A=P(1+r/n)nt. Main Categories of Investing Options Stocks Bonds Mutual Funds and Exchange-traded Funds Real Estate Commodities Collectibles STOCK INVESTMENTS Two main categories of stock: Preferred Common Preferred stock pays dividends at a set rate. Preferred stockholders have no voting powers Common stock represents general ownership in company and sharing of profits. STOCK INVESTMENTS Common stock represents general ownership in company and sharing of profits. Common stockholders are invited to annual corporate meetings and permitted to one vote per share of stock owned. STOCK INVESTMENTS Common & preferred stocks are similar: risk of loss of a investment They differ because preferred stock stockholders have priority in dividend payments BOND INVESTMENTS A bond is a promissory note to pay back a specified amount of money at a stated rate on a specific date. Municipal bonds are issued by local and state governments for public service projects. Example: The city government needs $1.2 million to build a new medical facility. OTHER INVESTMENTS Commodities include grain, livestock, and precious metals. Commodity investors usually agree to buy and sell for an amount at a specified price in the future. Examples may include rice, cattle, and gold. Collectibles are items collected over time that may increase in value. EXAMPLES: QUILTS, SPECIALTY GUITARS art work, antique furniture, and autographed items. Stock Table ABCDEFGHI 52 WeekSales HighLowStockDivYldPEVol 100s HighLowLastChg 12 1/8 8AAR /4 6 5/8 6 1/2-1/8 49 1/231 1/4ACF /437 5/8 37+3/4 26 1/216AMF /2 -3/8 6 1/8 3 1/8ARA /8 33 Selecting Stock Factors that could influence investors in selecting stock: Economic Inflation Interest rates Consumer spending Employment Company Dividend yield Price-earnings ratio EVALUATION FACTORS Safety is the assurance that the money you have invested will be returned to you. Risk is risking losing your investment (money). Potential yield is the percentage of money earned on your savings or investment over time. Usually higher risk of loss and higher yields go together. EVALUATION FACTORS Liquidity is the ease with which an investment can be changed into cash without losing its value. Taxes reduce your rate of return because what you have earned in investments can be taxed by the government in most cases. Some earnings may be tax-exempt. Yield Calculations Yield is usually calculated in the following way: current value original value = yield original value Current value=closing price for the day Original price=price paid for stock Yield=Interest earned For example: a stock is bought at $40 and valued at $43: $43 $40 $40 yield = 7.5% Yield Calculations Dividends also may be added to the calculation. For example: a stock is bought at $40 and sold at $43, but also earned a $2 dividend during that time: $43 + $2 $40 $40 yield = 12.5% Mutual Funds Companies major tasks in assisting investors of mutual funds Some examples of mutual fund categories Aggressive-growth stock funds Income funds International funds Sector funds Bond funds Balanced funds Exchange-traded Fund (ETF) An exchange-traded fund (ETF) is a portfolio of stocks, bonds or other investments that trade on a stock exchange like regular stock. Warm-up 5/15/15 How much interest is earned on a balance of $1,800 that is compounded semiannually at a 6% interest rate for an account maintained for one year? A. $ B. $110 C. $154 D. $175 How much interest is earned on a balance of $1,000 for a certificate of deposit that is compounded at an 8% interest rate for an account maintained for three years? INDICATIVE showing, signifying, or pointing out; expre ssive or Suggestive. The interest he earns on this plan is indicative of how the money markets are doing.
