Economics Swenson Chapter 11

Econ 4/27 1. Current events 2. Chapter 11.1 notes 3. McDonalds video, part two – ten facts learned about company + reflection HW: chapter 11 hw is due Th If you missed Friday’s test – tomorrow at lunch is the makeup

PS 4/27 1. Current events 2. Continue Street Fight and notes HW: If you missed Thursday’s test – tomorrow at lunch is the makeup

11.1 Investing is the act of redirecting resources from being consumed today. Investing also allows one to create financial benefits in the future. When you deposit your money into a savings account, the bank then lends YOUR money to businesses or other people. Their investment will then allow business expansion which in time will create new jobs and tax revenue.

When you deposit money you will then receive a document that confirms that transaction. These documents are known as financial assets or securities. If the borrower fails to pay you back, these docs serve as proof in court that money was borrowed.

Most savers and borrowers are linked via a financial intermediary. Banks, Savings and Loans + Credit Unions Finance companies — typically charge a higher interest rate than banks (to recover any loss made on defaulted loans) Mutual Funds - Many individuals investing as a group into stocks, bonds and other financial assets.

MF - allow people to invest in a broad range of companies on the stock market. MF- allow people to diversify Life Insurance Companies — Buy protection if you should lose your life. Leaves money for your family to cover expenses when you are gone. Pension Funds - Income that a retiree receives upon retirement. Pensions are invested by both worker and employer.

Working through a financial intermediary has three major advantages: Sharing risk — It may not be wise to put your life savings into one company. Most people want diversification. Providing Information - Many intermediaries will manage your portfolios for you and let you know how well your assets are performing. They also save you time researching a bunch of investment opportunities. Providing Liquidity- People can easily convert assets to cash (or more easily)

Saving and investing does involve trade-offs Savings account pay very little in interest. Typically only 2-3%. If you don’t need your money right away….it might be better off investing in a CD to earn a greater return. CDs (certificates of deposits) are very safe.

They are insured by the US govt. You earn a higher rate of return, but your money is locked in for a period of time. In general, the higher potential for return …the riskier the investment.

11.2 How do borrowers raise money for investment? Many sell bonds. Bonds are certificates sold by a company or government to finance projects or expansion. War bonds helped the US fund the war effort in WWII Bonds are basically IOUs Bonds are considered a low risk investment.

Econ 4/ notes 2. McDonalds – finish ten facts HW: chapter 11 hw due tomorrow If you missed the last test…today is the last day to make it up. I am here at lunch.

PS 4/29 1. Street Fight + notes 2. Turn in notes for timed write (I will pass back notes on the day of the timed write) If you missed the last test --- today is the last day to make it up. I will be here at lunch.

Bonds have three components: Coupon rate— This is the interest rate that the bond issuer will pay to the bondholder Maturity - This is the time at which the payment to the bondholder is due. Different bonds mature at a different rate. Per Value - The amount that an investor will be repaid at maturity. This is also known as principal.

Bonds are rated. Investors can check Standard & Poor’s and Moody’s for ratings. A rating will tell you what the likelihood of being repaid at a later date. The highest investment ratings is AAA. A bond that earns a D means the bond is default.

The higher the bond rating, the lower the interest rate the company has to pay to get people to buy their bonds. An AAA bond might earn a person 5% annually. While a BBB bond might pay 7.5%

Advantages and Disadvantages to the Issuer: Once the bond is sold, the coupon rate for that bond will not go up or down. Bond holders do not own a portion of the company (like stockholders) The company does have to make fixed interest payments, even in in bad years and it can’t change interest rates even when the rates have gone down. if the firm does not maintain financial health, its bonds may be downgraded to a lower bond rating and thus may be harder to sell.

Types of Bonds Savings — Given in fixed denominations. Often given as gifts. Save investments Treasury Bonds - Offered by the US Treasury. Also very safe. Municipal Bonds - Offered by State and local govt to pay for construction projects. Safe and the interest paid is not subject to federal income tax.

Corporate Bonds - Sold by companies. Moderate risk (no guaranteed tax money to repay). Corporations that sell bonds are closely monitored by S&P/Moody’s + the Securities and Exchange Commission (SEC) Junk Bonds - Very risky. High rate of turnout (12% often), but very low bond ratings and so you might out of everything.

Other types of financial assets CDs - Fixed terms, lower interest rates, safe Money Market Mutual Funds - Investors earn a higher interest rate. Not covered by FDIC (makes these a tad riskier)

All financial assets can be sold on a primary or a secondary maker. In a primary market — Financial assets can only be redeemed by the person making the investment In a secondary market - Assets can be resold to others. Allows for more liquidity.

Companies can also sell stock to raise revenue. When you buy stock, you are buying shares in the company. Stockholders may earn dividends — Checks paid out quarterly and the size of the checks depends on the company’s profit Stockholders may earn capital gains.

Capital gains occur when you sell your stock at a higher price then you originally purchased it. You can also suffer a capital loss :( Common stock — Stockholders are voting members and they earn a vote per share Preferred stock - Nonvoting members, but stockholders were earn dividends before the owners of the common stock.

Purchasing stock can be very risky. If a company declares bankruptcy, bond holders will be paid back before stock holders. Dividends are never guaranteed.’

Stocks are traded via a stockbroker. He or she will charge a fee for each transaction they make. The good news is a stockbroker is trained in trading and most private individuals are not.

Stock is bought and sold on a stock market. The NYSE (New York Stock Exchange) is the nation’s largest and most prestigious exchange. The nation’s top 50 companies trade there. Trade only “blue chip” stock. The NASDAQ is an example of an OTC Market. Items are traded over computers (and not on trading floors). Today it is the second largest market in the world.

Futures — Contracts to buy or sell commodities at a specific date in the future at a price specified today. Options - Contracts that give investors the choice to buy or sell stock and other financial assets. Bull market — When stock prices are steadily rising. Bear market - Stocks are sluggish. People expect to make money in bull markets and lose during bear markets. In a bear market, people often sell off shares in anticipation that value will drop further.

The Dow Short for Dow Jones Industrial Average Will show how stocks traded each day since 1896