Unit 4. Unit 4: Personal Finance

Transcription

1 Unit 4: Personal Finance 1

2 Unit IV [10 days] SECTIONS Personal Finance 1. Labor 2. Financial Institutions 3. Financial Markets 4. Financial Planning Enduring understandings Students will take away from this unit the following understandings: 1) Varying degrees of knowledge, skills and abilities affect earnings. 2) Financial institutions provide many services and are essential intermediaries between savers and investors. 3) Different forms of savings and investment such as stocks, bonds and mutual funds, can balance risk, liquidity and return. 4) Various types of insurance and other risk strategies protect against financial loss. 5) Rational decision making in spending and savings helps achieve future goals. Key Vocabulary: unskilled labor semi-skilled labor skilled labor professional labor money barter currency commodity money representative money fiat money liquidity demand deposit money market mutual fund interest principal debit card credit collateral finance charges maturity yield savings bond municipal bond corporate bond primary market secondary market share dividend capital gain capital loss stock split futures options bull market bear market premium deductible co-payment budget Skills Focus: Students will be able to: Describe how the earnings of workers are determined in the marketplace. Summarize how the U.S. labor force is changing. Explain that banks and other financial institutions are businesses which channel funds from savers to investors. Compare services offered by different financial institutions. Evaluate the costs and benefits of using credit. Evaluate a variety of savings and investment options, including stocks, bonds and mutual funds. Explain how financial systems bring together savers and borrowers. 2

3 Apply rational decision-making to personal spending and saving choices Describe how insurance and other risk-management strategies protect against financial loss. Identify the trade-off among risk, liquidity, and return. Prerequisites: SS6E4 The student will explain personal money management choices in terms of income, spending, credit, saving, and investing. Connections: The Business and Computer Science courses Entrepreneurial Ventures and Business Essentials as well as the Marketing, Sales, and Service courses Marketing Principles and Advanced Marketing have many curricular connections to this unit. Entrepreneurial Ventures: BCS-EV-24: The student describes the role and function of a human resource unit in an organization. c. Explains the nature of wage and benefit programs. d. Develops compensation plan/incentive systems. BCS-EV-25: The student utilizes techniques to staff a unit within an organization. h. Determines and applies appropriate selection criteria for new hires. i. Develops strategies for determining and negotiating salaries and benefits. BCS-EV-26: The student integrates training and development strategies to increase productivity and employee satisfaction. BCS-EV-39: The student develops the financial plan for a business. Business Essentials: BCS-BE-26: The student explains the process of developing a budget. BCS-BE-28: The student identifies financial aspects associated with opening a business. b. Compares and contrasts the sources of funding used in financing a business. BCS-BE-29: The student completes records which are fundamental for any business. BCS-BE-35: The student analyzes choices available to consumers for protection against risk and financial loss. Marketing Principles: MKT-MP-4: Implement, modify, and improve business and marketing systems to facilitate business activities. d. Relate the role of stockholders to management policies. MKT-MP-7: Employ financial knowledge and skill to facilitate marketing decisions. c. Identify problems involving simple and compound interest, discounts, sales tax, and credit charges related to financial transactions. d. Identify the types and purposes of credit. Advanced Marketing: MKT-AM-3: Evaluate financial systems to enhance their impact on business and marketing operations and decisions. Suggested Performance Assessment: Students will create books entitled My Financial Future. The book will be divided into chapters My Goals, My Career, My Savings and Investment, My Credit, My Insurance, and My Budget. Each chapter will include information about the student s own financial plan in that particular area and should include illustrations, pictures, articles, informational brochures, etc. 3 Unit 4

