Standard and Essential Question

• Standard -SSEMI1 The student will describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money. – b. Explain the role of money and how it facilitates

exchange.

• Essential Questions- How does money facilitate exchange in the economy?

Money

• Money- anything that serves as a medium of exchange, a unit of account, and a store of value

• Three Uses of Money– Medium of Exchange- anything that is used to

determine value during the exchange of goods and services

• Barter- a method of exchanging one thing for another– Barter is still used in traditional economies– Barter is too time consuming and too difficult to be practical in

large economies

Three Uses of Money Continued

• Unit of Account- a means for comparing the values of goods and services

• Store of Value- something that keeps its value if it is stored rather than used– Money keeps its value unless a country suffers

inflation; this means it takes more money to purchase an item than it required at an earlier time

Six Characteristics of Money

• Currency- coins and paper bills used as money; earlier societies used other objects as currency

• Six Characteristics of Money– Durability- must be able to withstand the physical

wear and tear that comes from being used over and over again

– Portability- people must be able to easily transfer money from one person to another

– Divisibility- money must be easily divided into smaller denominations

Six Characteristics of Money

• Uniformity- money must be the same in terms of what it will buy; a $1 will always buy a $1 worth of goods

• Limited Supply• Acceptability- people must recognize the

dollar and accept it in exchange for goods

Sources of Money’s ValueMoney is paper and metal, so what makes it valuable?

Commodity Money- objects that have value in themselves and that are also used as moneyExamples: salt, cattle, and precious stonesCommodity money is not portable, durable or divisibleUsed in small economies and in the American colonies

Representative Money- objects that have value because the holder can exchange them for something else of valueExample: People carried around silver and gold receipts to show

that they owned gold or silverUsed during the late colonial period and the early days of the

United States

Sources of Money’s Value

• Fiat Money- money that has value because the government has ordered that it is an acceptable means to pay debts– Also known as “legal tender”– Federal Reserve controls its supply– The control of the money supply is essential for a

fiat system to work

Measuring the Money Supply

• The money supply is all the money available in the United States economy.

• M1– M1 consists of assets that have liquidity, or the ability

to be used as, or easily converted into, cash.– Components of M1 include all currency, traveler’s

checks, and demand deposits.– Demand deposits are the money in checking accounts.

Measuring the Money Supply

• M2– M2 consists of all of the assets in M1, plus deposits in

savings accounts and money market mutual funds. – A money market mutual fund is a fund that pools money

from small investors to purchase government or corporate bonds.

Standard and Essential Question• Standard- SSEPF1 The student will apply rational

decision making to personal spending and saving choices. – a. Explain that people respond to positive and

negative incentives in predictable ways. – b. Use a rational decision making model to select one

option over another. – c. Create a savings or financial investment plan for a

future goal• Essential Question- How can rational decision

making impact current spending and future investment decisions?

Rational Decision Making

• Rational Decision making refers to the process by which rational consumers seeking their own happiness or utility will make choices.– Define range of options– Evaluate the costs, benefits, and trade-offs

involved in each choice to reach a decision• Rational decisions occur when the marginal

benefits of an action equal or exceed the marginal costs

Saving and Investing

• Investment- the act of redirecting resources from being consumed today so that they may create benefits in the future; the use of assets to earn income or profit

• Investing– Is an essential part of the free enterprise system– Promotes economic growth and contributes to a

nation’s wealth

Standard and Essential Question• Standard- SSEPF2 The student will explain that banks and other

financial institutions are businesses that channel funds from savers to investors. a. Compare services offered by different financial institutions. b. Explain reasons for the spread between interest charged and interest earned. c. Give examples of the direct relationship between risk and return. d. Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds.

• Essential Question- How do the various services offered at financial institutions compare in terms of risk and return?

Banking Services

• Banks perform many functions and offer a wide range of services to consumers. – Storing Money

• Banks provide a safe, convenient place for people to store their money.

