Economics 2/7/11 http://mrmilewski.com

• OBJECTIVE: Demonstration of Chapter#11 and begin examination of the circular flow.

• I. Administrative Stuff-attendance & distribution of test

• II. Chapter#11 Test• III. Journal #28 pt.A

-Read the Business Week “Newsclip” p.306

-Answer questions (1-2) p.306

• IV. Journal #28 pt.B-notes on savings & investing

• NOTICE: Journals 21-30 Due Wednesday!

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

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.

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.

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.

Circular Flow

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.

Economics 2/8/11http://mrmilewski.com

• OBJECTIVE: Examine investment strategies and financial assets.

• I. Journal #29 pt.A-Read Business Week “Newsclip” p.327

-Answer questions (1-2) p.327

• II. Quiz#17• III. Return of Chapter#11 Test• IV. Journal #29 pt.B

-notes on types of investments

• NOTICE: Journals 21-30 Due Tomorrow!

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

p. 319

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)

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?

• Coupon10% or .10

• Maturity2/8/2021

• Par value$1000.00

• Annual Interest Paid$100.00

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

Organized Stock Exchanges• NYSE – oldest, largest, and most prestigious in

the U.S. Located on Wall Street in NYC• AMEX – smaller stocks, those who can’t 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

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

• FUN FACT: NASDAQ is 40 years old today.• Few OTC stocks pay dividends. Most are small

and new companies

Bull v. Bear

• Bull market – when stocks are strong and stock prices are rising

• Bear Market – when stock prices are falling

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

• S&P 500 – uses the movement of 500 stocks traded to determine an index number which shows the direction of the market

Economics 2/9/11http://mrmilewski.com

• OBJECTIVE: Examine investment strategies and financial assets.

• I. Journal #30 pt.A-Read “The Global Economy” p.323

-Answer questions (1-2) p.323

• II. Quiz#18 • III. Journal #30 pt.B

-notes on market investment strategies

• IV. Journals 21-30 Due

Futures Trading• Spot – you pay the price something is worth today• Futures contract – you buy at today’s price and

you sell at a specific date in the future at today’s price, regardless of the market price at the time of sale.

• Example: You buy 1 oz of gold at today’s price: You also agree to sell that gold at today’s 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.

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.

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.

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.

Nonbank financial institutions• Another important group of financial

intermediaries includes:• nonbank financial institutions–

nondepository institutions that channel savings to borrowers.

• Finance companies, life insurance companies, pension funds, and real estate investment trusts are examples of nonbank financial institutions.

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.

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.

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.

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 fund–is the market value of a mutual fund share.

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.

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.

Real Estate Investment Trusts

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

Economics 2/10/11 http://mrmilewski.com

• OBJECTIVE: Examine the NYSE.

• I. Administrative Stuff-Attendance & Return of Journals

• III. Film: Modern Marvels: NYSE-questions on film the New York Stock Exchange

• NOTICE:Progress Report Printed Tuesday!

Economics 2/11/11 http://mrmilewski.com

• OBJECTIVE: Examine the concepts related to Financial Markets.

• I. Chapter#12 Guided ReadingsComplete the following activities due today!

-Chapter#12 section#1 Guided Reading

-Chapter#12 section#2 Guided Reading

-Chapter#12 section#3 Guided Reading

-Chapter#12 Enrichment

• II. Chapter#12 Review-Review for Chapter#12 Test

• NOTICE: Chapter#12 Test Monday!