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

2. What’s the Difference?
Saving
Investing

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

4. 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

5. 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

6. 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

7. 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

8. 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

10. 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?

11. 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

13. 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.

14. 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

16. 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

17. 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

18. 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

19. 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

20. Chapter 10: Money & Banking
Section1 & 2

21. 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

22. 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

23. Characteristics of money
Durability
Portability
Divisibility
Uniformity
Limited Supply
Acceptability

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

25. 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.)

26. 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.

27. Complete Section 2 on your own
Pages

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

29. 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

30. 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

31. Complete the rest of Section 3 on your own
Page