Economics 51109 http:students.resa.netmilewski

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Economics 5/11/09 http//students.resa.net/milews
ki

• OBJECTIVE Demonstration of Chapter11 and begin
  examination of the circular flow.
• I. Administrative Stuff
• -attendance
• -distribution of test
• II. Chapter11 Test
• III. Journal 29 pt.A
• -Read the Business Week Newsclip p.306
• -Answer questions (1-2) p.306
• IV. Journal 29 pt.B
• -notes on savings investing

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Capital

• The New York Stock Exchange generates the
  capital that makes capitalism work.
• Capital the equipment, tools, and machinery
  used in the production process.
• Financial Capital - savings
• Saving absence of spending
• Savings dollars that become available when
  people abstain from consumption

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The Financial System

• It is a network of savers, investors, financial
  institutions that work together to transfer
  savings to investors.
• This results in the circular flow, which is the
  way funds are transferred from savers to
  borrowers.

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As a saver you are

• Categorized as a household and can save the
  following ways
• 1.) Open a savings account
• 2.) Buy a CD (certificate of deposit) which is a
  receipt showing that an investor has made an
  interest bearing loan to a bank
• 3.) Buy a bond from the government or corporation
  in which you receive a receipt for the funds you
  loaned them.

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Receipts

• Are the claims on the property and the income of
  the borrower.
• They are assets because they are property that
  has value.
• It specifies how much was loaned, for how long,
  and the terms (interest rate) in which the loan
  was made.

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Circular Flow
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Circular Flow

• A circular flow takes place when funds are
  transferred from savers to borrowers
• i.e. Banks (Savings banks, credit unions,
  commercial banks, and savings associations)
  obtain funds when their customers or members make
  regular deposits.

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Economics 5/12/09 http//students.resa.net/milews
ki

• OBJECTIVE Examine the Role of Banks.
• I. Administrative Stuff
• -Attendance
• II. Modern Marvels NYSE
• -questions on film the New York Stock Exchange

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Economics 5/13/09http//students.resa.net/milewsk
i

• OBJECTIVE Examine investment strategies and
  financial assets.
• I. Journal 30 pt.A
• -Read Business Week Newsclip p.327
• -Answer questions (1-2) p.327
• II. Return of Chapter11 Test
• III. Journal 30 pt.B
• -notes on types of investments

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Risk

• Risk a situation in which the outcome is not
  certain, but probabilities for each outcome can
  be estimated.
• Low risk low return on investment, high degree
  of safety
• High risk possibility of high return, little
  degree of safety

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p. 319
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Bonds

• Bonds are long term obligations that pay a
  defined interest rate for a specific number of
  years
• The 3 components of a Bond
• coupon the interest rate
• maturity the length of time
• par value the amount borrowed (MUST be repaid
  when the bond matures)

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Example of a Bond

• You have 1000 to invest. The Milewski
  Corporation is offering a ten year bond at a 10
  interest rate paid annually. If you decide to
  invest in the Milewski Corp. today, what is the
  coupon, maturity, and par value on the bond you
  purchase?
• Coupon
• 10 or .10
• Maturity
• 5/13/2019
• Par value
• 1000.00
• Annual Interest Paid
• 100.00

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Was it a good investment?

• To determine if you made a good investment you
  should
• 1.) Determine the bond yield
• annual interest / purchase price current yield
• 100.00 / 1000.00 .10
• 2.) Check the Bond Rating
• 3.) Compare it to other similar bonds

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Organized Stock Exchanges

• NYSE oldest, largest, and most prestigious in
  the U.S. Located on Wall Street in NYC
• AMEX smaller stocks, those who cant quite make
  it to the NYSE are traded here. (the JV team)
  Also located in NYC
• Regional Stock Exchanges originally listed
  small companies and new companies. Now, they
  trade local stocks and better meets the needs of
  smaller companies. Located in Chicago, Pacific,
  Philadelphia, Boston, and Memphis

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Over-the-Counter Market

• OTC most stocks in the U.S. are not traded on
  organized exchanges. They are traded
  electronically using NASDAQ
• NASDAQ National Association of Securities
  Dealers Automated Quotation
• Few OTC stocks pay dividends. Most are small and
  new companies