– Credit Cards• Banks issue credit cards — cards entitling their holder

to buy goods and services based on each holder's promise to pay.

Banking Services

• Saving Money1. Savings Accounts2. Checking Accounts3. Money Market Accounts4. Certificates of Deposit (CDs)• Loans- By making loans, banks help new

businesses get started, and they help established businesses grow.

• Mortgage- a specific type of loan that is used to purchase real estate.

BANK

How Banks Make a Profit

Deposits from customers

Interest from borrowers

Fees for services

Money enters bank

Money leaves bank

Interest and withdrawals to

customers

Money loaned to borrowers:• business loans•home mortgages• personal loans

Bank’s cost of doing business:• salaries• taxes• other costs

Bank retains required reserves

How Banks Make a Profit

• The largest source of income for banks is the interest they receive from customers who have taken loans.

• Interest is the price paid for the use of borrowed money.

Types of Financial Institutions

• Commercial Banks– Commercial banks offer checking services, accept deposits,

and make loans. • Savings and Loan Associations

– Savings and Loan Associations were originally chartered to lend money for home-building in the mid-1800s.

• Savings Banks– Savings banks traditionally served people who made

smaller deposits and transactions than commercial banks wished to handle.

• Credit Unions– Credit unions are cooperative lending associations for

particular groups, usually employees of a specific firm or government agency.

• Finance Companies– Finance companies make installment loans to consumers.

The role of computers in banking has increased dramatically.

Automated Teller Machines (ATMs)Customers can use ATMs to deposit money, withdraw cash, and obtain account information. Debit CardsDebit cards are used to withdraw money directly from a checking account.Automatic Clearing Houses (ACH) An ACH transfers funds automatically from customers' accounts to creditors' accounts. Home BankingMany banks allow customers to check account balances and make transfers and payments via computer.Stored Value CardsStored value cards are embedded with magnetic strips or computer chips with account balance information.

Electronic Banking

Financial System

• Financial System- the system that allows the transfer of money between savers and borrowers– When people save they are lending funds to

others

• Financial Assets- claim on the property or income of a borrower

Financial intermediaries accept funds from savers and make loans to investors.

Financial Intermediaries

Commercial banksSavings & loan associations

Savings banksMutual savings banks

Credit unions

Financial Institutions that make loans to…

Life insurance companiesMutual funds

Pension fundsFinance companies

InvestorsSavers make deposits to…

The Flow of Savings and Investments

Financial Intermediaries• Financial Intermediaries- institution that helps channel funds from savers

to borrowers– Banks– Savings and Loan Associations– Credit Unions– Finance Companies– Mutual Funds- fund that pools the savings of many individuals and

invests this money in a variety of stocks, bonds, and other financial assets

– Life Insurance- bought by working members of families; used to make up for lost income if they die; companies lend part of premiums to investors

– Pension Fund

Advantages of Financial Intermediaries

• Sharing Risks- allows your money to be pooled with other investors– Diversification- spreading out investments to reduce

risk• Provide Information

– monitor income and spending of borrowers– Knows how stocks in their portfolios (collection of

financial assets) are doing• Provide this information to potential investors in a

prospectus (an investment report to potential investors)– Provide Liquidity- allows investors to convert assets to

cash

Risk, Liquidity, and Return

• Investments that are considered to be safe usually have a lower return (the money an investor receives above and beyond the sum of money initially invested)

• The riskier the investment the higher the return; however there is a greater chance you will lose your money

Bonds and Other Financial Assets• Bonds- Certificates sold by a company or government to finance projects

or expansion (like an IOU)– Pay the investor a fixed amount of interest– Lower Risk investments

• 3 Components of Bonds– Coupon Rate- the interest rate that a bond issuer will pay to a

bondholder– Maturity- the time at which payment to a bondholder is due– Par Value- the amount that an investor pays to purchase a bond and

that will be repaid to the investor at maturity• Yield- the annual rate of return on a bond if the bond were held to

maturity

• Buying Bonds at Discount– Discount from par- paying less than par- this occurs

because interest rates are not stable• Bond Ratings

– Standard and Poor’s and Moody’s are two firms that rate bonds

– Factor s that determine bond ratings» Issuer’s ability to make future interest payments» Ability to repay the principal when the bond matures

