1. F INANCIAL F UNDAMENTALS F INANCE IN S OCIETY By Mrs. Phillips

2. A F INANCIAL S YSTEM Throughout this presentation, there are questions that you will need to answer. Open a word document and save it in your Net Shared folder as Financial Fundamentals.

3. F INANCE IN S OCIETY Goals Describe the role of finance in the economy. Identify types of financial markets Terms Money Finance Inflation Security Stock Bond Liquidity

4. F INANCIAL A CTIVITIES IN A CTION Each day, you participate in various financial transactions. You may buying an item from the store, receive a paycheck, borrow money, or pay for your lunch. Money is any item that serves as a method of payment. It could be coins, bank notes, credit or debit cards. List 5 items, from the past, that were used as forms of money. (If you get caught here, ask Brenden. He made some really good points in class last week)

5. M ONEY ? In a word document, describe what money means to you.

6. F INANCIAL A CTIVITIES IN A CTION Finance refers to activities involved with saving, investing, and using money by individuals, business, and governments. Every person is involved in finance in some way.

7. P ARTICIPANTS IN THE F INANCIAL S YSTEM When people, businesses, and governments in a country have financial relationships, a financial systems exists. These relationships may include saving, spending, paying taxes, earning interest, receiving a salary, or buying investments.

8. A F INANCIAL S YSTEM Individual Consumers and Investors Your first role in the financial system is as a consumer. Every time you buy something a financial exchange takes place. Ex: receive a paycheck, receive money for your birthday or graduation, purchase a CD.

9. A F INANCIAL S YSTEM Businesses Everyone depends on the goods and services provided by various companies. They sell the items you want and this in return pays for their operating expenses. (We will go in further detail about operating expenses and cost incurred when owning a business) Companies also borrow money.

10. A F INANCIAL S YSTEM Government We all use schools, parks, roads, police protection, and many other public services. To pay for these services the government collects taxes and other fees from the working people. The government also borrows money. List 2 possible benefits and drawbacks of government regulations on financial activities. (Think about imports/exports)

11. A F INANCIAL S YSTEM INDIVIDUALS Consumers and households make purchases. Individuals save, invest, and pay taxes. GOVERNMENT Federal, state, and local agencies collect taxes and borrow money to pay for public goods and services. BUSINESSES Corporations and other organizations sell items, pay expenses, and borrow to finance business operations.

12. F ACTORS THAT A FFECT F INANCIAL A CTIVITIES Economic Condition Interest Rates: The rate at which you borrow money. If you go to the bank to borrow $15,000 to purchase a car. You will pay back the $15,000 plus the interest. This is how banks make money. They charge a fee to borrow money. If consumer saving and investing increase the supply of money, interest rates tend to decrease and vice versa. Interest rates are determined by the force in supply and demand.

13. F ACTORS THAT A FFECT F INANCIAL A CTIVITIES Consumer Prices The price you pay for something. Inflation is a rise in the general level of prices. In times of inflation, the buying power of the dollar decreases. Ex: if an item cost $10o and prices increase by 5%, the same item will now cost $105. Therefore, it now takes more money to buy the exact same good or service. The CPI or Consumer Price Index is used to measure the average change in prices.

14. F ACTORS THAT A FFECT F INANCIAL A CTIVITIES Money supply Includes coins, paper currency, and checking accounts, affects spending and borrowing. The amount of money in circulation in an economy is another important influence on financial activities. If there is too much money in circulation, it can result in lower interest rates but high consumer prices. (The more money we have to spend, the more businesses will try to take)

15. F ACTORS THAT A FFECT F INANCIAL A CTIVITIES Governmental Regulations Governments create a regulations for fairness in financial transactions. SEC (Security and Exchange Commission) created in 1934, is one of the primary financial regulatory agencies. The main goals of the SEC are: 1. Promote clear and full investment information 2. To protect investors against fraud and deception.

16. C HECKPOINT In a word document, complete the following: Describe how each of the economic factors listed (interest rates, consumer prices, and money supply) might effect the financial decisions of individuals, businesses, and government. Name three economic factors that affect financial activities.