4 Unit IV SECTION 1 Personal Finance Labor Aim: 1 of 1: How is education, skill-level, and training reflected in the earnings of workers? SSEPF6 Identify skills that are required to be successful in the workplace. Explain the significance of investment in education, training, and skill development Key Vocabulary: Productivity, equilibrium wage, unskilled labor, semi-skilled labor, skilled labor, professional labor, glass ceiling Content Expectation: The student will understand that education, training and job skills lead to higher paying jobs. the four categories of labor include unskilled, semi-skilled, skilled, and professional labor. the supply of and demand for various workers impact their wages in the labor market. Core Text: Economics: Principles in Action, pp Skills Focus Instructional Strategy: (Activity) In small groups, brainstorm a list of 20 jobs. Trade lists with another group. Go through the list and decide whether each job involves unskilled labor, semi-skilled labor, skilled labor, or professional labor. If the jobs require any special skills, education, or training, list what those would be under each job. Finally, order the jobs from the lowest wages earned to the highest wages earned (estimated). Compare and discuss answers with class, using a teacher-provided list of jobs. Other Instructional Suggestions: (Warm-up) Ask students to list reasons for the movement of U.S. manufacturing jobs to other countries. Have the students to explain how the loss of these jobs signals changes in the U.S. economy and its labor market. (Warm-up) What job do you eventually want? What kind of education will it require? What kind of training and experience will it require? What kinds of skill will it require? How much money will you earn for the job? Discuss student answers to the questions and relate to content of lesson. (Lecture) Color transparency 9F and the accompanying lesson and essential questions are perfect for emphasizing the concept of the relationship between earnings and education level. (Activity) Have student groups check one or more almanacs to find out the ten highest-paying and ten-lowest paying full-time occupations in the United States. Ask students to show the information on a bar graph and then speculate on the relationship between these jobs and their salaries. (Activity) Have students to create a graph or chart showing the trends in the labor force focusing on gender, education, race and temporary worker status. (Activity) Have students check one or more almanacs to find out the ten highest-paying and the ten lowest paying full-time occupations in the United States. Ask students to show the information on a bar graph and then to speculate about the relationships between jobs and salaries. (Discussion) Begin by discussing how the forces of supply and demand affect wages. Tell students 4

5 5 Unit 4 that factors other than supply and demand also affect wages; them discuss the skill levels, working conditions, and various forms of wage discrimination. Finally, explain the ways in which unions can determine wage scales (Assignment) Have students complete the assignment on wages and jobs (Unit 4 Supplemental Materials #3) (Lesson Plan) See attached lesson plan Earnings (Unit 4 Supplemental Materials #12) (Lesson Plan) See attached lesson plan Earning an Income (Unit 4 Supplemental Materials #13) (Wrap-Up Question) Which of the following is MOST likely to cause wages to increase for United States workers? a. an increase in interest rates b. an increase in the value of the dollar c. an increase in worker productivity d. an increase in retirement rate among United States workers. The answer is C. (Lecture Notes) U.S. Labor Trends Economics define the labor force as all nonmilitary people who are employed or unemployed. Employment People are considered employed if they are 16 years or older and meet at least one of the following requirements: They worked a least one hour for pay within the last week; or They worked 15 or more hours without pay in a family business; or The held jobs but did not work due to illness, vacations, labor disputes, or bad weather. Unemployment People are considered unemployed if they are 16 years or older and meet the following criteria: They do not have a job; and They have actively looked for work in the prior 4 weeks; and They are currently available for work. Occupational Trends A Changing Economy The economy of the United States has transformed from a mainly agricultural economy in the 1800s, to an industrial giant in the 1900s. The computer chip has revolutionized the economy since its introduction in the late 1900s. Overall, the United States is shifting from a manufacturing economy to a service economy. As service jobs increase, the nation is losing manufacturing jobs. Demand for skilled labor is rising, and the supply of skilled workers is increasing to meet the demand. The Changing Labor Force The learning effect is the theory that education increases productivity and results in higher wages. The screening effect theory suggests that the completion of college indicates to employers that a job applicant is intelligent and hard-working. Women at Work Overall, the number of women in the work force has increased from about 38 percent of all women