– The higher the rating the lower the risk and the lower the interest rate a company has to pay on a bond

Advantages and Disadvantages to the Issuer

• Once the bond is sold the coupon rate will not go up and down

• Bondholders do not own part of the company and the issuer does not have to share profits with them

• Must make fixed interest payments even in bad years

• Firms must maintain financial health so they do not receive a lower bond rating

Types of BondsSavings 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) and interest is paid only when the bond matures.

Treasury Bonds, Bills, and Notes• These investments are issued by the United States Treasury Department. Municipal Bonds• Municipal bonds are issued by state or local governments to finance such

improvements as highways, state buildings, libraries, and schools.

Types of Bonds Continued

Corporate Bonds• A corporate bond is a bond that a corporation

issues to raise money to expand its business. Junk Bonds• Junk bonds are lower-rated, potentially

higher-paying bonds.

Mutual Fund and IRAs

• Mutual Fund– established to invest many people’s money in many firms– Best to diversify

• Individual Retirement Account (IRA)– Allows you to build wealth and retirement security– May contribute $4,000 per year

• 401(k)- another retirement savings account– Employees deduct a portion of their earning before taxes– Must pay taxes when money is withdrawn– Money withdrawn prior to 59 ½ is subject to a penalty

Buying Stock• Corporations can raise money by issuing stock,

which represents ownership in the corporation. A portion of stock is called a share. Stocks are also called equities.

• Stockowners can earn a profit in two ways:1. Dividends, which are portions of a corporation’s

profits, are paid out to stockholders of many corporations. The higher the corporate profit, the higher the dividend.

2. A capital gain is earned when a stockholder sells stock for more than he or she paid for it. A stockholder that sells stock at a lower price than the purchase price suffers a capital loss.

Types of StockDividend Differences• Income stock pays dividends at regular times during the year.• Growth stock pays few or no dividends. Instead, the issuing

company reinvests earnings into its business. Decision-Making Differences• Investors who buy common stock are voting owners of the

company. • Preferred stock owners are nonvoting owners of the

company, but receive dividends before the owners of common stock.

Stock Splits and Stock Risks

Stock Splits• A stock split is the division of a single share of stock into more

than one share.• Stock splits occur when the price of a stock becomes so high

that it discourages potential investors from buying it. Risks of Buying Stock• Purchasing stock is risky because the firm selling the stock

may encounter economic downturns that force dividends down or reduce the stock’s value. It is considered a riskier investment than bonds.

Stock ExchangesThe New York Stock Exchange (NYSE)• The NYSE is the country’s largest stock exchange. Only stocks for

the largest and most established companies are traded on the NYSE.

NASDAQ-AMEX• 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.

How Stocks Are Traded

• A stockbroker is a person who links buyers and sellers of stock.

• Stockbrokers work for brokerage firms, or businesses that specialize in trading stock.

• Some stock is bought and sold on stock exchanges, or markets for buying and selling stock.

Futures and Options

• Futures are contracts to buy or sell at a specific date in the future at a price specified today.

• Options are contracts that give investors the option to buy or sell stock and other financial assets. There are two types of options:1. Call options give buyers the option to buy shares of

stock at a specified time in the future.2. Put options give buyers the option to sell shares of

stock at a specified time in the future.

Measuring Stock Performance

Bull and Bear Markets• When the stock market rises steadily over time, a bull market

exists. Conversely, when the stock market falls over a period of time, it’s called a bear market.

Stock Performance Indexes• The Dow Jones Industrial Average

– The Dow is an index that shows how stocks of 30 companies in various industries have changed in value.

• The S & P 500– The S & P 500 is an index that tracks the performance of 500

different stocks.

The collapse of the stock market in 1929 is called the Great Crash.

