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Essential Standard 4.00
Understand the role of finance in business.
Objective 4.03
Understand saving and investing options for clients.
Topics Saving and investing basics Saving and investing options Evaluation factors for savings and
investing options
Saving and investing basics
Saving and Investing Basics Reasons money is borrowed by the following:
Individuals People usually borrow money to purchase large
ticket items such as homes and cars.
Businesses Businesses usually borrow money to operate or
expand their business, which may include purchasing a building, replacing old equipment, or offering new products.
Government The Government may borrow money to improve
or expand transportation, schools, or other public services.
Saving and Investing Basics What is saving?
Saving is putting away money for future use.
What is investing? Investing is using savings to earn more money for
future financial security.
Saving influences on economic activity Saving influences the economy by making more
money available to be used by individuals, businesses, and the government. When the borrowed money is spent, the demand for goods and services is increased, which creates more jobs and spending for workers.
Saving and Investing Basics Main goals of savers and investors
include making available immediate income and long-term growth.
Growth of savings is interest earned when others borrow your money.
Simple interest is the amount of money paid to saver on amount
deposited for a period of time.
Compound interest is the amount of money paid to saver on money
deposited and interest previously earned for a period of time.
Saving and Investing Basics Impact of compound frequency on savings growth rate.
The more times that interest is compounded the more growth of savings.
How is simple interest calculated? by using the formula (P=Principal, R=Rate, T=Time
and I=Interest Rate) I=P * R * T.
How is compound interest calculated? by using the formula (A=Amount, P=Principal
amount/the initial amount you borrow or deposit, r=Annual rate of interest and n=Number of times interest is compounded)
A=P(1+r/n)nt.
Savings GrowthSimple interest$1,000 at 10%
Year 1: $1,000 * .10 = $100
$1,000 + $100 = $1,100Year 2:
$1,000 * .10 = $100$1,100 + $100 = $1,200What would the value
be at the end of year 3?
Compound interest$1,000 at 10%
Year 1: $1,000 * .10 = $100
$1,000 + $100 = $1,100Year 2:
$1,100 * .10 = $110$1,100 + $110 = $1,210What would the value
be at the end of year 3?
Savings Growth Answer Simple Interest- What would the
value be at the end of year 3?$1,000 * .10 = $100
$1,200 + $100 = $1,300 Compound Interest- What
would the value be at the end of year 3?
$1,200 * .10 = $120$1,200 + $120 = $1,320
Activity How Savings Grow worksheet (p.295)
Saving and investing options
Saving OptionsSavings Plans
Savings account usually allows low or zero balance, deposit or withdrawals
anytime and interest to be earned. Usually withdrawals are allowed without penalties.
Certificates of deposit (CDs) Certificates of deposits (CDs) requires a minimum deposit,
money to remain deposited for a period of time without penalties. Penalties may be assessed if money is withdrawn before specified time.
Money market account Money market account requires a minimum deposit and
interest is earned based on government and corporate securities. Usually withdrawals are allowed without penalties.
Main Categories of Investing Options Stocks Bonds Mutual Funds and Exchange-traded
Funds Real Estate Commodities Collectibles
Stock Investments Two main categories of stock:
Preferred Preferred stock pays dividends at a set rate.
Common Common stock represents general
ownership in company and sharing of profits.
What are the major similarities and differences between preferred and common stocks? Major similarities are:
Both have investment risks and pay dividends
Major differences are: Preferred stock pays dividends before common stock is
paid. Preferred stockholders do not have voting powers; but
common stockholders are invited to annual corporate meetings and permitted to one vote per share of stock owned.
Preferred stock is less risky than common stock.
Stock Investments
What are stockbrokers? Stockbrokers buy and sell stock and bonds at a
set price for a commission for stockholders. Stock exchange
Is where the trading of securities take place. What is market value of stock?
Is the price for which a share of stock can be purchased.
Stock Investments
Stock Investments There are two types of Markets:
Bull market refers to prices of securities rising for a long period of time.
Bear market refers to prices of securities falling for a long period of time.
