Credit Cards & Debt Topic 2 Day 1
What is a Credit Card? • Cards that entitle their holders to buy goods & services based on the cardholder’s promise to pay for these goods & services
Factors Considered when Granting Credit • Income; ability to pay • Debt • Bill Payment or Credit History
Credit Card Facts • There are more than 292 million credit cards in use in the United States • 76 percent of undergraduates have credit cards, and the average undergrad has $2,200 in credit card. • Most Americans have credit card debt, and the average American owes more than $9,000 to credit card companies.
Financial Jargonlet's go over some important terms you'll encounter in credit-card brochures or discussions with potential lenders: <<
Annual fee - A flat, yearly charge similar to a membership fee. • Finance charge - The dollar amount you pay to use credit. Besides interest costs, this may include other charges such as cash-advance fees, which are charged against your card when you borrow cash from the lender.
Grace period - A time period, usually about 25 days, during which you can pay your credit-card bill without paying a finance charge. • Annual percentage rate (APR) - The yearly percentage rate of the finance charge
Interest rates on credit-card plans change over time. • Fixed rate - A fixed annual percentage rate of the finance charge • Variable rate - Prime rate (which varies) plus an added percentage (For example, your rate may be PR + 3.9 percent.) • Introductory rate - A temporary, lower APR that usually lasts for about six months before converting to the normal fixed or variable rate (This is a hot topic -- more about it later.) http://www.cnn.com/video/#/video/politics/2007/12/04/cafferty.file.debt.cnn?iref=videosearch http://www.cnn.com/video/#/video/bestoftv/2008/01/11/me.howard.single.mom.tips.cnn?iref=videosearch http://www.cnn.com/video/#/video/business/2009/01/06/bts.velshi.calls.cnn?iref=videosearch http://www.cnn.com/video/#/video/bestoftv/2008/01/29/howard.debt.cnn?iref=videosearch
Other Types of Credit • Outside of credit card, there are many other ways to obtain credit. • Both public and private lenders offer loans with varying rates of interest.
Average credit card debt for people under age 35: 1998: $1,879 2000: $2,748 2006: $8,000 Pay it off? It will cost you $400 per month for the next 5 years. Gen Debt?
Mortgages • When buying a house, most people choose to take out a mortgage. • Length of mortgages range from 10 to 40 years. • 20- and 30- year mortgages are most popular. • Mortgage interest rates are largely dependent on the strength of the national economy. http://www.cnn.com/video/#/video/business/2009/02/03/dcl.cr.mortgage.debt.cnn?iref=videosearch http://www.cnn.com/video/#/video/bestoftv/2008/10/13/soros.financial.crisis.1.cnn?iref=videosearch
Student Loans • Nearly half of all college students receive some form of federal financial aid. • Over two thirds of all student loans are lent by the government. http://www.fafsa.ed.gov/index.htm
Student Loans • Most student loans are have very low interest, around five percent. • Loans are determined based on need. • Repayment of loans begins when the student has finished or stopped attending college. • Student loans can sometimes be forgiven for people entering the military and careers in education and public service.