The Great CrashCauses of the Crash• Many ordinary Americans

were struggling financially: many purchased new consumer goods by borrowing money.

• Speculation, or the practice of making high-risk investments with borrowed money in hopes of getting a big return, was common.

Effects of the Great Crash• The Crash contributed to a much

wider, long-term crisis — the Great Depression during which many people lost their jobs, homes, and farms.

• Americans also became wary of buying stock. As recently as the early 1980s, only about 25 percent of households in the United States owned stock.

Standard and Essential Question

• Standard- SSEPF3 The student will explain how changes in monetary and fiscal policy can have an impact on an individual’s spending and saving choices.

• a. Give examples of who benefits and who loses from inflation.

• b. Define progressive, regressive, and proportional taxes.

• c. Explain how an increase in sales tax affects different income groups.

Inflation

• Inflation- A general increase in prices• Who do you think benefits if prices go up?• Who do you think loses if prices go up?

Tax Bases

• Tax Base- the income, property, good or service that is subject to a tax– Individual Income Tax- a tax on a person’s income– Sales Tax- a tax on the dollar value of a good or

service being sold– Property Tax- a tax on the value of property– Corporate Income Tax- a tax on the value of a

company’s profits

Tax Structures

Type of Tax Structure Definition Example

Proportional Tax A tax for which the percentage of income paid in taxes remains the same for all income levels

Progressive Tax Tax for which the percentage of income paid in taxes increases as income increases

Regressive Tax A tax for which the percentage of income paid in taxes decreases as income increases

Characteristics of a Good Tax

• Simplicity- easily understood• Efficiency- easy to collect; not too costly• Certainty- clear when a tax is due, how much is

due, and how it should be paid• Equity- fair• Determining Fairness

– Benefits-Received Principle- a person should pay taxes based on the level of benefits he or she expects to receive (drive- pay gas tax)

– Ability to pay principle

Standard and Essential Question

• Standard- SSEPF4 The student will evaluate the costs and benefits of using credit. – a. List factors that affect credit worthiness. – b. Compare interest rates on loans and credit

cards from different institutions. – c. Explain the difference between simple and

compound interest rates. • Essential Question- How can credit be both

beneficial and harmful to a person?

Credit

• Credit- the ability of a consumer to obtain goods or services before payment, based on an agreement to pay later

• Interest- the price of using someone else’s money

• Credit is an unsecured loan- the loan is not backed with collateral (property required by a lender and offered by a borrower as a guarantee of payment on a loan)

Credit

• The Bright Side of Credit– Credit means obtaining the use of money that you do not have– Helps people acquire assets (homes and post-secondary ed. are

assets)– Credit can help people in an emergency– Using credit allows you to use a good or service today and pay for

it later

• The Dark Side of Credit– Mistakes in using too much credit in relation to your income can be

hard to recover from– Missing payments or defaulting on loans may keep you from

obtaining credit in the future

Credit

• Factors that affect credit worthiness– Character– Capacity– Collateral

Credit

• Lenders look for the “Three Cs” (Character, Capacity, Collateral) when they approve a loan to an individual– Character- Is the applicant responsible?

• Have you used credit before?• Do you have pay bills on time?• Do you have a good credit report?• Can you provide character references?• How long have you lived at your present address?• How long have you been at your present job?

– Capacity- Does the applicant have enough discretionary income to make the payments on the loan?

– Do you have a steady job?– What is your salary?– How reliable is your income?– Do you have other sources of income?

– Collateral- Will the loan be secured, or guaranteed by collateral that can be used to repay the debt in case the borrower defaults on the loan?

• Do you have a checking account?• Do you have a savings account?• Do you own any stocks or bonds?• Do you have any valuable collections or jewelry?• Do you own your own home?• Do you own a car?• Do you own a boat?