Stock Table
A B C D E F G H I
52 Week Sales
High Low Stock Div Yld PE Vol100s
High Low Last Chg
12 1/8 8 AAR .44 6.2 15 6 6 3/4 6 5/8 6 1/2 -1/8
49 1/2 31 1/4 ACF 1.76 7.4 7 477 36 1/4 37 5/8 37 +3/4
26 1/2 16 AMF 1.36 6.7 7 133 17 1/2 17 1/2 17 1/2 -3/8
6 1/8 3 1/8 ARA 2 7 8 10 33 7/8 33 7/8 33 -1
Selecting StockFactors that could influence investors in
selecting stock: Economic
Inflation Interest rates Consumer spending Employment
Company Dividend yield (is the amount paid per share
for stock) Price-earnings ratio (is the relationship
between a stock’s selling price and its yield)
Yield Calculations Yield is usually calculated in the following way:
current value – original value = yieldoriginal value
Current value=closing price for the day Original price= price paid for stock Yield=Interest earned For example: a stock is bought at $40 and valued at
$43:$43 – $40
$40 yield = 7.5%
Yield Calculations Dividends also may be added to the
calculation. For example: a stock is bought at $40
and sold at $43, but also earned a $2 dividend during that time:
$43 + $2 – $40 $40
yield = 12.5%
Bond Investments What is a bond?
is a promissory note to pay back a specified amount of money at a stated rate on a specific date.
Bonds are issued to lend funds to the organization selling the bond.
Main Categories of Bonds Government bonds Corporate bonds
Bond Investments Government bonds
Municipal bonds are issued by local and state governments for public service
projects. U.S. savings bonds
Series EE bonds, HH bonds, and I bonds. The EE bond interest is paid once the bond is cashed. The HH bond interest is paid twice a year, which may be
considered income. Treasury bills and notes
The treasury bills and notes differ by their maturity time frame.
Treasury bills may reach maturity between 91 days to a year.
Treasury notes take one to ten years.
Bond Investments Corporate Bonds
Purchasing corporate bonds is a means of loaning money to a company.
Bond Investments Lenders vs. Owners
When you invest in stock, you become and owner. When you buy a bond, you are lending money to a
company.
How does stated interest rate impact the value of a bond? The stated interest rate usually determines the
price investors want to pay for a bond. If a bond’s stated interest rate is lower than
similar ones, investors will most likely want to pay less for the bond.
If the stated interest rate is higher than similar ones, the seller will most likely want to be paid more than its face value.
Mutual Fund
Is an investment fund set up and managed by companies that receive money from many investors.
A Companies’ major task is assisting investors of mutual funds. Company assist investors by: Studying companies stocks and bonds. Buying a variety of stocks and bonds to sell.
Mutual Fund Some examples of mutual fund categories
Aggressive-growth stock funds look for quick growth, but also have an higher risk than
other stock. Income funds
concentrate on stocks that pay regular dividends. International funds
invest in a variety of company stock around the world. Sector funds
purchase stocks of companies in the same industry. Bond funds
concentrate in corporate bonds. Balanced funds
invest in both stocks and bonds.
Exchange-traded Fund (ETF)
An exchange-traded fund (ETF) is a portfolio of stocks, bonds or other investments that trade on a stock exchange like regular stock.
Activities Comparing Mutual and Exchange-
Traded Funds Activity (p.305)
Comparing Bond Investments Activity (p.307)
The right Type of Mutual Fund Activity (p.309)
Other Investments Real Estate
includes land and anything attached to it. Advantages
advantages of investing in real estate are tax benefits, increased equity, and pride of ownership.
Disadvantages disadvantages of investing in real estate are
property taxes, interest payments, property insurance, and maintenance.
Examples a house, condominium, and a mobile home park.
Other Investments Commodities and futures
Include things like grain, livestock, and precious metals.
Commodity investors usually agree to buy and sell for an amount at a specified price in the future.
Examples may include rice, cattle, and gold.
Collectibles Are items collected over time that may increase
in value. Examples may include art work, antique
furniture, and autographed items.
Evaluation factors for savings and investing options
Evaluation FactorsAs you decide which investments are best for you, four main factors should be considered: Safety and risk Potential yield (return) Liquidity Taxes
Safety and Risk Guarantee of Money invested to be
returned. Diversity of investment Options.
(don’t put al your eggs in one basket) Types of Risk:
Low Tolerance RiskHigh Tolerance Risk
Potential yield (return) Is the percentage of money earned on
your saving or investment over a year.
A good savings plan or investment should earn a reasonable return.
Types of yield:High Yield:Low Yield:
Liquidity Is the ease with which an investment can
be changed into cash without losing its value.
Sometimes cash is needed quickly to pay unexpected bills, investments that can be changed into money quickly are called liquid.
Types of Liquidity: High Liquidity: Low Liquidity:
Taxes Earnings from certain types of savings and
investments are taxed. Taxes reduce your rate of return. Example:
If your earn $100 in interest but 20% is taken in taxes, you have only earned $80. [$100-(4100 x 0.20)]
Some investments have tax-exempt earnings, meaning you don’t have to pay taxes on that income. These investments are attractive because the tax-
free yield may actually be higher than a comparable taxable investment.
Activity Which option is Best Activity (p.313)
I will do a summary day for 4.03 and include a quiz and the very important terms worksheet from this section (p.292).