chapter 11:1: saving and investing · pension funds: o a pension is income that some retirees...

Chapter 11:1: Saving and Investing:

Objectives: • WHAT: Explain how investing

contributes to the free enterprise system.

• WHAT: Explain how the financial system brings together savers and borrowers.

• WHAT: Explain the role of financial intermediaries in the financial system.

• WHAT: Identify the trade-offs among liquidity, return, and risk.

• WHY: ECN.4.2 Demonstrate understanding of basic concepts (Investing)

• (Deu 8:18) But thou shalt

remember the LORD thy

God: for it is he that giveth

thee power to get wealth, that

he may establish his

covenant which he sware

unto thy fathers, as it is this

day.

Activity o For SDAs, write a check out for tithe to your local church for

$200.00. Or write a donation to a charity of your choice.

o Write a check out to Charter Spectrum for $55 for your monthly internet bill.

o Write a check out to pay electric bill to Southern California Edison for $40.00

o Deposit of $50.00.

o Balance your checkbook. Your initial balance is $500.00.

Investing:

o The act or redirecting resources from being consumed today so that they may create benefits in the future.

o In more narrow economic terms, investment is the use of assets to earn income or profit.

o Investing is in fact, an essential part of the free enterprise system.

o It promotes economic growth and contributes to a nation’s wealth.

o When people deposit money in a savings account in a bank, for example the bank may then lend the funds to businesses.

o The businesses in turn may invest that money in new plants and equipment that give them the resources to increase production.

The Financial System:

• When people save they are in

essence lending funds to others.

• Whether they put cash in a saving

account, purchase a certificate of

deposit or buy a government or

corporate bond, savers obtain a

document that confirms their

purchase or deposit.

The Financial System:

o These documents may be passbooks monthly statements, bond certificates.

o Such documents represent claims on the property or income to the borrower.

o These claims are called financial assets, or securities.

o If the borrower fails to pay back the loan, these documents can serve as proof in court that money was borrowed and that commitments were made that were not fulfilled.

Financial Intermediaries:

o The middle man between borrowers

and lenders, these include:

o Banking, Saving and Loans and

Credit Unions (use deposits to lend

to other businesses).

o Mutual Funds: safe investing where

many people invest in a variety of

financial assets.

Life Insurance:

o Working members of a family may buy life insurance so that if they die, money will be paid to survivors to make up for lost income.

o Insurance companies collect payments called premiums from the people who buy insurance.

o They lend out to investors part of the premiums that they collect.

Pension Funds: o A pension is income that some retirees receive

after working for a certain number of years or reaching a certain age.

o In certain cases, injuries may qualify a working person for pension benefits.

o Employers may set up pension funds in a number of ways.

o Employers may set aside pension funds for the employee’s behalf or take a percentage of their paycheck to deposit it to a pension.

o Pension fund managers invest those deposits in stocks, bonds, and other financial assets.

Advantage of Financial Intermediaries:

o Can diversify your investment and thus reduce the risk that you will lose all of your funds if a single investment fails rather than risk investing in just one thing.

o By law must disclose information on investments and potential forecast how they will do.

o Provides liquidity: it can be converted to real money.

Liquidity, Return, and Risk. o Suppose you save money in a savings

account.

o Savings account are good ways, to save when you need to be able to get to your cash for immediate use.

o On the other hand, savings accounts pay relatively low interest rates, about 2 to 3 percentage points below a certificate of deposit (CD).

o In other words, saving accounts are liquid, but they have a low return.

o Return is the money an investor receives above and beyond the sum of money that has been invested.

Return and Risk:

o Certificates of deposit (up to

$250,000) are considered very safe

investments because they are

insured by the federal government.

o When you buy a CD valued at less

than $250,000, you are giving up

liquidity for a certain period of time,

but you are not risking the loss of

your money.

Return and Risk:

o What if you decided to invest the

money into a new company that

your friends are starting?

o You must consider the risk you are

now incurring.

o In general, the higher the potential

return on an investment, the riskier

the investment.

ACTIVITY

ACTIVITY

What type of investment do you think is best for your needs? Mutual funds, saving accounts, CDs, or in a new start up business? Explain why you had chosen that investment.