Credit

• APR is the annual percentage rate• Truth in Lending Act

– requires creditors to disclose the cost of the credit in simple terms

– Creditors must display both their finance charges and APR (annual percentage rate) of the forms they use

• Fair Credit Reporting Act– governs the activities of credit bureaus and creditors– Requires creditors to furnish accurate and complete

information regarding your credit history

Credit Reports

• Credit Report- a record of an individual’s personal credit history

• A credit report will tell, in detail, how much the person has borrowed, from whom, and whether the bills have been paid on time

Interest: Simple vs. Compound

• Simple Interest• Compound Interest

INSURANCE

Standard and Essential Question

• Standard: SSEPF5 The student will describe how insurance and other risk-management strategies protect against financial loss. – a. List various types of insurance such as automobile,

health, life, disability, and property. – b. Explain the costs and benefits associated with different

types of insurance. • Essential Question: How do insurance and other risk-

management strategies protect consumers against financial loss?

Why do we care about insurance?

• As people begin to acquire assets and an income, they begin to start thinking about how to protect what they have from loss.

• That’s why many people buy insurance.• Decision to buy insurance depends on

individual judgments about the future.– A general guideline is not to allow a large portion

of a potential loss to remain uninsured.

What are some low-risk choices that people make?

• Drinking tap water• Eating peanut butter• Turning on a light• Taking a walk

What are some high-risk choices that people make?

• Motorcycling• Scuba diving• Parachuting• Hang gliding• Riding a bull• Smoking/drinking/drugs

Driving a Car involves risk…

• Risk of an accident– You could cause an accident– Another driver could cause an accident that

involves you

How can you reduce the risks involved with driving?

• Stop driving – walk, ride the bus, ride a bike.

• Become a safe driver – Take defensive driving– Study your safety manual– Avoid driving in rush hour or on dangerous roads– Avoid using cell phone while driving

• Purchase auto insurance!– Protect yourself against loss for car repairs, medical costs,

lawsuits resulting from an accident.

ALL CHOICES INVOLVE RISKS

• You can take steps to reduce risks involving your behavior or your possessions.– Change the behavior/reduce the risk

• Go the speed limit• Parachute or hang glide with experts• Stop drinking or smoking• Have a designated driver, etc.

– Purchase insurance to protect your property or your family.

Thinking About Risk

• The most common mistake people make is to over-insure against small risks and under-insure against big risks.– If consequences are minor you should probably do

nothing other than try to reduce your risk through your own behavior.

– If there are major consequences, you should get insurance and try to avoid or reduce the risk.

How does insurance work?

• Spreads the risk over many payers.• A pool of people contribute money to buy

insurance from an insurance company with the expectation that only a few of them will actually experience a loss that will need to be covered.

EXAMPLE• Suppose student council in a school of 1,000 students wanted to offer all

students insurance against the theft of personal possessions from school lockers.– Establish a locker insurance company

• Suppose that students in this school have an average of $50 worth of personal stuff in each locker.

• Suppose that an average of 10 lockers are broken into each year.– In a typical year, students in the school lose a total of $500 worth ($50 of stuff x 10

locker break-ins) in locker theft.– If all 1,000 students wanted to buy insurance it would cost:

• $500 loss = $.50 charge for each student for locker ins.1000 students

If every student bought the insurance they would be covered from loss. This is fundamentally how insurance companies work.

What is a premium?

• The fee paid for insurance protection.

What is a deductible?

• The amount of loss paid by the insured.

Types of Insurance

• Auto• Health• Renter’s• Homeowner’s• Life• Disability

Auto Insurance • Provides financial protection to the owner, operator, and occupants of an

automobile in case of accidents or damages.– Collision (when you’re at fault) coverage provides for the repair or

replacement of the policyholder’s car if it is damaged in an accident.• PROTECTS YOUWHEN YOU’RE AT FAULT AND WHEN THE OTHER DRIVER

HAS NO INSURANCE.– Liability (when you’re at fault) protection covers the cost of property damage

and injuries to others as a result of an accident.• PROTECTS YOU WHEN YOU DRIVE YOUR CAR, OTHERS WHEN YOU LET

THEM DRIVE YOUR CAR, AND YOU IF YOU DRIVE SOMEONE ELSE’S CAR.• YOU SHOULD HAVE ENOUGH TO COVER YOUR ASSETS, PREFERABLY

DOUBLE YOUR ASSETS. REMEMBER, FUTURE WAGES CAN BE GARNISHED!