6 in 1960 to about 58 percent of all women in Unit 4 Supply and Demand in the Labor Market Labor Demand The higher the wage rate, the smaller the quantity of labor demanded by firms and government. Labor Supply As wages increase, the quantity of labor supplied also increases. Equilibrium Wage The wage rate that produces neither an excess supply of workers nor an excess demand for workers in the labor market is called the equilibrium wage. Wages and Skill Levels Wages vary according to workers skill levels and education. Jobs are often categorized into the following four groups: Unskilled Labor Unskilled labor requires no specialized skills, education, or training. Examples: waiters, messengers, janitors Semi-Skilled Labor Semi-skilled labor requires minimal specialized skills and education. Example: fork-lift operator Skilled Labor Skilled labor requires specialized skills and training. Examples: auto mechanics, plumbers Professional Labor Professional labor demands advanced skills and education. Examples: lawyers, doctors, teachers Wage Discrimination Laws Against Wage Discrimination The Equal Pay Act of 1963 declared that male and female employees in the same workplace performing the same job had to receive the same pay. Title VII of the Civil Rights Act of 1964 forbids job discrimination on the basis of race, sex, color, religion, or nationality. Pay Levels for Women Despite these protections, American women today earn about 75 percent of what men earn. Pay Levels for Minorities As the figure to the right shows, racial minorities tend to earn lower pay than white men. Other Resources: Virtual Economics Disk: Focus- Learning, Earning and Investing: High School. Lesson 3: Invest in Yourself. Learning Styles Lesson Plans Folder: Section 1 Lesson Plan, p 23 Math Practice Folder: Real Dollar Value of Minimum Wage, p.7. Differentiation: Honors: Find the top ten and bottom ten paying jobs in the country. Place information on a bar graph and write a brief summary of the information found. Remediation: Outline Chapter 9, Section 2 by writing the main headings in the chapter and summarizing each section. ELL: Define vocabulary in Chapter 9, Section 2. 6

7 Unit IV SECTION 2 Personal Finance Financial Institutions Aim: 1 of 3: What are the three uses of money and explain their six characteristics? Key Vocabulary: Money, medium of exchange, barter, unit of account, store of value, currency, commodity money, representative money, fiat money Content Expectation: The student will understand that the three uses of money are being a medium of exchange, a unit of account, and a store of value. the six characteristics of money are durability, acceptability, divisibility, rareness, portability, and uniformity. money s value comes from its inherent value, its trade in value, or because the government says it has value. Core Text: Economics: Principles in Action, pp Skills Focus Instructional Strategy: (Activity) Divide students into small groups. Give each group a small bag of random household and found items (pens, silverware, rocks, etc.). Have students analyze each item in their bags to determine if the items would make good money by looking at the characteristics of money and answering if the item has that characteristic or not. After students have completed this assignment, discuss the characteristics of our currency and why it makes good money. See lesson plan and activity for further description (Unit 4 Supplemental Materials #1 and #4) Other Instructional Suggestions: (Warm-up) Show students a $20 bill. Ask for a show of hands for who in the class would like the $20 bill. Then show the student a fake $20 bill (Monopoly money, novelty money, handmade $20, etc). Ask for a show of hands for who wants the fake $20 bill (note do not identify it as a fake $20 bill). When students do not raise their hands, ask them why. What is different about the second $20 bill? Is it not the same color, made of the same material, have the same writing on it? Use this to get students to think about WHY we find our currency valuable. Introduce the uses and characteristics of money. (Activity) Have students to write a journal about their weekend after payday. Have the students to show how they use money as a medium of exchange, unit of account and a store of value. (Activity) Display the following list of items: sugar, emeralds, horses, coins, seashells, and government issued currency. Ask students in each group to evaluate each item with respect to its usefulness as money. Tell students to consider the six characteristics of money as they make their evaluations: durability, portability, divisibility, uniformity, scarcity, and acceptability. (Activity) To build understanding of the concept of money and its value, have students use two web graphic organizers like the one shown in Ch. 10, section 1 of the Section Reading Support transparencies. Remind students that a web shows a main idea and its supporting details. In the center of one organizer, students should put the label, Uses of Money and in the other they should 7