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Bull v. Bear

• Bull market when stocks are strong and stock
  prices are rising
• Bear Market when stock prices are falling

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Economics 5/14/09http//students.resa.net/milewsk
i

• OBJECTIVE Examine investment strategies and
  financial assets.
• I. Administrative Stuff
• -Attendance
• -Progress Reports
• II. Journal 31 pt.A
• -Read The Global Economy p.323
• -Answer questions (1-2) p.323
• III. Journal 31 pt.B
• -notes on market investment strategies

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Measuring the Market

• Question How do you know if stock market is a
  bull or a bear?
• Dow Jones Industrial Average (the Dow) the
  average of 30 stocks traded on the NYSE
• SP 500 uses the movement of 500 stocks traded
  to determine an index number which shows the
  direction of the market

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Futures Trading

• Spot you pay the price something is worth today
• Futures contract you buy at todays price and
  you sell at a specific date in the future at
  todays price, regardless of the market price at
  the time of sale.
• Example You buy 1 oz of gold at todays price
  You also agree to sell that gold at todays price
  to your friend six months from today. If gold
  six months from now is lower, you make money. If
  the price of gold is higher, you lose money.

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Futures Market

• Where futures contracts are bought and sold.
• Most are associated with livestock and farm
  products.
• Futures markets are located in NYC, Chicago,
  Kansas City.

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Options Markets

• Call option the right to buy the share of stock
  at a specific date and price in the future.
• Put option the right to sell a share of stock
  at a specific date and price in the future.

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Nonbank financial institutions

• Another important group of financial
  intermediaries includes
• nonbank financial institutionsnondepository
  institutions that channel savings to borrowers.
• Finance companies, life insurance companies,
  pension funds, and real estate investment trusts
  are examples of nonbank financial institutions.

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Finance Companies

• finance company - a firm that specializes in
  making loans directly to consumers and in buying
  installment contracts from merchants who sell
  goods on credit.
• Some finance companies make loans directly to
  consumers.
• Because they make some risky loans, and because
  they pay more for the funds they borrow, finance
  companies charge more than commercial banks for
  loans.

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Life Insurance Companies

• A financial institution that does not get its
  funds through deposits
• The head of a family, for example, purchases a
  life insurance policy to leave money for a spouse
  and children in case of his or her death.

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Life Insurance Companies

• premium - the price the insured pays for this
  policy and is usually paid monthly, quarterly, or
  annually for the length of the protection.
• Because insurance companies collect cash on a
  regular basis, they often lend surplus funds to
  others.

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Mutual Funds

• mutual fund - a company that sells stock in
  itself to individual investors and then invests
  the money it receives in stocks and bonds issued
  by other corporations.
• Mutual funds allow people to play the market
  without risking all they have in one or a few
  companies.
• net asset value (NAV)the net value of the mutual
  fund divided by the number of shares issued by
  the mutual fundis the market value of a mutual
  fund share.

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Pension Funds

• pension - a regular payment intended to provide
  income security to someone who has worked a
  certain number of years, reached a certain age,
  or suffered a certain kind of injury.
• pension fund - a fund set up to collect income
  and disburse payments to those persons eligible
  for retirement, old-age, or disability benefits.

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Pension Funds

• During the 30- to 40-year lag between the time
  the savings are deposited and the time the
  workers generally use them, the money is usually
  invested in corporate stocks and bonds.

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Real Estate Investment Trusts

• real estate investment trust (REIT) a company
  organized primarily to make loans to construction
  companies that build homes.

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Economics 5/15/09http//students.resa.net/milewsk
i

• OBJECTIVE Examine investment strategies and
  financial assets.
• I. Journal 32 pt.A
• -Examine 12.2 p.319
• -Answer the caption question on p.319
• -Examine Figure 12.5 p.322
• -Answer the caption question on p. 322
• II. Journal 32 pt.B
• -notes on markets
• III. Mindjogger
• -video quiz on Chapter12 Financial Markets

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Types of Markets

• Capital market where money is loaned for more
  than one year.
• Money market where money is loaned for less
  than one year.
• Primary market a market where only the original
  issuer can repurchase or redeem a financial
  asset.
• Secondary market is a market in which existing
  financial assets can be resold.