Download The Future Value of a Dollar (FVD)

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Fundamentals of Business
Study Guide for Quiz #4: STOCK MARKET, MONEY BANKING, AND THE
FEDERAL RESERVE SYSTEM (FED)
TOPIC #1: THE STOCK MARKET
VOCAB:
Stocks (or equities): certificates of ownership in a corporation
Shares: portions of stock
capital gain: if a stockholder sells their stock at a lower price than the purchase
price
bear market: when the stock market falls steadily over a period of time
bull market: when the stock market rises steadily over a period of time
stockbroker: a person who specializes in selling stocks
bonds: fixed income securities (corporate, US treasury and agencies, mortgagebacked)
diversification: investing in stocks in different sectors
ticker symbol: the letter abbreviation for companies
OTC market: over the counter market (no trading floor)
Important Concepts

Publicly vs. Privately traded companies

What is an Initial Public Offering (IPO)?

What does is mean for a company to go public?

What is an exchange? What are the major US exchanges? How are they
different?

What is a ticker symbol and how do I track a stock’s price?

How does the stock market work?

Major US indices: DOW Jones Industrial, S+P 500 and NASDAQ composite

What role does risk play in investing in a stock portfolio?

Risk-return profiles
o Low risk = low potential return but stable
o High Risk – Potential very high or very low returns, unstable

Importance of Diversification

Types of Bonds
Calculation of stock market portfolio trades

Stockholders can earn a profit through:
1. dividends which are typically paid 4 times a year
2. capital gains – a stockholder can sell their stock at a higher price than the
price he/she bought it at

Calculations of Investment Portfolio Transactions (capital gain/ loss)
Below is an example of an investment portfolio transaction:
Stock Market Portfolio Transactions
If you buy 100 shares of stock XYZ at $12.00 a share with a 1% brokerage fee, the
transaction ends up costing you the following:
(# of shares) * (price of one share in $) + (.01) (initial cost) =
100
* 12.00
+ (0.01) * (1200) =
1200
+ 12
=
$1,212
If you take that same 100 shares of a stock XYZ and sell it the next day when the
price has risen to $14.00 a share, you would have spent $1,224 on our initial
investment. Now when you sell the stock, your transaction would be as follows:
(# of shares) * (price of one share in $) – (0.01) (1,400)
100 *
14.00
- (.01) (1,400)
1,400
14
=
1,386
Therefore in those 2 transactions you have spent $1,212 and then received back
$1,386 Therefore, you have a net profit of $174.
Topic #2: MONEY
The Major Functions of Money include:
1. medium of exchange – It must be accepted by everyone as a payment for goods
and services. In the past in addition to currency materials including gold, silver and
salt have been used as medium of exchange.
2. standard of value – When something is a measure of value it can be used to
express worth in a way people can understand. (ex. A price tag on an item)
3. store of value – Money holds money over time and can be stored or saved. Money
will still be valuable years later. The only exception is if an economy goes through
inflation or a fast increase in prices which could cause the value of money to go
down.
Characteristics of Money: Currency is coins or paper bills.
1. stable in value
2. scarce
3. accepted
4. divisible into parts
5. portable
6. durable
Calculations of future value and present value of money
You do not need to memorize the formulas below. However, you will need to
know how to apply them and use them to calculate both future and present
values of money.
The Future Value of a Dollar (FVD)
FV = P (1+i) n
FV = Future Value of a Dollar
P = Principal
i = interest rate per year
n = number of years
The Present Value of a Dollar (PVD)
FVD
PVD = ─────
(1+i)n
PVD = Present Value of a Dollar
FVD = Future Value of a Dollar
i = interest rate per time period
n = number of time periods
Topic #3: BANKING
Major Functions of Banks
1. Transfer Money
2. Lend Money
3. Store Money
Most bank in the United States are insured by the Federal Deposit Insurance
Corporation
Banking Related Terms
Bank account – record of the amount of money a customer has deposited into or
withdrawn from a bank
Deposit – money put in a bank account
Withdrawal – money taken out of a bank account
Interest – rate that the bank pays customers for keeping their money
Electronic funds transfer – allows money to be transferred from one bank account
to another through a network of computers
Direct deposit – electronic transfer of a payment directly made from the payer’s
bank account to that of the party being paid
Collateral – property or goods pledged by a borrower to use as security against a
loan if it is not repaid.
Default – if borrowers can not pay their loan bank
4 TYPES OF LOANS
1. Mortgage loan – loan used to buy real estate such as a house or office
building
2. Commercial loan – loan made to businesses to buy supplies and equipment
3. Individual loan – loan made to an individual to pay for personal items
4. Line of credit – credit arrangement in which a financial institution agrees to
lend a specific amount of money to be used at any time for any purpose
TYPES OF FINANCIAL INSTITUTIONS
1. Commercial banks – full service banks that offer the entire range of banking
services (checking, savings, loans, etc.)
2. Savings and loan associations – financial institutions that hold customers’
funds in interest-bearing accounts and invest mainly in mortgage loans
3. Credit Unions – not-for-profit banks set up by organizations for their
customers to use
4. Mortgage companies – provide loans specifically for buying a home or
business
5. Finance companies – offer short-term loans to businesses and consumers at
much higher interest rates than banks charge
6. Insurance companies – provide protection against problems such as fire and
theft but also offer loans to businesses
7. Brokerage firms – sell stocks, bonds and other financial services to
customers
Topic #4: The FEDERAL RESERVE SYSTEM
THE FEDERAL RESERVE SYSTEM – Central Bank of the United States (known as
The Fed) monitors money supply. The Fed is made up a Board of Governors in
Washington D.C. and 12 Federal Reserve Banks (12 separate districts). There are
approximately 4,000 Fed member banks.
The FEDERAL RESERVE SYSTEM (or the FED) has the following 6 functions:
1.
Clearing Checks – Funds are transferred from one bank to another when
someone writes or deposits a check
2.
Acting as Federal Government’s Fiscal Agent – The Federal Reserve
distributes money to Federal Reserve member banks and commercial banks. It also
tracks the deposits and holds a checking account for the U.S. Treasury
3.
Supervising Member Banks – The Fed regulates banks that are members of
the Federal Reserve System.
4.
Regulating the Money Supply – The primary responsibility of the Federal
Reserve is to determine the amount of money in circulation and either increase it or
decrease it.
5.
Setting Reserve Requirements – Member banks must keep a certain
percentage of deposits as reserves. Reserves are funds set aside for emergencies.
6.
Supplying Paper Currency – The Federal Reserve is responsible for printing
and maintaining US paper currency.