investments brian wassmuth how they work. first, what is interest? interest is ‘the price paid for...
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InvestmentsBrian 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.
•
•ExampleIf 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
Read Passage Pg. 303
• 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 INTEREST
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. Commercial Property investment: retail centers, franchises,
commercial vacant land.2. Residential Property Investment: town homes, condos,
residential homes. 3. Precious Metal : Platinum, Silver, Gold.4. Conservative Investments : Bonds, Treasury Bills, Corporate
Bonds, Savings, CD’s.5. Stock Market : Indexes, Ritz Indexes, Individual Stocks,
Mutual Funds.6. 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=irving+fisher+time+value+of+money+masseur&source=web&ots=7DcFA9w0sL&sig=TBKYTdBDcU4BwFjToFDdiSLtpzs#PPA261,M1
• Various Google Image searches and Google Book Searches
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