8 put, Characteristics of Money. Answers for this activity can be found in the Ch. 10, sec. 1 of Section Reading Support Transparencies. (Wrap-Up Question) What is NOT a use of money? a. a unit of account b. a medium of exchange c. a form of barter d. a store of value The answer is c. (Lecture Notes) What Is Money? Money is anything that serves as a medium of exchange, a unit of account, and a store of value. Unit 4 The Three Uses of Money Money as Medium of Exchange A medium of exchange is anything that is used to determine value during the exchange of goods and services. Money as a Unit of Account A unit of account is a means for comparing the values of goods and services. Money as a Store of Value A store of value is something that keeps its value if it is stored rather than used. Six Characteristics of Money The coins and paper bills used as money in a society are called currency. A currency must meet the following characteristics: 1. Durability Objects used as money must withstand physical wear and tear. 2. Portability People need to be able to take money with them as they go about their business. 3. Divisibility To be useful, money must be easily divided into smaller denominations, or units of value. 4. Uniformity Any two units of money must be uniform, that is, the same, in terms of what they will buy. 5. Limited Supply Money must be available only in limited quantities. 6. Acceptability Everyone must be able to exchange the money for goods and services. The Sources of Money s Value Commodity Money Commodity money consists of objects that have value in themselves. Representative Money Representative money has value because the holder can exchange it for something else of value. Fiat Money Fiat money, also called legal tender, has value because the government decreed that is an acceptable means to pay debts. Other Resources: Virtual Economics Disk: Focus-Advanced Placement Economics: Teachers Resource Manual. Unit 4 Macroeconomics-Lesson 1: Money. 8

9 Learning Styles Lesson Plans Folder: Section 1 Lesson Plan, p.25. Unit 4 Folder: Economics Skills, p.8. Differentiation: Honors: Research the development of money in the U.S. and create a timeline of important developments in U.S. money. Then write a paragraph about why its important for a society to have money. Remediation: For each of the six characteristics of money, define and illustrate the term. ELL: For each of the six characteristics of money, define and illustrate the term. Unit 4 9

10 Unit IV SECTION 2 Personal Finance Financial Institutions Aim: 2 of 3: What services do financial institutions provide and how are they able to provide these services? SSEPF2 Compare services offered by different financial institutions. Explain reasons for the spread between interest charged and interest earned. Key Vocabulary: Money supply, liquidity, demand deposit, money market, mutual fund, Fractional reserve banking, default, mortgage, credit cards, interest, principal, debit card Content Expectation: The student will understand that The main functions of financial institutions are to store money, invest money, and to issue loans and credit. interest earned on money kept in banks is lower than interest charged to take out a loan from the bank because banks kept the difference in order to make a profit. Core Text: Economics: Principles in Action, pp , , Skills Focus Instructional Strategy: (Activity) Have student groups create a fact poster that lists and briefly describes the various services that banks provide: storing money, saving money, loaning money, issuing credit cards. Remind students that they are creating a fact poster, so bulleted information under each service should be brief and to the point. Other Instructional Suggestions: (Warm-up) Ask students to give examples of the different types of financial institutions and the services that they provide. (Activity) Have students study the graphic on page 273 (figure 11.1) Then ask them to write a paragraph in which they use this graphic to explain how the elements of the financial system especially financial intermediaries link savers to borrowers. (Activity) Have student trace an amount of money put in the bank through three different types of accounts (checking, simple interest, and compound interest). They should trace the money over the course of a year and compare how the money increases differently in each account. (Activity) Have students create posters that trace the flow of money through the bank from money deposited in savings and checking accounts to money loaned to homeowners, car owners, etc to money repaid to the bank in loan repayments to interest paid to savings account holders to profits earned by the bank. Select students to present their posters and explain them to the class. (Wrap-Up Question) Brandon had $5,000 in his savings account when his bank declared bankruptcy. Which of the following is true? a. Brandon s savings will be transferred to an Individual Retirement Account. b. Some of Brandon s savings will be returned to him after the bank s assets are sold off. c. Brandon s savings will be lost due to the bankruptcy. d. Brandon s savings will be protected by the FDIC. 10