17. F INANCIAL MARKETS Whenever you buy or sell something, you participate in a market. A financial market is a location (physical or online) where buyers and sellers of financial products meet to conduct business. Financial markets involve the buying and selling of various assets and investments. Physical assets include houses, land, gold, and rare coins. Ownership investments include stocks or bonds. When transactions take place internationally, it is a global financial market.

18. F INANCIAL MARKETS In your word document, describe a business transaction for each situation: 1. Trading with no money 2. Buying with cash 3. Buying with a check or debit card 4. Buying by using credit Explain how each of these options involves the use of a market.

19. F INANCIAL MARKETS A security is an investment instrument issued by a corporation, government, or other organization representing ownership or a debt. A stock is a security representing ownership in a corporation. In contrast, a bond is debt, money that is borrowed by a company or government. Other examples of securities include: Mutual funds, certificates of deposit (CDs) and commodity futures.

20. F INANCIAL MARKETS You may work in groups for this exercise: In your word document, explain the difference between a stock and a bond. Describe a situation in which a company might use each of type of security. Prepare a list of factor’s a person might consider when deciding whether to invest in bonds or stocks.

21. F INANCIAL MARKETS Go to www.money.msn.comwww.money.msn.com Look for the stock ticker on the right hand side of the page. Under the sector watch, list 3 items from the strong and weak categories. List three current market events and describe how they impact the global financial market.

22. T YPES OF FINANCIAL M ARKETS Many financial markets exist around the world but they are commonly classified into two major categories: money markets and capital markets. Money Markets (short-term debt securities) Treasury bills Certificates of Deposit (CD) Commercial Paper Capital Markets (long-term securities) Treasury Notes and Bonds Corporate and Municipal Bonds Common and Preferred Stock

23. T YPES OF FINANCIAL M ARKETS Money Markets Are financial markets where short term debt securities (less than one year) are bought and sold. Usually have a lower risk than investments with longer maturities. Capital Markets When an organization is in need of funds for long-term use, it will become involved in capital markets. These are issued for longer than one year. Debt securities represent borrowing by companies or government. Ex: bonds issued by corporations and municipal bonds issued by sate and local governments. Equity securities represent ownership. Most common type is stock.

24. V ALUE OF S ECURITIES Investors are continually interest in the value of assts they own. Many factors can affect the value of a security. The most common of these are: 1. Supply and Demand – the more desire there is for a certain investment the value of it will likely increase. The more attractive an investment, the more investors, thus increases the value of a companies stock. And, vice versa. 1. The same goes for video games, cell phones, ipods, ipads, etc…the more people that want an item, the more likely it is for a company to raise the price.

25. V ALUE OF S ECURITIES 2. Future Cash Flows – when making an investment, you expect to receive money in the future. Larger amounts of future cash flows will increase the value a person will pay for an investment. The expected return is the amount of future cash inflows. The rate of return (or yield) is the relationship between the amount received and the cost of the investment. Ex: You receive $1,000 for a $10,000 investment. The rate of return is 10%. ($1,000 divided by $10,000)

26. V ALUE OF S ECURITIES 3. Risk – every investor and business manager must consider risk. The changes include economic conditions, political uncertainty, and shifting consumer buying preferences. Ex: Going back to the sock industry. We already know that the sock industry has, for the most part, moved over seas. However, before it officially moved, it was a higher risk to start a sock company. Banks and lenders had to decide how risky it would be to loan a up and coming sock business money when the industry was headed out of the area. However higher risk investments often result in higher potential returns.

27. V ALUE OF S ECURITIES 4. Liquidity – The value of a security is often influenced by its ability to be converted to cash. It refers to the ease and speed with which an investment can be converted into cash. 5. Interest Rates – the cost of money, measured by interest rates, if another important factor affecting the value of an investment. Ex: if interest rates rise, more people will likely put their money in a savings account instead of buying stock.

28. C HECKPOINT Name 5 factors that affect the value of securities.

29. T HINK C RITICALLY These web sites will be of value in answering the following questions: Financial Times The Wall Street Journal The Economist Federal Reserve System Yahoo! Finance The Motley Fool Yahoo! Bonds MarketWatch BondsOnline Treasury Direct

30. T HINK C RITICALLY Use this lesson and the internet to answer the following questions: 1. Are interest rates expected to rise? 2. What are the best investments during times of inflation? 3. Should a company use debt or equity to finance a new factory?