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Chapter 11: Financial Markets. BW: Grab folders/3-hole punch packet from back Complete Page 97: Chapter Warm-up. 11.1. “What are benefits and risks of saving and investing?” Objectives to know: How investing contribute to free-enterprise

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chapter 11 financial markets

Chapter 11: Financial Markets

BW: Grab folders/3-hole punch packet from back

Complete Page 97: Chapter Warm-up

  • “What are benefits and risks of saving and investing?”
  • Objectives to know:
    • How investing contribute to free-enterprise
    • How the financial system brings together savers and borrowers
    • Role of financial intermediaries in financial system
    • Trade-offs among liquidity, return, and risk
  • What are benefits/risks of saving/investing?
    • Savings you deposit in a bank will grow w/little risk
    • Investing, while riskier, may earn larger return for same investment; or prove devastating.
investing and free enterprise
Investing and Free Enterprise
  • Investing is essential to free enterprise system
    • Promotes economic growth and contributes to nations wealth
    • Deposits by people into savings are loaned to businesses
    • Allows businesses to increase production
      • Leading to expansion/growth
the financial system
The Financial System
  • Est.d so investments can take place
  • Saving money= loaning it to other people
  • Savers receive reciept as confirmation
    • Statements or bonds
      • Represent the claims, or financial assets, of the borrower
  • Financial systems bring savers/investors together
    • Fuels economic growth
    • Savers include:
      • Households
      • Individuals
      • Businesses
    • Investors include:
      • Businesses
      • Government
financial intermediaries
Financial Intermediaries
  • Include banks and other financial institutions
  • Accept funds from savers to make loans to investors
sharing risk
Sharing Risk
  • Dealing w/financial intermediaries offers 3 advantages
    • Sharing Risk
    • Providing Information
    • Providing Liquidity
  • Sharing Risk
    • Diversification allows you to spread out investments and not “all eggs in one basket”
    • Sharing risk helps ward against losing everything on one bad investment
    • Types
      • Read/answer 11.2 Chart (pg. 280)
providing info and liquidity
Providing Info and Liquidity
  • They provide both lenders/borrowers vital data that saves them the time/money of gathering selves.
    • EX: Portfolios or prospectus.
  • Also allows people to get access to their money with they need it, depending on how liquid it is.
return and risk
Return and Risk
  • Some investments, like CDs, are very safe b/c insured by govt.
  • Investing in a new business is far riskier, but can have larger gains
  • General info:
    • Higher potential return = higher the risk
    • Evaluating investments try to balance risks with expected rewards
lesson closing
Lesson Closing
  • 98, 54, and 58 in workbook
  • 58 will have a little time for BW tomorrow
  • Watch Case Study Video
  • Get marker and Check Multiple Choice of test
chapter 11 2
Chapter 11.2

BW: Finish S.1 Quiz: Answer Case study on pg.281

chapter 11 21
Chapter 11.2
  • “Why are bonds bought and sold?”
  • Objectives to know
    • Characteristics of bonds as financial assets
    • Different types of bonds
    • Characteristics of other types of financial assets
    • 4 different types of financial asset markets
  • Key Terms (3)
  • Why are bonds bought and sold?
    • Bonds are sold by govts and/or corporations to finance projects
    • Bonds offer a higher return than savings accounts, although generally riskier than savings accounts
bonds as financial assets
Bonds as Financial Assets
  • Bonds are loans that represent debt that the seller must repay to the investor
  • 3 Basic components
    • Coupon Rate: interest rate that bond issuer will pay
    • Maturity: Time which payment to holder is due
    • Par Value: Amount paid to holder at maturity
discounts from par
Discounts from Par
  • Investors can not only earn money from the interest on their bonds but also by buying bonds at a discount
    • Read and Answer 11.3
bond ratings
Bond Ratings
  • In order to decide which bonds to buy, investors can check bond quality through independent firms that issue credit ratings
    • Rate bonds on the issue’s financial strength, ability to make interest payments, and ability to repay principle when bond matures
    • High grade, such as AAA, means safe investment
advantages v disadvantages
Advantages v Disadvantages



  • Once bond is sold, coupon rate remains same
  • Company does not have to share profits w/holders if doing well
  • Company must make fixed interest payments and cannot change its interest payments
  • Firm’s bonds may be given a low bond rating and be harder to sell when not doing well
types of bonds
Types of Bonds

Municipal Bonds

Savings Bond

Treasury Bonds, Bills, Notes

  • State/localgovt.s issue bonds to finance projects
    • Highways, libraries, parks, and schools
  • Relatively save and attractive long-term investments
  • Low denominations
  • Issued by U.S. govt.
  • Govt. pays interest
  • U.S. treasury issues bonds, bills, and notes
  • Among safest investments
corporate and junk bonds
Corporate and Junk Bonds
  • Corporate bonds are issues by a corporation to raise money to expand business
    • Moderate risk, bc investors depend on corporation
  • Junk bonds
    • High risk and potentially high return
      • Investors face strong possibility that some of firms may default on their debt
other types of financial assets
Other types of Financial Assets