Ave. Student Loan Debt: • 1994: • Undergraduate: $15,700. • 2007: • Undergraduate: $30,000 • Graduate/Professional Degrees: $30,000-$114,000 1994: 46% of graduating seniors took out college loans. 2000: 70%
Average Annual Tuition http://www.cnn.com/video/#/video/bestoftv/2009/04/28/nbnb.student.loans.cnn?iref=videosearch
Bonds & Other Financial Assets Topic 2 Day 2
What are they? • pay investor a fixed amount of interest at regular intervals for a fixed amount of time
Three Components of Bonds • interest rate that the bond issuer will pay the bondholder • time at which payment to the bondholder is due • amount that an investor pays to purchase the bond & that will be repaid to the investor at maturity
Not all bonds are held to maturity • Some may be bought or sold, & their price may change • Yield is the annual rate of return on the bond if the bond were held to maturity
Advantages to the Issuer • relatively safe • Once the bond is sold, the coupon rate doesn’t change • do not own a part of the company
Disadvantages • Company must make fixed interest payments, even in bad years when it does not make money • firm maintains financial health, its bonds may be downgraded to a lower bond rating & thus may be harder to sell unless they are offered at a discount
Savings Bonds • Low denomination bonds issued by the U.S. government • help pay for public works • no risk of default
Treasury Bonds, Bills, & Notes • U.S. Treasury Department • Offer different lengths of maturity • Safest investments in terms of default risk
Municipal Bonds • finance such improvements as highways, state buildings, libraries, parks, & schools • Interest paid on these is not subject to income taxes at the federal level or issuing state
Corporate Bonds & Junk Bonds • Issued by corporations to help raise money to expand their businesses • Junk Bond: high-yield securities, are lower-rated, & potentially higher paying
Financial Asset Markets • Classified according to the length of time for which bonds are lent • Capital Markets • Money is lent for periods longer than a year • Money markets • Money is lent for periods of less than a year
The Stock Market Saving & Investing Topic 2 Day 3
Stock Shock: Understanding the Stock Market
and you also hear about it daily in statements like "The Dow Jones Industrial Average rose 2 percent today, with advances leading declines by a margin of..."
The NYSE is a supermarket for stocks. The NYSE can be thought of as a big room where everyone who wants to buy and sell shares of stocks can go to do their buying and selling.
Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The New York Stock Exchange is an example of such a market.
Return and Liquidity Savings accounts have greater liquidity, but in general have a lower rate of return. Certificates of deposit usually have a greater return but liquidity is reduced. Return and Risk Investing in a friend’s Internet company could double your money, but there is the risk of the company failing. In general, the higher potential return of the investment, the greater the risk involved. Risk and Return Return is the money an investor receives above and beyond the sum of money initially invested.
Certificates of Deposit Certificates of deposit (CDs) are available through banks, which use the funds deposited in CDs for a fixed amount of time. CDs have various terms of maturity, allowing investors to plan for future financial needs. Money Market Mutual Funds Money market mutual funds are special types of mutual funds. Investors receive higher interest on a money market mutual fund than they would receive from a savings account or a CD. However, assets in money market mutual funds are not FDIC insured. Other Types of Financial Assets
What is the FDIC? • Ensures customer deposits if a bank fails • Insure losses up to $100,000
What is the Federal Reserve? • Influences & controls the money supply
Financial Intermediaries Savers make deposits to… Financial Institutions that make loans to… Investors Commercial banks Savings & loan associations Savings banks Mutual savings banks Credit unions Life insurance companies Mutual funds Pension funds Finance companies The Flow of Savings and Investments Financial intermediaries accept funds from savers and make loans to investors.
Diversification • Spread your money around to reduce the risk of losing your entire investment • Mutual Funds are the best at this, since the investment can buy shares of up to 120 different companies
Investment Considerations • Risk v. Return, High Risk= High Return • Objectives: College, Retire, age
(1) Hi-Lo. The first column is the highest and lowest prices at which the stock traded in the past year (52 weeks). In our example, the highest price was $47 and the lowest was $37
(2) Company Symbol. The second column is the abbreviated name of the firm issuing the stock. The symbol of the company stands next to the abbreviated name. In our case, it is "Z." This symbol is sometimes referred to as the company's "ticker symbol."
3) Dividends. Dividends are the amount a company pays to its stockholders. The third column is the annual dividend paid per share. In our example, it is $2.30
4) Volume. The fourth column, titled "VOL," lists the volume of shares (in hundreds) that were traded that day. In our example, on August 23, 1999, 33,500 shares were traded by XYZ. Volume may give you an indication on the size of the breadth of the market for a company's shares
5) The YLD column approximates the dividend yield. The dividend yield is the current return on invested capital. We can use it to compare dividend returns for firms that have different stock prices. We derive the dividend yield by dividing the current dividend by the closing stock price. In our case the dividend yield is 5%, calculated as follows: