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  1. Splash Screen

  2. Chapter Introduction Section 1: Savings and the Financial System Section 2: Financial Assets and Their Markets Section 3: Investing in Equities and Options Visual Summary Chapter Menu

  3. You have just been hired as a financial planner to provide advice on how to invest wisely and effectively. Miguel, your client, is a widower raising two young children. He wants to be sure that (1) he will have enough money to send his children to college, and (2) he will be financially secure in his retirement. What advice would you give Miguel? Read Chapter 11 to learn more about how people can accomplish their financial goals. Chapter Intro 1

  4. Governments and institutions help participants in a market economy accomplish their financial goals. Chapter Intro 2

  5. Chapter Intro-End

  6. Section Preview In this section, you will learn how the components of a financial system work together to transfer savings to investors. Section 1-Preview

  7. Content Vocabulary • saving • savings • certificate of deposit • financial asset • financial system • financial intermediary • nonbank financial institution • finance company • premium • pension • pension fund • risk Academic Vocabulary • sector • compensation Section 1-Key Terms

  8. A B C Have you ever thought about what your financial goals are and what steps you need to take to reach them? A. Yes, often B. Occasionally C.Never Section 1

  9. Savings and the Financial System • Saving—absence of spending • Savings—dollars that are available once you abstain from consumption Section 1

  10. Saving and Economic Growth The financial system brings savers and borrowers together and helps the economy grow. Section 1

  11. Saving and Economic Growth(cont.) • Saving makes economic growth possible. • Individuals save by • Opening a savings account • Purchasing a bond • Purchasing a certificate of deposit Overview of the Financial System Section 1

  12. Saving and Economic Growth(cont.) • Documents are given in each case showing money saved—financial assets. • The economy has afinancial system to transfer savings to investors. Overview of the Financial System Section 1

  13. Saving and Economic Growth(cont.) • Three parts to the financial system • Funds a saver transfers to a borrower • Financial assets that certify conditions of the loan • Organizations that bring the surplus funds and financial assets together Overview of the Financial System Section 1

  14. Saving and Economic Growth(cont.) • Financial intermediaries—institutions that lend funds savers provide • Governments and businesses are the largest sector of borrowers. • Households and businesses are the biggest sources of funds. Overview of the Financial System Section 1

  15. A B C D In the financial system, who really benefits? A.Savers B.Borrowers C.Everyone D. No one Section 1

  16. Nonbank Financial Intermediaries Organizations other than banks can transfer money from savers to borrowers. Section 1

  17. Nonbank Financial Intermediaries(cont.) • Another group of financial intermediaries are the nonbank financial institutions. • Finance company • Life insurance companies—charge a premium • Pension fund—pays a pension to specified individuals for specific reasons Profiles in Economics:Sallie Krawcheck Section 1

  18. A B C D Which entity would charge you a higher interest rate for your car loan? A.Bank B.Credit union C.Finance company D. Relative Section 1

  19. Basic Investment Considerations Investors should consider several factors before investing their money. Section 1

  20. Basic Investment Considerations(cont.) • Before investing, consider the following • Consistency • Simplicity The Power of Compound Interest Section 1

  21. Basic Investment Considerations(cont.) • The risk-return relationship • Risk—degree to which outcome is uncertain but a probable outcome can be estimated • Investment objectives Risk and Return Section 1

  22. A B An investment that appears too good to be true probably is worth the risk. A.True B.False Section 1

  23. Section 1-End

  24. Section Preview In this section, you will learn about the characteristics of various investments to help with your investments. Section 2-Preview

  25. Content Vocabulary • money market • primary market • secondary market • bond • coupon rate • maturity • par value • current yield • junk bond • municipal bond • tax-exempt • savings bond • beneficiary • Treasury note • Treasury bond • Treasury bill • Individual Retirement Account (IRA) • capital market Section 2-Key Terms

  26. Academic Vocabulary • offset • presumed Section 2-Key Terms

  27. A B C What determines the price and yield of a bond? A. Risk of investment B. Supply and demand C.Current interest rates Section 2

  28. Bonds as Financial Assets A bond is a long-term investment, with the price determined by supply, demand, and the buyer’s assessment of repayment risk. Section 2