Certificates of Deposit

Money Market Mutual Funds

  • CDs through banks
  • Lend out funds deposited in CDs for a fixed amount of time
  • Investors receive higher interest on a MMMF than savings account
  • Higher interest b/c not covered by FDIC insurance
financial assets markets
Financial Assets Markets
  • Bonds, CDs, and MMMFs are traded on financial asset markets
  • One way to classify markets is according to length of time funds are lent
    • Capital Markets
      • Money is lent for periods longer than a year (CDs)
    • Money Markets
      • Money is lent for periods of a year or less
        • Include treasury bills and money market mutual funds
financial assets markets1
Financial Assets Markets
  • Markets may also be classified according to whether or not assets can be resold to other buyers
    • Primary Markets
      • Financial assets can be redeemed only by original holder
        • Savings bonds and small CDs
    • Secondary Markets
      • Financial assets can be resold, which provides liquidity to investors
lesson closing1
Lesson Closing
  • Pearson Video
    • How Economy Works
  • Exit Card Questions
    • What are 2 ways of classifying financial asset markets?
    • What type of bond might have been used to fund construction of your school?
  • HW:
    • Workbook: Pgs. 99,, 61, 65
      • 65=Quiz, little time to work on tomorrow
  • “How does the stock market work?”
  • Objectives to know
    • Benefits/risks of buying stocks
    • How stocks are traded
    • How stock performance is measured
    • Great Crash of 29’ and recent events
  • Key Terms (3)
  • How does the Stock Market Work?
    • Stock, or shares in company, are bought/sold on the stock market
    • Brokers help individuals/businesses invest their money in the stock market
    • Investors keep track of the stock market by checking local paper.
      • When doing well people may see large returns on investments
      • Vice-versa when market doing poorly
benefits of buying stock
Benefits of Buying Stock
  • In addition to selling bonds, corporations can raise money by selling stock shares
  • Benefits of buying stocks:
    • Dividends
      • Sharing in part of firms profits
      • Usually paid four times/year (quarterly)
      • Larger the profit of company, larger the dividend
    • Capital Gains
      • Selling the stock for more than paid for it
      • Loss=selling for less (you’ve all seen both in game)
types of stock
Types of Stock
  • Stocks may be classified by whether or not it pays dividends
    • Income stock
      • Provides investors w/income by paying dividends
    • Growth Stock
      • Pays few or no dividends and earnings are reinvested in the company
types of stock1
Types of Stock
  • Classified by whether or not the holder has a voice in company
    • Common stock
      • Holders are voting members of the company
    • Preferred Stock
      • Holders are nonvoting members of company
  • Common Stock owners may initiate a stock split when stock price becomes to high.
    • Berkshire did this in game!
risks of buying stock
Risks of Buying Stock
  • Buying stock is risky
    • B/C dividends are determined by how well a company is doing
    • B/C of laws of bankruptcy
      • Stocks end up riskier than bonds since bondholders are paid before stockholders in case of company bankruptcy
how stocks are traded
How Stocks are Traded
  • If you want to buy stock contact a stock-broker
    • Gives advise on stocks to guy
  • You buy stocks on a secondary market known as a stock exchange
    • NYSE is country’s largest and most powerful
      • Handle top stock/bond exchanges in U.S. and world
    • Nasdaq is 2nd largest securities market and largest electronic market
futures and options
Futures and Options
  • Futures are contracts to buy/sell commodities at a particular date in the future at a specified price today
    • Grain and livestock
  • Options are contracts that give investors the choice to buy or sell stock and other financial assets
  • Most people who buy stock hold their investment for a significant period
    • Day traders trade stocks daily, which is very risky
measuring stock performance
Measuring Stock Performance
  • Bull Market
    • When stock market rises steadily or a period of time
  • Bear Market
    • When stock market falls or is stagnant for period
  • Dow Jones Industrial Average
    • Measure stock performance
    • Represents the average value of a set of stocks
    • Reported in points
great crash read great crash 296
Great Crash: Read Great Crash : 296
  • In the 1920s, stock market was soaring
    • Speculation and buying on margin (credit) led to crash that killed economy
  • Dow fell steadily in Sept. 1929
    • People began selling shares
    • Companies couldn’t keep up.
    • Oct. 1929 16.4 million shares sold and market crashed
  • Aftermath: Crash led to Great Depression
    • Now people saw stocks as risky and avoided them
    • By 1980s, w/new mutual funds Americans gained confidence
      • Crashed again in 1987 but recovered much faster
scandals and market today
Scandals and Market Today
  • By 1990s people began to buy more stocks
    • Investors began to worry that companies could not make enough money to justify high priced stocks
  • Enron scandal causes investors to question knowledge of companies investing in
  • 2008, stock markets begins fall
    • Causes major economic crisis in U.S.
lesson closing2
Lesson Closing
  • Pearson Videos
    • Visual Glossary
    • Action Graphs
    • Case Study Video
  • Workbook
    • All unfinished 100-104
    • Section quizzes
  • Quiz Tuesday
  • Sub Monday: Will give you practice Test to take
    • I will not provide answers to it though.