Download Chapter 11

Financial Markets
How do your saving and investment
choices affect your future?
 Objectives:
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Describe how investing contributes to the free
enterprise system.
Explain how the financial system brings together
savers and borrowers.
Explain the role of financial intermediaries in the
financial system.
Identify the trade-offs among liquidity, return
and risk.
 Investment
– the act if redirecting resources
from being consumed today so that they may
create benefits in the future; the use of assets
to earn income or profit
 Examples:
 How
does it promote the free enterprise
system?
 “Better
safe than sorry.”
 Nothing ventured, nothing gained.
 “Don’t put all your eggs in one basket.”
 “The riskier the road, the greater the
reward.”
 “A penny saved is a penny
 Financial
system – the network of structures
and mechanisms that allows the transfer of
money between savers and borrowers
 Financial
Assets – claim on property or
income of a borrowers
 Institution
that helps channel funds from
savers to borrowers

Banks, savings and loans associations, credit
unions, finance companies
Mutual Funds
Hedge Funds
Life insurance companies
Pension Funds
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WS: 11-1A
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 Sharing
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Risk
Would you put your entire savings into one
company?
Diversification: strategy of spreading out of
investments to reduce risk
 Providing
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
Information
Portfolios – collection of financial assets
Prospectus – an investment report that provides
information to potential investors
 Providing
Liquidity
 Come
up with your own scenarios of each
type of risk. You will write them on note
cards and then be asked to quiz the class.
 Types of Risk:
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Credit Risk – borrowers may not pay back the
money they have borrowed, or they may be late
in making payments
Liquidity Risk – you may not be able to convert
the investment back into cash quickly enough for
your needs
Inflation Rate Risk – inflation erodes the value of
your assets
Time Risk – you may have to pass up better
opportunities for investment
 Liquidity


and Return
Do you need the money right away?
Return – money investor receives above the
investment
 Return
and Risk
 Objectives:

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Describe the characteristics of bonds as financial
assets.
Identify different types of bonds.
Describe the characteristics of other types of
financial assets.
List 4 different types of financial asset markets.
3
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Components of Bonds
1. Coupon Rate

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2. Maturity

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Interest rate
Length of time
3. Par Value

Amount to be paid at maturity
 Suppose
that you buy a $1,000 bond from the
corporation Amazon. The investor who buys
the bond is called the holder. The seller of
the bond is the issue. You are, therefore, the
holder of the bond. You are going to receive
a 5% return on your investment after a 10
year period.
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Coupon Rate =
Maturity =
Par Value =
How much would you receive after 10 years?

Yield =
 Buying
Bonds at Discount
 Standard’s
& Poor’s
 Moody’s


AAA – best rating
Higher the bond rating, the lower the interest
payment…why?
 Savings
Bonds
 Treasury Bonds, Bills and Notes

Inflation-indexed bond – linked to rate of
inflation
 Municipal

State and local govt.
 Corporate

Help raise money
 Junk
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Bonds
Bonds
High rish
 www.investinginbonds.com
 Find
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Issuer, rating (if applicable), maturity date,
coupon, yield to maturity, and price
 Find
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1 Municipal bond
Issuer, rating (if applicable), maturity date,
coupon, yield to maturity, and price
 Find

2 corporate bonds
1 Treasury bond or T-bill
Issuer, rating (if applicable), maturity date,
coupon, yield to maturity, and price
 Which
asset would you invest in and why?
 CDs
 Money
Market Mutual Funds
 Capital
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Capital Markets - $ lent for more than a year
Money Markets - $ lent for less than a year
 Primary
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
Markets and Money Markets
and Secondary Markets
Primary market – market for selling assets that
can only be redeemed by the original owner
Secondary market – market for reselling
secondary assets
 Objectives:
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Evaluate the benefits and risks of buying stock
by comparing them to those of investing in
bonds
Identify the different systems and markets that
allows the trading of stocks to occur
Create an investment portfolio
Describe the events leading up to the Great
Depression
 Who
benefits from the stock buying
process?
 You
have $1000 based off of what you
know, would you invest in stocks, bonds,
or both?
 Why
is there a potential for greater profit
in stocks?
 Dividends

Profits that corporations pay to their stock
holders. Usually paid four times per year.
 Capital

Selling stock for more than you paid for it.
 Capital

Gain
Loss
Selling stock for less than you paid for it.
 You
buy 300 shares of stock from a
company that just went public at $25 per
share.
How much did that cost you?
 You
sell your 300 shares of stock at
$32.50 per share.
How much did you sell them for?
 What
was your profit?
 You
buy 150 shares of stock in a company
that just went public for $30 a share.
How much did that cost you?

The market is looking grim and you sell
your 300 shares for $25 a share, to avoid
losing more money.
How much did you sell them for?
 What
was your profit?
 Income
Stock – Pays investors using
dividends. These payments vary from
company to company.
 Growth Stock – Pays little to no dividends,
but the investment is used to better the
company.
 Common Stock – Investors become voting
members of the company. One share = One
vote
 Preferred Stock – Usually none voting
members. But receive the dividends before
the common stockholders.
 Owners
of common stock sometimes vote
to split the stock that their company
owns.
 This process doubles the amount of shares
in a company and halves price of each
share.
 Why would a company want to do this?