Then go to the designated subject corners of the room that it is labeled.

Chapter 11:2 Bonds and other Financial Assets

Objectives: • WHAT: Describe the

characteristics of bonds as financial assets.

• WHAT: Identify different types of bonds.

• WHAT: Explain the characteristics of other types of financial assets.

• WHY: ECN.4.2 Demonstrate understanding of basic concepts (Investing)

• “Cast thy bread upon the

waters: for thou shalt find it

after many days. Give a

portion to seven, and also to

eight; for thou knowest not

what evil shall be upon the

earth.” Ecc 11:1-2.

Bonds:

o Are basically loans, or IOU’s

that represent debt that the

seller, or issuer, must repay to

an investor.

o Bonds, typically pay the

investor a fixed amount of

interest at regular intervals for

a specific amount of time.

Three Component Bonds.

1. The Coupon rate is the interest rate that a bond issuer will pay to a bond holder.

2. The time at which payment to a bondholder is due is called the bond’s maturity.

3. Par Value, a bond’s par value assigned to the issuer, is the amount to be paid to the bondholder at maturity.

Types of Bonds: Saving Bonds

o Issued by the Federal

Government with the

proceeds used to help

pay for public works

projects.

Savings Bonds:

o The federal government pays interest on saving bonds.

o However unlike most other bond issuers, it does not send interest payments to bondholders on a regular schedule.

o Instead, the purchaser buys a savings bond for less than par value.

o For example, you can purchase a $50 savings bond for only $25.

o When the bond matures, you receive the $25 you paid for the bond plus $25 with interest.

Bonds:

o The United States Treasury Department issues treasury bonds as well as treasury bills and notes.

o Municipal bonds are sold by State and local governments and municipalities (government units with corporate status).

o To finance such projects as highways, state buildings, libraries, parks, and schools.

Corporate Bonds:

o Corporations issue bonds to help raise money to expand their businesses.

o The interest on the corporate bonds is taxed as ordinary income.

o Unlike governments, corporations have no tax base to help guarantee their ability to repay their loans.

o It is regulated by the Security and Exchange Commission (SEC) to make sure corporations are not defrauding customers.

Junk Bonds:

o Bonds with a fairly high risk of default

but a potentially high yield.

o They are risky investments because

the issuer has high risk of defaulting

on its debts.

Other Types of Financial Assets:

o Certificate of Deposit (CDs) are one of

the most common form of investment.

o CDs are available through banks which

lend out the funds deposited in CDs for a

fixed amount of time, such as six months

or two years.

o When it matures, you can gain access to

your deposit plus the interest you

earned.

Other Types of Financial Assets:

o Certificate of Deposit (CDs) are one of

the most common form of investment.

o CDs are available through banks which

lend out the funds deposited in CDs for a

fixed amount of time, such as six months

or two years.

o When it matures, you can gain access to

your deposit plus the interest you

earned.

Money Market Mutual Funds:

o Are special types of mutual funds where financial intermediaries collect money from individual investors.

o And then buy stocks, bonds, or other financial assets to form a mutual fund.

o Investors receive higher interest on a money market mutual fund than they would receive from a savings account.

o They are not covered or insured by the FDIC and thus is riskier than a savings account.

Financial Asset Markets:

o Capital Markets: Markets in which money is lent for periods longer than a year are called capital markets.

o Assets traded in capital markets include long term CDs and corporate and government bonds that require more than a year to mature.

Primary and Secondary Markets:

o Primary Markets: Financial assets

that can be redeemed only by the

original holder are sold on primary

markets (e.g., saving bonds and

Certificates of deposits).

o Secondary Markets: Financial Assets

that can be resold are sold on

secondary markets.

Discussion Question

If the government is selling bonds for a

specific purpose, what bonds are you willing

to buy?

To support the military during times of war?

To build bridges and improve roads?

To build Schools?

