1. Begin End ShowTable of Contents THE FINANCIAL SECTOR - 9.3.2 Copyright © 2013 N.S.

2. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Table of Contents Stock Market Game The Financial System Learning Targets The Financial System Learning Targets Basics of the Financial System Risk and Reward Functions of the Financial System Types of Financial Assets Financial Intermediaries The Stock Market Access Prior Knowledge Set Goals New Information Activity Conclusion Stock Market Expectations

3. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Stock Market Game The class will be divided into groups of 4 or 5 students. Each group member will pick and track two stocks using the list of companies from the Dow Jones Industrial Average. Each company can only be chosen once within your group. You have $1,000 for each of your two stocks ($2,000 total). Calculate the values of your two stocks each year from 2008 to 2013. The yearly values will be revealed one at a time. After the final year, add each group member’s profits (or losses) together. The group that makes the most money wins! Go to the Data

4. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Stock Market Game Show 2008 Data Company200820092010201120122013 3M Alcoa American Express AT&T Bank of America Boeing Caterpillar Chevron Cisco Systems Coca-Cola DuPont ExxonMobil General Electric Hewlett- Packard Home Depot Company200820092010201120122013 Intel IBM Johnson & Johnson JPMorgan Chase McDonald’s Merck Microsoft Pfizer Procter & Gamble Travelers UnitedHealth United Technologies Verizon Wal-Mart Walt Disney

5. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Stock Market Game Show 2009 Data Company200820092010201120122013 3M Alcoa American Express AT&T Bank of America Boeing Caterpillar Chevron Cisco Systems Coca-Cola DuPont ExxonMobil General Electric Hewlett- Packard Home Depot Company200820092010201120122013 Intel IBM Johnson & Johnson JPMorgan Chase McDonald’s Merck Microsoft Pfizer Procter & Gamble Travelers UnitedHealth United Technologies Verizon Wal-Mart Walt Disney Company200820092010201120122013 3M84.24 Alcoa36.46 American Express 52.09 AT&T41.51 Bank of America 41.53 Boeing87.57 Caterpillar72.56 Chevron93.96 Cisco Systems27.00 Coca-Cola30.73 DuPont44.15 ExxonMobil94.15 General Electric 37.10 Hewlett- Packard 50.48 Home Depot27.13 Company200820092010201120122013 Intel26.28 IBM108.9 Johnson & Johnson 66.56 JPMorgan Chase 43.55 McDonald’s59.48 Merck58.15 Microsoft35.79 Pfizer22.76 Procter & Gamble 73.59 Travelers53.66 UnitedHealth57.19 United Technologies 76.64 Verizon40.84 Wal-Mart47.41 Walt Disney32.32

6. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Company200820092010201120122013 Intel26.28 IBM108.9 Johnson & Johnson 66.56 JPMorgan Chase 43.55 McDonald’s59.48 Merck58.15 Microsoft35.79 Pfizer22.76 Procter & Gamble 73.59 Travelers53.66 UnitedHealth57.19 United Technologies 76.64 Verizon40.84 Wal-Mart47.41 Walt Disney32.32 Company200820092010201120122013 3M84.24 Alcoa36.46 American Express 52.09 AT&T41.51 Bank of America 41.53 Boeing87.57 Caterpillar72.56 Chevron93.96 Cisco Systems27.00 Coca-Cola30.73 DuPont44.15 ExxonMobil94.15 General Electric 37.10 Hewlett- Packard 50.48 Home Depot27.13 Stock Market Game Show 2010 Data Company200820092010201120122013 3M84.2457.55 Alcoa36.4611.36 American Express 52.0919.20 AT&T41.5128.74 Bank of America 41.5313.92 Boeing87.5742.80 Caterpillar72.5644.91 Chevron93.9674.23 Cisco Systems27.0016.41 Coca-Cola30.7322.70 DuPont44.1525.42 ExxonMobil94.1580.06 General Electric 37.1016.51 Hewlett- Packard 50.4836.25 Home Depot27.1323.07 Company200820092010201120122013 Intel26.2814.69 IBM108.983.89 Johnson & Johnson 66.5660.13 JPMorgan Chase 43.5531.19 McDonald’s59.4862.38 Merck58.1530.46 Microsoft35.7919.53 Pfizer22.7617.88 Procter & Gamble 73.5961.69 Travelers53.6645.26 UnitedHealth57.1926.70 United Technologies 76.6453.46 Verizon40.8431.88 Wal-Mart47.4155.98 Walt Disney32.3222.76

7. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Company200820092010201120122013 Intel26.2814.69 IBM108.983.89 Johnson & Johnson 66.5660.13 JPMorgan Chase 43.5531.19 McDonald’s59.4862.38 Merck58.1530.46 Microsoft35.7919.53 Pfizer22.7617.88 Procter & Gamble 73.5961.69 Travelers53.6645.26 UnitedHealth57.1926.70 United Technologies 76.6453.46 Verizon40.8431.88 Wal-Mart47.4155.98 Walt Disney32.3222.76 Company200820092010201120122013 3M84.2457.55 Alcoa36.4611.36 American Express 52.0919.20 AT&T41.5128.74 Bank of America 41.5313.92 Boeing87.5742.80 Caterpillar72.5644.91 Chevron93.9674.23 Cisco Systems27.0016.41 Coca-Cola30.7322.70 DuPont44.1525.42 ExxonMobil94.1580.06 General Electric 37.1016.51 Hewlett- Packard 50.4836.25 Home Depot27.1323.07 Stock Market Game Show 2011 Data Company200820092010201120122013 3M84.2457.5583.09 Alcoa36.4611.3616.47 American Express 52.0919.2040.81 AT&T41.5128.7428.41 Bank of America 41.5313.9215.24 Boeing87.5742.8055.72 Caterpillar72.5644.9157.65 Chevron93.9674.2378.20 Cisco Systems27.0016.4124.11 Coca-Cola30.7322.7028.58 DuPont44.1525.4233.98 ExxonMobil94.1580.0668.72 General Electric 37.1016.5115.22 Hewlett- Packard 50.4836.2551.54 Home Depot27.1323.0729.15 Company200820092010201120122013 Intel26.2814.6920.79 IBM108.983.89131.2 Johnson & Johnson 66.5660.1364.71 JPMorgan Chase 43.5531.1941.79 McDonald’s59.4862.3862.63 Merck58.1530.4636.82 Microsoft35.7919.5330.62 Pfizer22.7617.8818.27 Procter & Gamble 73.5961.6961.11 Travelers53.6645.2650.15 UnitedHealth57.1926.7031.38 United Technologies 76.6453.4670.21 Verizon40.8431.8831.21 Wal-Mart47.4155.9853.74 Walt Disney32.3222.7632.50

8. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Company200820092010201120122013 Intel26.2814.6920.79 IBM108.983.89131.2 Johnson & Johnson 66.5660.1364.71 JPMorgan Chase 43.5531.1941.79 McDonald’s59.4862.3862.63 Merck58.1530.4636.82 Microsoft35.7919.5330.62 Pfizer22.7617.8818.27 Procter & Gamble 73.5961.6961.11 Travelers53.6645.2650.15 UnitedHealth57.1926.7031.38 United Technologies 76.6453.4670.21 Verizon40.8431.8831.21 Wal-Mart47.4155.9853.74 Walt Disney32.3222.7632.50 Company200820092010201120122013 3M84.2457.5583.09 Alcoa36.4611.3616.47 American Express 52.0919.2040.81 AT&T41.5128.7428.41 Bank of America 41.5313.9215.24 Boeing87.5742.8055.72 Caterpillar72.5644.9157.65 Chevron93.9674.2378.20 Cisco Systems27.0016.4124.11 Coca-Cola30.7322.7028.58 DuPont44.1525.4233.98 ExxonMobil94.1580.0668.72 General Electric 37.1016.5115.22 Hewlett- Packard 50.4836.2551.54 Home Depot27.1323.0729.15 Stock Market Game Show 2012 Data Company200820092010201120122013 3M84.2457.5583.0986.75 Alcoa36.4611.3616.4715.82 American Express 52.0919.2040.8143.30 AT&T41.5128.7428.4129.68 Bank of America 41.5313.9215.2413.85 Boeing87.5742.8055.7266.15 Caterpillar72.5644.9157.6594.38 Chevron93.9674.2378.2091.66 Cisco Systems27.0016.4124.1120.45 Coca-Cola30.7322.7028.5832.94 DuPont44.1525.4233.9850.05 ExxonMobil94.1580.0668.7273.72 General Electric 37.1016.5115.2218.49 Hewlett- Packard 50.4836.2551.5442.22 Home Depot27.1323.0729.1535.20 Company200820092010201120122013 Intel26.2814.6920.7921.01 IBM108.983.89131.2147.2 Johnson & Johnson 66.5660.1364.7162.63 JPMorgan Chase 43.5531.1941.7943.00 McDonald’s59.4862.3862.6377.10 Merck58.1530.4636.8236.29 Microsoft35.7919.5330.6228.05 Pfizer22.7617.8818.2717.70 Procter & Gamble 73.5961.6961.1164.39 Travelers53.6645.2650.1556.09 UnitedHealth57.1926.7031.3836.38 United Technologies 76.6453.4670.2179.19 Verizon40.8431.8831.2136.06 Wal-Mart47.4155.9853.7454.23 Walt Disney32.3222.7632.5037.74

9. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Company200820092010201120122013 Intel26.2814.6920.7921.01 IBM108.983.89131.2147.2 Johnson & Johnson 66.5660.1364.7162.63 JPMorgan Chase 43.5531.1941.7943.00 McDonald’s59.4862.3862.6377.10 Merck58.1530.4636.8236.29 Microsoft35.7919.5330.6228.05 Pfizer22.7617.8818.2717.70 Procter & Gamble 73.5961.6961.1164.39 Travelers53.6645.2650.1556.09 UnitedHealth57.1926.7031.3836.38 United Technologies 76.6453.4670.2179.19 Verizon40.8431.8831.2136.06 Wal-Mart47.4155.9853.7454.23 Walt Disney32.3222.7632.5037.74 Company200820092010201120122013 3M84.2457.5583.0986.75 Alcoa36.4611.3616.4715.82 American Express 52.0919.2040.8143.30 AT&T41.5128.7428.4129.68 Bank of America 41.5313.9215.2413.85 Boeing87.5742.8055.7266.15 Caterpillar72.5644.9157.6594.38 Chevron93.9674.2378.2091.66 Cisco Systems27.0016.4124.1120.45 Coca-Cola30.7322.7028.5832.94 DuPont44.1525.4233.9850.05 ExxonMobil94.1580.0668.7273.72 General Electric 37.1016.5115.2218.49 Hewlett- Packard 50.4836.2551.5442.22 Home Depot27.1323.0729.1535.20 Stock Market Game Show 2013 Data Company200820092010201120122013 3M84.2457.5583.0986.7583.76 Alcoa36.4611.3616.4715.828.94 American Express 52.0919.2040.8143.3048.30 AT&T41.5128.7428.4129.6830.46 Bank of America 41.5313.9215.2413.855.75 Boeing87.5742.8055.7266.1574.70 Caterpillar72.5644.9157.6594.3892.77 Chevron93.9674.2378.2091.66108.7 Cisco Systems27.0016.4124.1120.4518.55 Coca-Cola30.7322.7028.5832.9435.08 DuPont44.1525.4233.9850.0546.58 ExxonMobil94.1580.0668.7273.7285.97 General Electric 37.1016.5115.2218.4918.23 Hewlett- Packard 50.4836.2551.5442.2226.32 Home Depot27.1323.0729.1535.2042.41 Company200820092010201120122013 Intel26.2814.6920.7921.0124.62 IBM108.983.89131.2147.2186.7 Johnson & Johnson 66.5660.1364.7162.6365.59 JPMorgan Chase 43.5531.1941.7943.0034.06 McDonald’s59.4862.3862.6377.10101.3 Merck58.1530.4636.8236.2937.88 Microsoft35.7919.5330.6228.0526.55 Pfizer22.7617.8818.2717.7021.86 Procter & Gamble 73.5961.6961.1164.3966.30 Travelers53.6645.2650.1556.0960.11 UnitedHealth57.1926.7031.3836.3851.24 United Technologies 76.6453.4670.2179.1974.91 Verizon40.8431.8831.2136.0640.28 Wal-Mart47.4155.9853.7454.2359.97 Walt Disney32.3222.7632.5037.7437.97

10. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Company200820092010201120122013 Intel26.2814.6920.7921.0124.62 IBM108.983.89131.2147.2186.7 Johnson & Johnson 66.5660.1364.7162.6365.59 JPMorgan Chase 43.5531.1941.7943.0034.06 McDonald’s59.4862.3862.6377.10101.3 Merck58.1530.4636.8236.2937.88 Microsoft35.7919.5330.6228.0526.55 Pfizer22.7617.8818.2717.7021.86 Procter & Gamble 73.5961.6961.1164.3966.30 Travelers53.6645.2650.1556.0960.11 UnitedHealth57.1926.7031.3836.3851.24 United Technologies 76.6453.4670.2179.1974.91 Verizon40.8431.8831.2136.0640.28 Wal-Mart47.4155.9853.7454.2359.97 Walt Disney32.3222.7632.5037.7437.97 Company200820092010201120122013 3M84.2457.5583.0986.7583.76 Alcoa36.4611.3616.4715.828.94 American Express 52.0919.2040.8143.3048.30 AT&T41.5128.7428.4129.6830.46 Bank of America 41.5313.9215.2413.855.75 Boeing87.5742.8055.7266.1574.70 Caterpillar72.5644.9157.6594.3892.77 Chevron93.9674.2378.2091.66108.7 Cisco Systems27.0016.4124.1120.4518.55 Coca-Cola30.7322.7028.5832.9435.08 DuPont44.1525.4233.9850.0546.58 ExxonMobil94.1580.0668.7273.7285.97 General Electric 37.1016.5115.2218.4918.23 Hewlett- Packard 50.4836.2551.5442.2226.32 Home Depot27.1323.0729.1535.2042.41 Stock Market Game Company200820092010201120122013 3M84.2457.5583.0986.7583.7694.19 Alcoa36.4611.3616.4715.828.948.88 American Express 52.0919.2040.8143.3048.3058.33 AT&T41.5128.7428.4129.6830.4634.39 Bank of America 41.5313.9215.2413.855.7512.05 Boeing87.5742.8055.7266.1574.7076.55 Caterpillar72.5644.9157.6594.3892.7792.95 Chevron93.9674.2378.2091.66108.7110.3 Cisco Systems27.0016.4124.1120.4518.5520.12 Coca-Cola30.7322.7028.5832.9435.0836.99 DuPont44.1525.4233.9850.0546.5845.95 ExxonMobil94.1580.0668.7273.7285.9787.79 General Electric 37.1016.5115.2218.4918.2321.51 Hewlett- Packard 50.4836.2551.5442.2226.3214.83 Home Depot27.1323.0729.1535.2042.4163.57 Company200820092010201120122013 Intel26.2814.6920.7921.0124.6221.15 IBM108.983.89131.2147.2186.7194.1 Johnson & Johnson 66.5660.1364.7162.6365.5971.02 JPMorgan Chase 43.5531.1941.7943.0034.0644.98 McDonald’s59.4862.3862.6377.10101.389.4 Merck58.1530.4636.8236.2937.8841.86 Microsoft35.7919.5330.6228.0526.5527.25 Pfizer22.7617.8818.2717.7021.8625.53 Procter & Gamble 73.5961.6961.1164.3966.3068.65 Travelers53.6645.2650.1556.0960.1173.09 UnitedHealth57.1926.7031.3836.3851.2454.88 United Technologies 76.6453.4670.2179.1974.9183.43 Verizon40.8431.8831.2136.0640.2844.49 Wal-Mart47.4155.9853.7454.2359.9768.93 Walt Disney32.3222.7632.5037.7437.9750.80 Answer the Conclusion questions at the bottom of your sheet.

11. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. “The Financial System” Targets Knowledge Understand the importance and features of the financial system. Reasoning Explain how supply and demand, risk, and expectations about the future determine the interest rate (and price) for financial assets.

12. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Basics of the Financial System The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system.

13. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Basics of the Financial System The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system. 1) Financial markets are where people invest their accumulated savings, or wealth. Some financial markets and institutions include the stock market, the bond market, and banks.

14. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Basics of the Financial System The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system. 1) Financial markets are where people invest their accumulated savings, or wealth. Whenever you deposit money in the bank, you are “buying” a financial asset for yourself. 2) Most investments are financial assets, meaning the buyer gets future income from the seller.

15. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Basics of the Financial System The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system. 1) Financial markets are where people invest their accumulated savings, or wealth. When investing in physical assets, such as real estate, you can use the object however you wish, such as renting it or selling it. 2) Most investments are financial assets, meaning the buyer gets future income from the seller. 3) People can also invest in physical assets, such as a house or machinery.

16. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Basics of the Financial System The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system. 1) Financial markets are where people invest their accumulated savings, or wealth. 2) Most investments are financial assets, meaning the buyer gets future income from the seller. 3) People can also invest in physical assets, such as a house or machinery. 4) A liability is a requirement to pay someone in the future. If you were to take a loan out from the bank to buy a new car, the loan is a liability from your point of view and an asset from the bank’s point of view.

17. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Functions of the Financial System The purpose of the financial system is to reduce transaction costs, reduce financial risk, and provide liquidity.

18. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Functions of the Financial System The purpose of the financial system is to reduce transaction costs, reduce financial risk, and provide liquidity. 1) Reduce Transaction Costs These are the costs of negotiating and executing a legal deal. Such costs may include paying legal fees, drawing up documents, or negotiating the terms of a deal.

19. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Functions of the Financial System The purpose of the financial system is to reduce transaction costs, reduce financial risk, and provide liquidity. 1) Reduce Transaction Costs These are the costs of negotiating and executing a legal deal. People are generally risk-averse, meaning they prefer lower returns on a safe investment than the higher returns on a riskier investment. 2) Reduce Financial Risk People are more willing to make investments if risk is minimized.

20. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Functions of the Financial System The purpose of the financial system is to reduce transaction costs, reduce financial risk, and provide liquidity. 1) Reduce Transaction Costs These are the costs of negotiating and executing a legal deal. 2) Reduce Financial Risk People are more willing to make investments if risk is minimized. 3) Provide Liquidity Liquid investments can be easily turned into cash without a loss. Illiquid investments cannot. Investments must be somewhat liquid since the future is uncertain.

21. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Types of Financial Assets Financial assets have value because of a contractual agreement between two parties. (They have no physical value, like physical assets.)

22. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Types of Financial Assets Financial assets have value because of a contractual agreement between two parties. (They have no physical value, like physical assets.) 1) Bank Deposits Includes checking, savings, and money market accounts. Bank deposits are viewed as an asset by the depositor, and they are viewed as a liability by the bank.

23. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Types of Financial Assets Financial assets have value because of a contractual agreement between two parties. (They have no physical value, like physical assets.) 1) Bank Deposits Includes checking, savings, and money market accounts. Most loans are made by banks to individuals or to firms. Banks view loans as an asset, and the individual or firm view them as a liability. 2) Loans Money given to another in return for future payment with interest.

24. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Types of Financial Assets Financial assets have value because of a contractual agreement between two parties. (They have no physical value, like physical assets.) 1) Bank Deposits Includes checking, savings, and money market accounts. This bond has not been filled out, but we can see that it matures 30 years from the issue date. Bonds come in a variety of denominations and interest rates. 2) Loans Money given to another in return for future payment with interest. 3) Bonds Bondholders loan money to a firm (or government) and are repaid with interest on a specified date.

25. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Types of Financial Assets Financial assets have value because of a contractual agreement between two parties. (They have no physical value, like physical assets.) 1) Bank Deposits Includes checking, savings, and money market accounts. Owners of stock are referred to as shareholders. The percentage of shares of stock you own determines the percentage of assets you are entitled to. 2) Loans Money given to another in return for future payment with interest. 3) Bonds Bondholders loan money to a firm (or government) and are repaid with interest on a specified date. 4) Stocks Stockholders have part ownership of the company and its profits.

26. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Financial Intermediaries Financial intermediaries are institutions that gather together money from many people and transform those funds into financial assets.

27. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Financial Intermediaries Financial intermediaries are institutions that gather together money from many people and transform those funds into financial assets. 1) Mutual Funds Creates a diversified financial portfolio and resells shares of the portfolio to investors. If an individual wanted to create a diversified portfolio, it would be very difficult. Mutual funds make it possible for small investors to achieve diversification.

28. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Financial Intermediaries Financial intermediaries are institutions that gather together money from many people and transform those funds into financial assets. 1) Mutual Funds Creates a diversified financial portfolio and resells shares of the portfolio to investors. Pension funds are established by employers for their employees. They pay into it during their working years and receive money from it after retirement. 2) Pension Funds Is similar to a mutual fund, and provides retirement income.

29. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Financial Intermediaries Financial intermediaries are institutions that gather together money from many people and transform those funds into financial assets. 1) Mutual Funds Creates a diversified financial portfolio and resells shares of the portfolio to investors. Because financial difficulties often arise as a result of a death in the family, life insurance policies are a great way to reduce financial risk. 2) Pension Funds Is similar to a mutual fund, and provides retirement income. 3) Life Insurance Guarantees payment to a client’s beneficiaries upon death.

30. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Financial Intermediaries Financial intermediaries are institutions that gather together money from many people and transform those funds into financial assets. 1) Mutual Funds Creates a diversified financial portfolio and resells shares of the portfolio to investors. Banks use the liquid assets of its depositors to finance the illiquid investment needs of its borrowers. Thus, money deposited in banks is lent out as loans. 2) Pension Funds Is similar to a mutual fund, and provides retirement income. 3) Life Insurance Guarantees payment to a client’s beneficiaries upon death. 4) Banks Banks provide liquid assets and also meet investment needs.

31. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Stock Market Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time.

32. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Stock Market Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time. 1) A stock has value because of its ability to generate future income. The value of financial assets is derived from their future consumption. This is different from goods and services, which are consumed in the present.

33. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Stock Market Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time. 1) A stock has value because of its ability to generate future income. A) The company may pay interest or dividends to its shareholders. Many companies pay dividends to all or some of their shareholders at various times. Dividends are payouts of some of the company’s earnings.

34. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Stock Market Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time. 1) A stock has value because of its ability to generate future income. A) The company may pay interest or dividends to its shareholders. The goal of any investor is to buy low and sell high. When the stock market is rising, it is called a bull market. When it is falling, it is called a bear market. B) The shareholder may sell the stock for a profit.

35. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. D1D1 S1S1 The Stock Market Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time. 1) A stock has value because of its ability to generate future income. A) The company may pay interest or dividends to its shareholders. Supply and demand determine equilibrium in the stock market. Shareholders who want to sell their stock “supply” it to investors who “demand” it. B) The shareholder may sell the stock for a profit. 2) A stock’s price is determined by expectations about the future. E1E1

36. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. D1D1 S1S1 The Stock Market Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time. 1) A stock has value because of its ability to generate future income. A) The company may pay interest or dividends to its shareholders. Suppose Verizon announces higher future earnings. Investors will surely want to purchase their stock, while current shareholders will be reluctant to sell. B) The shareholder may sell the stock for a profit. D1D1 S1S1 D Good S Good 2) A stock’s price is determined by expectations about the future. A) If expectations are good: i) Demand increases ii) Supply decreases E Good E1E1

37. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. The Stock Market Remember that stock is a financial asset. Any owner of stock can hold onto or sell his/her shares of stock at any time. 1) A stock has value because of its ability to generate future income. A) The company may pay interest or dividends to its shareholders. Suppose Verizon announces bankruptcy. Investors will purchase other stocks, while current shareholders will sell in order to cut their losses. B) The shareholder may sell the stock for a profit. 2) A stock’s price is determined by expectations about the future. A) If expectations are good: i) Demand increases ii) Supply decreases B) If expectations are bad: i) Demand decreases ii) Supply increases D1D1 S1S1 D1D1 S1S1 D Bad S Bad E Bad E1E1

38. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Stock Market Expectations Current stock prices are determined by expectations about the future, but how are these expectations formed?

39. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Stock Market Expectations Current stock prices are determined by expectations about the future, but how are these expectations formed? 1) Efficient Markets Hypothesis A) Stock prices always reflect all publicly available information. Such information might include the changing price of a company’s inputs, the time of year, new product lines, or the strength of competition from other firms.

40. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Stock Market Expectations Current stock prices are determined by expectations about the future, but how are these expectations formed? 1) Efficient Markets Hypothesis A) Stock prices always reflect all publicly available information. Notice how stock prices are very erratic in the short run, making them very difficult to predict. In the long run, however, the stock market consistently rises. B) Only new information changes price. Thus, the value of stock follows a random walk.

41. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Stock Market Expectations Current stock prices are determined by expectations about the future, but how are these expectations formed? 1) Efficient Markets Hypothesis A) Stock prices always reflect all publicly available information. Because of the unpredictability of the future, the efficient markets hypothesis contends that no investor can consistently outsmart the stock market. B) Only new information changes price. Thus, the value of stock follows a random walk. C) Thus, it is impossible to “beat the market.”

42. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Stock Market Expectations Current stock prices are determined by expectations about the future, but how are these expectations formed? 1) Efficient Markets Hypothesis A) Stock prices always reflect all publicly available information. Stock prices decreased by one half in less than two years. Many question whether such a drop in prices accurately reflected changes in available information. B) Only new information changes price. Thus, the value of stock follows a random walk. C) Thus, it is impossible to “beat the market.” 2) Irrational Markets A) Many investors think stock prices are not always rational.

43. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Stock Market Expectations Current stock prices are determined by expectations about the future, but how are these expectations formed? 1) Efficient Markets Hypothesis A) Stock prices always reflect all publicly available information. Warren Buffett, here seated with Barack Obama, has become a billionaire by purchasing under-priced stock and selling it later for a large profit. B) Only new information changes price. Thus, the value of stock follows a random walk. C) Thus, it is impossible to “beat the market.” 2) Irrational Markets A) Many investors think stock prices are not always rational. B) Evidence suggests that smart investors can “beat the market.”

44. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Risk and Reward DIRECTIONS Throughout your lifetime you will likely have many opportunities to invest your money in the hopes of earning interest (or dividends). Some options will give you a guaranteed return on your investment, but the interest rate will be quite low. Others, however, will offer the chance of making a high interest rate, but the risk of losing some or all of your money will be a real possibility. Some investment options you may encounter are listed below (along with a brief explanation). Using the table, categorize each one as either a physical asset, one of the types of financial assets, or as an investment that utilizes a combination of assets. DIRECTIONS Using the investment options from the front side, list which investments you think you will utilize during the following decades of your adult life. For each one you choose, explain why you think that particular investment will be a good choice for that time in your life.

45. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. “The Financial System” Targets Knowledge Understand the importance and features of the financial system. Reasoning Explain how supply and demand, risk, and expectations about the future determine the interest rate (and price) for financial assets.

46. Last Slide Viewed ForwardBack End ShowResourcesTitle PageTable of Contents Copyright © 2013 N.S. Resources http://commons.wikimedia.org/wiki/File:EE_Savings_Bond.jpg - bond note http://finance.yahoo.com/q/hp?s=%5EDJI+Historical+Prices - Dow Jones Industrial data http://en.wikipedia.org/wiki/File:Buffett_%26_Obama.jpg - Picture of Warren Buffett with Barack Obama