2. Managing Your Money
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3. 4B Activity Review Go through Discussion Iteration Formula FV function
1. What would be another way to calculate interest rather than just adding up the individual interest amounts
2. What percentage of the balance is the interest and what percent is the principal? Do these percentages change if you modify the principal or APR? How?
3. What are some of the pros and cons to each of the three methods you have used?
4. Which of the three methods is your favorite way to calculate the balance and why?
5. What impressions or insights have you gained from this exercise?

4. Savings Plans and Investments
Unit 4C
Savings Plans and Investments
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5. Suppose you want to save money…
You could deposit a lump sum of money today and let it grow through the power of compound interest.
Most people deposit smaller amounts on a regular basis.
Long term saving plans are so popular that many have special names, some even get special tax treatment: IRA (individual retirement accounts), 401(k) plans, Keogh plans, and employee pension plans.
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6. Savings Plan Formula (Regular Payments)
A = accumulated savings plan balance
PMT = regular payment (deposit) amount
APR = annual percentage rate (as a decimal)
n = number of payment periods per year
Y = number of years
The derivation of the annuity formula in the book is very approachable for most students and might be discussed if time permits. Several savings scenarios can be worked through to get acquainted with this formula. The more realistic, the better.
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7. Definitions An annuity is any series of equal, regular payments.
An ordinary annuity is a savings plan in which payments are made at the end of each month.
An annuity due is a plan in which payments are made at the beginning of each period.
The future value of an annuity is the accumulated amount at some future date.
The present value of a savings plan is a lump sum deposit that would give the same end result as regular payments into the plan.
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8. Using the Savings Plan Formula CN (1)
Use the savings plan formula to calculate the balance after 6 months for an APR of 12% and monthly payments of $100. 1.
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9. Retirement Plan CN (2)
At age 30, Michelle starts and IRA to save for retirement.
2. She deposits $100 at the end of each month. If she can count on an APR of 6%, how much will she have when she retires 35 years later at age 65?
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10. Planning Ahead with Savings Plans
For planning ahead, the important questions is this:
Given a financial goal (the total amount A after a certain number years), what regular payments are needed to reach the goal?
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11. College Savings Plan at 3% CN (3)
You want to build a $100,000 college fun in 18 years by making regular, end of month deposits.
3. Assuming an APR of 3%, calculate how much you should deposit monthly.
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12. A comfortable retirement CN (4-5)
You would like to retire 25 years from now, and you would like to have a retirement fund from which you can draw an income of $50,000 per year—forever!
4. How can you do it?
5. Assume a constant APR of 7%
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13. Total Return
Consider an investment that grows from an original principal P to a later accumulated balance A.
The total return is the relative change in the investment value:
Many examples from portfolio quarterly statements or brochures will show both percentages and make great examples to share with students.
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14. Annual Return
Consider an investment that grows from an original principal P to a later accumulated balance A in Y years.
The annual return is the annual percentage yield (APY) that would give the same overall growth.
Many examples from portfolio quarterly statements or brochures will show both percentages and make great examples to share with students.
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15. Total Return
Example:
Suppose that you decided to invest in some real estate property in the year The amount of your original investment is $27,500. In the year 2013 you decide to sell and receive $43,400 for the property.
What is your total return percentage?
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16. Annual Return Example:
Suppose that you decided to invest in some real estate property in the year The amount of your original investment is $27,500. In the year 2013 you decide to sell and receive $43,400 for the property.
What is your annual return percentage?
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17. Mutual Fund Gain CN (6)
You invest $3000 in the Clearwater mutual fund. Over 4 years, your investment grow in value to $8400.
1. What are your total and annual returns for the 4 year period?
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18. Investment loss CN (7)
You purchased shares in NewWeb.com for $ Three years later, you sold them for $1100.
2. What were your total return and annual return on this investment?
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19. Types of Investments
Stock (or equity) gives you a share of ownership in a company.
Invest some principal amount to purchase the stock.
The only way to get your money out is to sell the stock.
Stock prices change with time, so the sale may give you either a gain or a loss on your original investment.
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20. Types of Investments
A bond (or debt) represents a promise of future cash.
Buy a bond by paying some principal amount to the issuing government or corporation.
The issuer pays you simple interest (as opposed to compound interest).
The issuer promises to pay back your principal at some later date.
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21. Types of Investments
Cash investments generally earn interest and include the following:
Money you deposit into bank accounts
Certificates of deposit (CD)
U.S. Treasury bills
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22. Investing….
There are two basic ways to invest in any of these categories.
First – invest directly, which means buying individual investments yourself.
Second – invest indirectly, which means you can purchase shares in a mutual fund, where a professional fund manager invests your money.
Stock mutual funds - in stocks.
Bond mutual funds – in bonds
Money market funds – in cash
Diversified funds – in a mixture of stocks, bonds and cash.
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23. Investment Considerations
Liquidity: How difficult is it to take out your money?
Risk: Is your investment principal at risk?
Return: How much return (total or annual) can you expect on your investment?
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24. Most Difficult
One of the most difficult tasks of investing is trying to balance risk and return.
Financial Analysts look at historical trends by using an index that describes the overall performance of some category of investment.
Best known index is Dow Jones Industrial Average – it reflects the prices of the stocks of 30 large companies.
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25. Stock Market Trends
In light of recent market trends, the Dow Jones Average graphs can generate a significant amount of discussion in the area of investments.
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26. Historical Returns CN (7)
Suppose your great-great grandmother invested $100 at the end of 1900 in each of three funds that tracked the averages of stocks, bonds, and cash, respectively.
3. Assuming that her investments grew at the rates given in table 4.6, approximately how much would each investment have been worth more or less today?
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27. Financial Data—Stocks
In general, there are two ways to make money on stocks:
Sell a stock for more than you paid for it, in which case you have a capital gain on the sale of the stock.
Make money while you own the stock if the corporation distributes part or all of its profits to stockholders as dividends.
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28. The Financial Pages
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29. NYSE Composite Transactions
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30. Financial Data—Bonds p.240
Bonds are issued with three main characteristics:
The face value (or par value) is the price you must pay the issuer to buy the bond.
The coupon rate of the bond is the simple interest rate that the issuer promises to pay.
The maturity date is the date on which the issuer promises to repay the face value of the bond.
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31. Bond Interest CN (9)
The closing price of a US Treasury bond with a face value of $1000 is quoted as points, for a current yield of 3.7%.
4. If you buy this bond, how much annual interest will you receive?
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32. Financial Data—Mutual Funds p.242
When comparing mutual funds, the most important factors are the following:
The fees charged for investing (not shown on most mutual fund tables)
Measures of how well the manager is doing with the fund’s money
Note: Past performance is no guarantee of future results.
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33. Mutual Fund Quotations
Encourage students to analyze actual quote tables from business sections of a newspaper.
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34. Understanding the Mutual Fund Quote CN (10-11)
Answer the following questions based on the Vanguard 500 mutual fund quote shown in Figure 4.7.
Suppose you decide to invest $3000 in this fund today.
5. How many shares will you be able to buy?
Suppose you invested $3000 in this fund 3 years ago.
6. How much would your investment be worth now?
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35. Homework 4C Discussion on 4B Class Notes 1-11 Quick Quiz p.243
Exercises p.244:1 - 14
1 Web
78. Investment Tracking
79. Dow Jones Industrial Average
80. Company Research
81. Financial Web Sites
82. Other Averages
83. Online Brokers
1 World
84. Advertised Investment
85. Financial Pages
86. Personal Investment Options
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