Chapter 11 Section 3: Buying Stock

Objectives:

o WHAT: Identify the benefits and risks of buying stock.

o WHAT: Describe how stocks are traded

o WHAT: Explain how stock performance is measured.

o WHY: ECN.4.2 Demonstrate understanding of basic concepts (Investing)

• “Bring ye all the tithes into the storehouse, that there may be meat in mine house, and prove me now herewith, saith the LORD of hosts, if I will not open you the windows of heaven, and pour you out a blessing, that there shall not be room enough to receive it.” Malachi 3:10.

Stocks: • Besides, bonds, corporations can

raise funds by issuing stock, which represents ownership in the corporation to raise money to run or expand their businesses.

• Stock is issued in portions known as shares.

• By selling shares of stock, corporations raise money to start, run, and expand their businesses.

Stock Activity:

Props: Play Money and fake stock certificate.

Student volunteer goes to the process of buying stock (broker). Checking the Stock Exchange for value, and reselling or receiving dividends (capital gains and capital loss).

Benefits of Buying Stock:

• Dividends: many corporations

pay out part of their profits as

dividends to their

stockholders.

• Capital Gains: A second way

an investor can earn a profit is

to sell the stock for more than

he or she paid for it.

Types of Stock:

o Income Stock: by paying dividends, this stock provides investors with income.

o Growth Stock: this stock pays few or no dividends, instead the issuing company reinvests its earning in its businesses growing the value of the stock and business (you earn your money by selling at the right time).

Types of Stock:

o Common stock are for

investors who are voting

owners of a company.

o Preferred Stock: Investors

who buy preferred stock are

usually nonvoting owners of

the company.

Risks of Buying Stock:

o Can get less dividends because of lower than expected profits.

o If the price of stock decreases and the owner decides to sell, he may get a capital loss.

o If the corporation goes bankrupt, it sells it assets and pays the creditors including bondholders first and stockholders of all the money left over.

How Stocks Are Traded:

o A stockbroker buys and sells

in your behalf.

o Stockbrokers often work for

brokerage firms that cover

their costs and earn a profit by

charging a commission or fee,

on each stock transaction.

Stock Exchanges: o A market for buying and selling

stock is known as a stock exchange.

o The New York Stock Exchange (NYSE) handles buying and selling of stocks of the top profitable companies called blue chips.

o NASDAQ is another stock exchange that is automated that focuses on tech stocks and securities.

Futures and Options:

o Futures are contracts to buy or sell commodities at a particular date in the future at a price specified today (such wheat or livestock)

o The Options are contracts that give investors the choice to buy or sell stock and other financial assets at a certain set time.

Measuring Stock Performance: o When the stock market rises steadily

over a period of time a bull market exists.

o On the other hand, when the stock market falls or stagnates for a period of time, people call it a bear market.

o Dow Jones Industrial Average measure of stock performance known simply as the Dow measures the top 30 companies.

o S & P 500 measures 500 different stocks.

Great Depression: o Wealth concentrated in a few without

distribution to the rest of the society.

o People buying everything on credit and in debt.

o Factories overproducing that caused a surplus and not enough consumer demand to purchase products.

o Speculation: the practice of making high risk investments with borrowed money in hopes of getting a big return.

ACTIVITY:

You are given $1,000 to invest. What type of

companies or businesses would you consider

investing in stocks? Go to the Dow Jones and

pick what companies you want to buy stock

from. Budget your money to how many shares

you would buy stock and monitor if you either

made or lost money on the value of the stock.

CHAPTER 12:2 Business Cycles

Objectives:

o We will study the phases

of a business cycle and

the four key factors that

keep the cycle going.

• Psa_119:72 The law of thy

mouth is better unto me than

thousands of gold and silver.

Business Cycle:

o Is a period of macroeconomic

expansion followed by a period of

macroeconomic contraction.

o Economists also call these periods

of change “economic fluctuations.”

o The cycle consist of major changes

in real gross domestic product

above or below normal levels.

The typical business cycle consists of four phases:

I. An expansion is a period of economic growth as measured by a rise in real GDP (low unemployment, businesses are doing well).

II. Peak: When real GDP stops rising, the economy has reached its peak, the height of an economic expansion

The typical business cycle consists of four phases:

(3) Contraction: After reaching its peak, the economy enters a period of contraction, an economic decline marked by falling real GDP.

(4) Trough: When the economy has “bottomed out” it has reached the lowest point in an economic contraction.