– Comprehensive (when there’s no one to blame) covers the cost of damage to an auto as a result of fire, theft or storms.

• COVERS NONCOLLISION EXPENSES.– Uninsured motorist, medical, rental car….– LEGALLY REQUIRED TO HAVE AUTO INSURANCE!!

Coverage You Can Probably Skip

• Roadside Assistance• Towing• Rental Car Reimbursement

– These riders appear inexpensive, but they add up and can sometimes be a hassle to claim.

– Remember, insure yourself against the big losses, not the small ones!!

What determines your rates?• Age, sex, marital status, accidents and traffic

violations, expected mileage, whether your teenage child is driving your car, where you live, etc.

• Discounts to ask for– Multicar and multipolicy– Antitheft devices– Safety features (antilock brakes)– Good driver– Non-smoker– Good student

Health Insurance

• Protects against financial loss due to illness or accident.– Basic Health insurance covers only office visits,

laboratory or hospital costs and routine care.– Major Medical covers the cost of treatment of

catastrophic illness or injury.– Dental and Vision – covers some of the cost of

routine exams and specific services.

The Basics of Health Insurance

• Three major types:– Fee for Service– Preferred Provider Organizations (PPOs)– Health Management Organizations (HMOs)

Fee for Service

• You choose the doctor or hospital that you want and the insurance company pays for part or all of the cost.

• There are usually:– Deductibles: the minimum amount you have to pay each year

before the insurance kicks in.– Co-payments: the percentage of bills you have to cover. For

example, a company might pay 80% of the first $5,000 in bills and 100% of the bill above $5,000.

PPOs

• Steer employees to cooperating doctors and hospitals that have agreed to a predetermined plan for keeping costs down.

• There are often fines for going out of network, but it’s often easier to go out of network with a PPO than with an HMO.

• You can usually save money with a PPO compared to a fee-for-service plan if you stay within the list of providers.

HMOs

• You pay in advance for your care – the amount you pay does not depend on the services you use.

• The HMO handles all of your healthcare needs but without the paperwork and with hardly any deductibles or copayments.

• Try to make preventive care easily accessible to cut down on future expenses.

• All HMOs are organized differently, but basically manage care through a primary care physician.

Cost vs. Flexibility

• Fee for Service costs the most – you pay for flexibility in your choices.

• HMO costs the least and provides the least flexibility – must use the primary care physician.

• PPOs are in the middle – lower costs than fee for service and some choice of doctors.

Renter’s Insurance

• Protects the renter from loss due to fire, smoke, or damage to personal possessions.

• Also provides you with liability insurance if someone is hurt in your home and chooses to sue you.

• Should look for policies that give you replacement costs not cash-value coverage.

Homeowner’s Insurance

• Protects the homeowner from loss due to damage from fire, theft, storms, and so forth.– Physical Damage – reimburses for fire or water damage to

house or other structures on the property.– Loss or Theft – reimburses for personal property damaged or

stolen.– Liability – protects against loss from a lawsuit for injuries to

invited or uninvited guests.

Life Insurance

• Provides financial protection to people who depend on a wage earner when the wage earner dies.– Term Life – offers protection for a specified period of time.– Whole Life – offers protection that remains in effect during the

lifetime of the insured and acquires a cash value.

• IMPORTANT IF SOMEONE COUNTS ON YOU FOR FINANCIAL SUPPORT!

Disability Insurance

• Provides income over a specified period when a person is ill or unable to work.– Policy owner selects a replacement income for

lost wages if an illness or accident prevents the person from working.

– Disability income is paid for a specified period of time after a waiting period.