Saving & Investing, Bonds & Other Assets, & the Stock Market Financial Markets Saving & Investing, Bonds & Other Assets, & the Stock Market

What’s the Difference? Saving Investing

Investing The use of assets to earn income or profit Investment promotes economic growth and contributes to a nation’s wealth

Financial Intermediaries Institutions that help channel funds from savers to borrowers Examples Banks, savings and loan associations & credit unions Finance companies- make loans to consumers Mutual funds- pool the savings of many & invest it in a variety of stocks, bonds & other assets Life insurance companies Pension funds

Return & liquidity Assets that can be converted to cash easily are called liquid Typically speaking, assets that are very liquid will have a lower return

Return & risk The higher the potential return, the higher the risk CDs are safe investments When you buy a CD, you give up liquidity for a period of time, but will not lose any money CDs are insured by the government

What are bonds? Bonds are certificates sold by a company or government to finance a project or expansion They are loans or IOUs that represent a debt the seller must pay to the buyer They pay back the original amount, plus interest They are usually low-risk investments

Three components of bonds Coupon rate Interest rate that the bond issuer will pay to the bondholder Maturity Time at which the payment to the bondholder is due Can be 10, 20 or 30 years Par value Amount that an investor pays to purchase a bond Also called face value or principal

Example Suppose you buy a $1000 bond from Jeans, Etc. You are now called a “holder” and Jeans, Etc. is called the “issuer” If the coupon rate is 5% paid annually and the maturity rate is 10 years, how much money will you earn?

Bond ratings How do investors know which bonds to buy? Two firms rate and publish bond ratings Standard & Poor’s Moody’s The higher the bond rating, the lower the interest rate usually offered Higher rated bonds are usually less-risky

Types of Bonds- Savings bonds Low-denomination bonds issued by the government Funds from their sale pay for projects like roads, buildings and dams They are virtually risk-free They do not pay interest, they are instead sold below value You can buy at $50 bond for $25. When the bond matures, you receive the total amount.

Types of Bonds- Treasury Bonds, Bills & Notes Investments that offer different lengths of maturity They are very safe investments & are backed by the U.S. government

Types of Bonds- Municipal Bonds Issued by state & local governments Also called “munis” Most munis are safe investments, depending on the stability of the state or town Interest earned on these bonds is not taxed by the federal government which makes them very attractive to investors

Types of Bonds- Corporate Bonds Issued in fairly large denominations, usually at $1000 or more Interest earned is taxed as income They are moderately-risky Corporations that issue bonds are rated by S&P and Moody, and also the Securities & Exchange Commission (SEC) to help prevent fraud

Types of Bonds- Junk Bonds High-yield, low-rated and higher-paying bonds Very popular in the 80s & 90s They have paid over 12% interest in the past, but are prone to default

Other Types of Financial Assets Certificates of Deposit (CDs) Money Market Mutual Funds Most common forms of investment Available through banks, which lend out the funds over a fixed amount of time (6mos- 1year) Can cost as little at $100 & have varying maturity Types of mutual funds where intermediaries buy short-term financial assets such as US Treasury bills Not covered by FDIC Slightly riskier than savings accounts

Chapter 10: Money & Banking Section1 & 2

Uses of Money Money is anything that serves as a medium of exchange Without money, we would have to barter (trade) Bartering is still used in traditional economies in parts of Asia, Africa & Latin America

Three Uses For money As a medium of exchange for goods/services As a unit of account- enables us to compare values As a store of value- money keeps its value if you decide to save it

Characteristics of money Durability Portability Divisibility Uniformity Limited Supply Acceptability

Commodity money Objects that have value in and of themselves and are often used as money Examples are salt, cattle and precious stones Disadvantages?

Representative money Makes use of objects that have value because the holder can exchange them for something of value Paper receipts for gold, IOUs, bills of credit, Continentals (people thought they could not be redeemed because the government didn’t have the power to collect taxes so they had nothing to back up the currency with.)

Fiat Money “This note is legal tender for all debts, public and private. Our money is valuable because the government says it is Examples are dollar bills and coins Money by government decree. Paper currency was another popular from of fiat money in the colonies. The Continental Congress issued paper money to finance the Revolutionary War. In 1775, it printed Continental dollars, a form of fiat paper currency with no gold or silver backing. Why was the Continental dollar virtually worthless by the end of the revolution? By the end of the war, nearly one-quarter billion Continental dollars had been printed – a volume so large that it was virtually worthless by the end of the revolution.

Complete Section 2 on your own Pages 250-256

Money Supply All the money available in the U.S. economy The money supply is partially controlled by the Federal Reserve

M1- money that people can access immediately Includes assets that are liquid (easily converted to cash) Almost half of M1 is made up of currency outside bank vaults Deposits in checking accounts, traveler’s checks

M2- all assets in M1 plus near money M2 funds cannot be used as cash directly, but can be converted to cash easily Deposits in savings accounts, money market mutual funds

Complete the rest of Section 3 on your own Page 259-264