Recession:

o If real GDP falls for two consecutive quarters at least six straight months, the economy is said to be in a recession.

o A recession is a prolonged economic contraction.

o Generally lasting six to 18 months.

o Recessions are typically marked by unemployment reaching the range of 6 to 10 percent.

Four Main Factors That Keep Business Cycles Going:

(1) Business investment:

(2) Interest Rate and Credit

(3) Consumer Expectations

(4) External Shock

Business Investment:

o When the economy is expanding businesses expect their sales and profits to keep rising.

o Therefore they may invest heavily in building new plants and buying new equipment.

o Or they may invest in the expansion of old plants in order to increase the plants productivity capacity.

Four Main Factors That Keep Business Cycles Going:

o All of this investment spending

creates additional output and jobs.

o Help to increase GDP and

maintain the expansion.

o At some point firms may decide

that they have expanded enough

or that demand for their products is

dropping.

Four Main Factors That Keep Business Cycles Going:

o They cut back on investment

spending as a result, aggregate

demand falls.

o The result is a decline in GDP and

also in the price level.

o The drop in business spending

reduces output and income in

other sectors of the economy.

Four Main Factors That Keep Business Cycles Going:

o When this occurs industries that produce capital goods slow their own production.

o Workers began to be laid off.

o Other industries might follow, causing overall unemployment to rise.

o Jobless workers cannot purchase new products.

o This may lead to recession.

Interest Rates and Credit:

o Consumers often use credit to purchase items from new cars and houses to home electronics and vacations (big ticket items).

o The cost of credit is the interest rate that financial institutions charge their customers.

o If the interest rate rises, consumers are less likely to buy those new cars and appliances.

Interest Rate and Credit:

o Businesses look to interest rates

in deciding whether or not to

purchase new equipment.

o Expand their facilities or make

many other large investments.

o When interest rates are low,

companies are more willing to

borrow money.

Interest Rate and Credit:

o When interest rates climb,

business borrowing falls.

o One result of rising interest rates,

is less output, such a result may

lead to a contraction phase.

Consumer Expectations:

o Consumer spending is

determined partly by consumer

expectations.

o If people expect the economy to

begin contracting.

o They may reduce their spending

because they expect layoffs and

lower incomes.

External Shocks (Negative):

o Natural disasters.

o Disruption to the oil supply.

o Wars that interrupt trade

o Drought that reduce crop harvest

o This can affect aggregate supply.

External Shocks (Positive):

o Discovery of large deposit of oil.

o Perfect mix of sun and rain that

produce a large bountiful

harvest.

ACTIVITY: What are the effects of the following Economic

conditions?

o Recession

o Depression

o Stagflation

o Business Investment

o Interest Rate and Credit

o Consumer Expectation

o External Shocks

• (Isa 46:10) Declaring the end

from the beginning, and from

ancient times the things that

are not yet done, saying, My

counsel shall stand, and I will

do all my pleasure:

POP QUIZ!!!!!!!!!!

B –Total Cost A –Profit

C –Stocks D –Mr. Chung

By selling shares of _________, corporations

raise money to start, run, and expand their

businesses.

B –Capital Gains A –Washington Capitals

C –Gaining Capital D –All of the Above

A second way an investor can earn a profit is to

sell the stock for more than he or she paid for it.

The difference between the higher selling price

and lower purchase price is called?

B –Green Chips A –Red Chips

C –Blue Chips D –All of the Above

These Stocks are often in high demand, because

investors expect the companies to continue to do

business profitably for a long time. for a long time.

B –NASDAQ A –New York Stock Exchange

C –Both A and B D –PKCSGA

Which of these are stock

exchanges? a long time.

B –Super Junior A –Super Cycle

C –Business Cycle D –Commerce Cycle

This is a period of macroeconomic expansion

followed by a period of macroeconomic

contraction.

B –Recession A -Regression

C –Expansion D –All of the Above

If real GDP falls for two consecutive

quarters at least six straight months, the

economy is said to be in this state.

B –Inflation A –Expansion

C –Staglation D –All of the Above

What is economic growth seen with steady long-term

increase of real GDP called?