  29. Bonds as Financial Assets(cont.) • Governments and businesses issue a bondwhen they need to borrow funds for long periods. • Bonds have three main components: • Coupon rate • Maturity • Par value Bond Ratings Section 2

  30. Bonds as Financial Assets(cont.) • To compare bonds, investors compute the bond’s current yield. • Interest received and price paid determines the actual current yield of each bond. • Bond ratings are published by Standard & Poor’s and Moody’s. Bond Ratings Section 2

  31. Bonds as Financial Assets(cont.) • Bonds rated on • Basic financial health of the issuer • Expected ability to make future coupon and principal payments • Issuer’s past credit history • Bonds with higher ratings sell at higher prices than bonds with lower ratings. Bond Ratings Section 2

  32. A B C Which of the following rated bonds has the greatest risk? A.BBB or Baa B.CCC or Caa C.CC or Ca Section 2

  33. Financial Assets and Their Characteristics Investments include CDs, bonds, bills, and IRAs, all of which vary in cost, maturity, and risk. Section 2

  34. Financial Assets and Their Characteristics (cont.) • Investors today have many choices. • Certificates of deposit—loans investors make to financial institutions • Corporate bonds—IRS considers interest and payments as taxable income. • Junk bonds—offer high rate of return due to exceptionally high risk Section 2

  35. Financial Assets and Their Characteristics (cont.) • Municipal bonds—issued by state and local governments,generally tax exempt • Government Savings Bonds—savings bondsare paper-based or paperless • Bonds can be purchased for investor’s heirs by designating a beneficiary. Section 2

  36. Financial Assets and Their Characteristics (cont.) • Treasury notes—U.S. government borrows funds for 2 to 10 years • Treasury bonds—U.S. government borrows funds for 10 to 30 years • Treasury bills—(T-bills) short term obligations, maturity of 4, 13, or 26 weeks • Individual Retirement Account (IRAs) Section 2

  37. A B C D Which of the following could you invest in today? A.Savings bonds B.IRA C.T-bill D. 401(k) plan Section 2

  38. Markets for Financial Assets Financial assets are grouped into different markets depending on their maturity and liquidity. Section 2

  39. Markets for Financial Assets(cont.) • Markets for financial assets • Capital market—money is loaned for more than one year. • Money market—money is loaned for periods less than one year. Financial Assets and Their Markets Section 2

  40. Markets for Financial Assets(cont.) • Primary market—original issuer can sell or repurchase a financial asset. • Secondary market—existing financial assets can be resold to new owners. Financial Assets and Their Markets Section 2

  41. A B C D Under which financial market(s) would Disney bonds with maturity in 5 years be classified? A.Money market B.Capital market C.Primary market D. Secondary market Section 2

  42. Section 2-End

  43. Section Preview In this section, you will learn more about the equities, or stocks, that are traded in markets. Section 3-Preview

  44. Content Vocabulary • equities • stockbroker • Efficient Market Hypothesis (EMH) • portfolio diversification • mutual fund • net asset value (NAV) • 401(k) plan • stock exchange • securities exchange • over-the-counter market (OTC) • Dow Jones Industrial Average (DJIA) • Standard & Poor’s 500 (S&P 500) Section 3-Key Terms

  45. Content Vocabulary (cont.) • bull market • bear market • spot market • futures contract • option • call option • put option Section 3-Key Terms

  46. Academic Vocabulary • prospects • implication Section 3-Key Terms

  47. A B Do you think investing is a wise decision? A. Yes B. No Section 3

  48. Stocks and Efficient Markets Investors can purchase stock through stockbrokers on exchanges, through mutual funds, or through 401(k) plans. Section 3

  49. Stocks and Efficient Markets(cont.) • Equitiesor shares of common stockrepresent another financial asset for investors. • Ways to purchase equities • Stockbroker • Internet account with discount brokerage firm A New York Stock Exchange Listing Section 3

  50. Stocks and Efficient Markets(cont.) • Mutual funds • Net asset value (NAV) • 401(k) plan A New York Stock Exchange Listing Section 3