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Financial Markets


Financial Markets Chapter 11 – PowerPoint PPT presentation

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Title: Financial Markets

  • Financial Markets

Chapter 11
The Financial System
  • Bear Market
  • Investors generally sell because they are
    expecting lower profits
  • Bull Market
  • Investors usually buy because they are expecting
    higher profits
  • Financial Assets
  • When savers invest, they receive documents known
    as financial assets.

Financial Intermediaries
Financial intermediaries are institutions that
help channel funds from savers to borrowers.
Banks, Savings and Loan Associations Take in
deposits from savers and then lend some of these
funds to various businesses Credit
Unions Member-owned organization to make money
for its members, usually considered
community-based and more interested in doing the
right thing Finance Companies Make loans to
consumers and small businesses, but charge
borrowers higher fees and interest rates to cover
possible losses Mutual Funds Pool the savings of
many individuals and invest this money in a
variety of stocks and bonds usually diversified
with less risk Life Insurance Companies Provide
financial protection to the family, or other
beneficiaries, of the insured. The premium is
usually paid monthly Pension Funds Are set up by
employers who withhold a certain percentage of a
workers salary to deposit in a fund distribute
for payment when the worker retires usually
covers many years
  • Financial Planning- financial plans include
    spending and saving plan, investment plan,
    retirement plan, estate plan.
  • Important factors in financial planning
  • Budget- list of fixed and flexible expenses.
  • Fixed Expenses- remain constant from month to
  • Flexible Expenses- can vary from month to month.

Your investment Plan
  • Stocks are pay the highest reward, but have the
    greatest risk
  • You dont want to be risking your money as you
    get older
  • The general rule is to subtract your age from 110
    to find the percentage of stocks you should have
    in your portfolio(110 30 80 or 110 55

Stocks Fixed Income Cash Ave return since 1970
Conservative (50 ) 20 50 30 7.9
Moderate (35-50) 60 35 5 9.8
High risk (under 35) 95 0 5 10.4
Risk and Return
  • 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.
  • Liquidity is important if you might need quick
    access to the funds
  • Return and Risk
  • Investing in a friends 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.

Bonds as Financial Assets
  • Bonds are basically loans, or IOUs, that
    represent debt that the government or a
    corporation must repay to an investor. Bonds
    have three basic components
  • 1. The coupon rate the interest rate that the
    issuer will pay the bondholder.
  • 2. The maturity the time when payment to the
    bondholder is due.
  • 3. The par value the amount that an investor
    pays to purchase the bond and that will be repaid
    to the investor at maturity.
  • Not all bonds are held to maturity. Sometimes
    bonds are traded or sold and their price may
    change. Economists therefore refer to a bonds
    yield, which is the annual rate of return on the
    bond if the bond were held to maturity.

How Bonds Work
  • Eagle Corporation sells a 4, 20-year, 1,000
    par value bond that pays interest semiannually
  • The coupon payment to the holder is 20 every 6
    months (.04 x 1,000, divided by 2)
  • When the bond reaches maturity after 20 years the
    debt is retired and the holder gets the par value
    of 1,000
  • Bonds can be compared by using the current yield
  • (annual interest divided by the purchase price)

Bond Ratings
  • Standard Poors and Moodys rate bonds on a
    number of factors, including the issuers ability
    to make future payments and to repay the
    principal when the bond matures.
  • A high bond rating usually means that the bond
    will sell at a higher price, and that the firm
    will be able to issue the bond at a lower
    interest rate.

Advantages and Disadvantages to Bond Issuers
  • Bonds are desirable from the issuers point of
    view for two main reasons
  • 1. Once the bond is sold, the coupon rate for
    that bond will not go up or down.
  • 2. Unlike stock, bonds are not shares of
    ownership in a company so they have a very small
    risk defaulting is the big risk!
  • Bonds also pose two main disadvantages to the
  • 1. The company must make fixed interest payments,
    even in bad years when it does not make money.
  • 2. If the issuer does not maintain financial
    health, its bonds may be downgraded to a lower
    bond rating. This makes it harder to sell future
    bonds unless a discount or higher interest rate
    is offered.

Types of Bonds
  • Savings Bonds
  • Savings bonds are low-denomination (50 to
    10,000) bonds issued by the United States
    government. Savings bonds are purchased below
    par value (a 100 savings bond costs 50 to buy),
    interest is paid when bond matures.
  • Treasury Bonds, Bills, and Notes
  • These investments are issued by the United States
    Treasury Department. The absolute least amount
    of risk!
  • Municipal Bonds
  • Municipal bonds are issued by state or local
    governments to finance such improvements as
    highways, state buildings, libraries, and
  • Corporate Bonds
  • Issued by a corporation to raise money to expand
    its business.
  • Junk Bonds
  • Junk bonds are lower-rated, potentially
    higher-paying bonds. (High Risk!!!).

Other Types of Financial Assets
  • Money Market 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.
  • 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.

Mutual Funds
  • A mutual fund pools investors money.
  • The fund puts its investors money into the
    markets on their behalf.
  • In effect, investors own small amounts of many
    different assets - diversified.
  • Mutual funds enable investors to avoid risk that
    comes from owning any one asset. In other words,
    mutual funds make it easy to diversify.

Roth IRA/401(K)
  • A Roth IRA is an Individual Retirement Account
    that is usually not taxed
  • Must be 59.6 years to withdraw tax-free money
  • In 2013-14 tax year0-49 years can contribute -
    5,50050 years can contribute - 6,500
  • 401(K) a pension plan in which money is deducted
    from a paycheck before tax (and sometimes by
    employer). Tax is not paid until it is
    withdrawnAnnual pre-tax limit (2013) IS 17,500

Stock Exchanges
  • The New York Stock Exchange (NYSE)
  • The NYSE is the countrys largest stock exchange.
    Only stocks for the largest and most established
    companies are traded on the NYSE.
  • NASDAQ-AMEX is an exchange that specializes in
    high-tech and energy stock.
  • The OTC Market
  • The OTC market (over-the-counter) is an
    electronic marketplace for stock that is not
    listed or traded on an organized exchange.
  • Daytrading
  • Daytraders use computer programs to try and
    predict minute-by-minute price changes in hopes
    of earning a profit.

Stock Exchanges
  • Every country has a stock exchange
  • On the NYSE movement is measured by the Dow Jones
    Industrial Average (Dow).

How Stocks Are Traded
  • Stockbroker is a person who links buyers and
    sellers of stock.
  • Stockbrokers work for brokerage firms, or
    businesses that specialize in trading stock.
  • Speculation involves picking high-risk
    investments in the hope of a high reward
  • Odd lot 1-99 shares
  • Portfolio is a collection of financial assets
  • Diversification is the key!!!!!

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  • Trading of various types of products.
  • Ex. wheat, soybeans, oats, corn, steel, coal,
    gold, silver, diamonds, etc.
  • High risk investments.
  • Contracts where investors give money today for
    the promise of a commodity delivered at a later
    date. Investor hopes that price of the commodity
    will rise and the contract can be resold for a

Regulating the Market
  • Congress is the top regulator
  • SEC- securities and exchange commission- set up
    after big stock market crash - 1929 - requires
    that companies who sell stock must meet rigorous
    standards - supply detailed information including
    a prospectus.
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