11 (Lecture Notes) The answer is d. Financial Institutions Unit 4 Measuring the Money Supply The money supply is all the money available in the United States economy. 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. 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. 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. Saving Money Four of the most common options banks offer for saving money are: 1. Savings Accounts 2. Checking Accounts 3. Money Market Accounts 4. Certificates of Deposit (CDs) Loans By making loans, banks help new businesses get started, and they help established businesses grow. Mortgages A mortgage is a specific type of loan that is used to purchase real estate. 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. 11

12 Finance Companies Finance companies make installment loans to consumers. Unit 4 Electronic Banking 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 Cards -Debit 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 Banking -Many banks allow customers to check account balances and make transfers and payments via computer. Stored Value Cards -Stored value cards are embedded with magnetic strips or computer chips with account balance information. Other Resources: Virtual Economics Disk: Focus-From Pan to Market: Teaching Ideas for Social Studies, Economics, and Business Class. Lesson 7: Why Middlemen Matter: The Role of Financial Institution in a Market Economy. Nystrom Economics Series: Banking and Investing Math Practice Folder: Comparing Credit Cards Payments, p.9. Case Studies in Free Enterprise Folder: Dineh Mohajer, pp Differentiation: Honors: Go to two banks (a small bank and a national bank) and collect brochures about services offered by the bank. Compare the services offered by the banks. Remediation: Create a pamphlet that a bank would give perspective customers, detailing the services that the bank offers customers. ELL: Describe the four most common forms of savings (savings accounts, checking accounts, money market accounts, and CDs) 12

13 Unit IV SECTION 2 Personal Finance Financial Institutions Aim: 3 of 3: What are the costs and benefits of using credit? SSEPF4 List factors that affect credit worthiness Compare interest rates on loans and credit cards from different institutions. Explain the difference between simple and compound interest rates. Key Vocabulary: Credit, credit bureau, credit rating, collateral, finance charges Content Expectation: The student will understand that credit worthiness is impacted by past use of credit, income, current assets, and present and future ability to repay debt. the use of credit has both pros and cons Core Text: Economics: Principles in Action, pp , Skills Focus Instructional Strategy: (Activity) Read pp , Credit and Debt. Point out and discuss the Four Steps to Establishing Credit on p Review the items in How to Choose a Credit Card on p.515. Have student groups review credit card offers that you or students bring in. Have the groups make a chart comparing their features and finance charges. Identify and explain which credit card is the best deal. Other Instructional Suggestions: (Activity) Provide copies of a credit card application. Have students review the qualifications for credit worthiness (pg. 512) and find where the credit card application asks for these qualifications. (Activity) Provide copies of a credit card statement. Have students identify components of the statement, such as any finance charges, late fees, APR, payment date, minimum payment, how charges are notated, etc. Identify these parts as a class on an overheard transparency copy of the statement. (Discussion) Points to discuss and stress with students include the difference between a debit card and a credit card, how to establish good credit, how to ruin your credit, the difference between credit and loans, and the importance of paying more than the minimum payment each month. (Activity) Have students create a brochure about appropriate usage of credit (Unit 4 Supplemental Materials #5) (Lesson Plan) See sample lesson plan Comparing Loans (Unit 4 Supplemental Materials #14) (Wrap-Up Question) Eric received a $2,000 bonus from his employer. He deposited the entire amount in a one-year certificate of deposit with a simple interest rate of 5%. When the CD matured, how much interest had Eric earned? a. $10 b. $20 c. $50 d. $100 The answer is d. 13

14 Other Resources: Virtual Economics Disk: Focus-Learning, Earning and Investing: High School. Lesson 11-Financial Institutions in the U.S. Economy. Virtual Economics Disk: Focus-Your Credit Counts Challenge: Trainer s Guide. Section 2-Finanical Institutions. Differentiation: Honors: Locate a credit card contract or offer and answer the questions on page 515 How to Choose a Credit Card? about the card. Remediation: Explain the difference between a credit card and a debit card. ELL: Define credit and explain all the different kinds of credit available (mortgages, loans, credit cards, store accounts, etc.) 14

15 Unit IV SECTION 3 Personal Finance Financial Markets Aim: 1 of 3: How do different forms of savings and investing balance risk, liquidity, and return? SSEPF2 Give examples of the direct relationship between risk and return. Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds. Key Vocabulary: Investment, financial system, financial asset, financial intermediary, mutual fund, diversification, portfolio, prospectus, return Content Expectation: The student will understand that the more risk an investor takes, the greater the possible return on his/her investment. the more liquid an investor s assets, the lower the possible return on his/her investment. Core Text: Economics: Principles in Action, pp , , Skills Focus Instructional Strategy: (Activity) Divide students into six groups. Have each group create a skit on a situation where 1)they need a liquid check account 2)where they need a high return 3)where they don t want to risk their money. Have 2 groups creating each of the different skits. Have students perform the skits and discuss the concepts of risk, return, and liquidity. Other Instructional Suggestions: (Lecture) Presentation Pro CD-Rom, chap 11 section 1 provides excellent lecture notes, powerpoint illustrations and assessment questions regarding the concept of savings, investment, liquidity and return. Color transparencies 11A and 11B and accompanying questions provide excellent visuals and materials for discussing Financial Intermediation and Risk and Return. (Activity) break students up into four risk groups as seen on page 274 (Figure 11.2), have students to tell you (the teacher) what could happen to each person in the group if an investor wanted to invest in them. (Activity) Ask groups of three or four students to design graphic organizers that use text and illustrations to show the differences and interrelationships among capital markets, money markets, primary markets, and secondary markets. Encourage students to go beyond the text and find additional information about these markets and incorporate that information into their graphic organizers. (Activity) Follow directions for the Investing Game (Unit 4 Supplemental Materials #6) (Wrap-Up Question) How does investing contribute to a free enterprise system? a. Investing places large amounts of money in one corporation or business, allowing it to gain power over competition. b. Investing gives more money to businesses to expand and grow, creating new jobs and better products. c. Investing combines two or more firms competing with the same good or 15

16 (Lecture Notes) Unit 4 service in the same market. d. Investing distributes money evenly so that enterprises can compete equally in the marketplace. The answer is b. The Financial System A financial system is a system that allows the transfer of money between savers and borrowers. Financial Assets When savers invest, they receive documents confirming their deposit or bond purchase, such as passbooks or bond certificates. These documents are known as financial assets. They represent claims on property or income of the borrower. Financial Intermediaries Financial intermediaries are institutions that help channel funds from savers to borrowers. Banks, Savings and Loan Associations, and Credit Unions -Take in deposits from savers and then lend some of these funds to various businesses 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 Life Insurance Companies -Provide financial protection to the family, or other beneficiaries, of the insured Pension Funds -Are set up by employers to collect deposits and distribute payments to retirees Services Provided by Financial Intermediaries Sharing Risk Diversification is the spreading out of investments to reduce risk. Financial intermediaries help individual savers diversify their investments. Providing Information Financial intermediaries reduce the costs in time and money that lenders and borrowers would pay if they had to search out investment information on their own. Providing Liquidity Financial intermediaries allow savers to easily convert their assets into cash. Risk and Return Return is the money an investor receives above and beyond the sum of money initially invested. 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. Return and Risk Investing in a friend s Internet company could double your money, but there is the risk of the company failing. 16

17 In general, the higher potential return of the investment, the greater the risk involved. Unit 4 Other Resources: Virtual Economics Disk: Focus-Learning, Earning, and Investing: High School. Lesson 15-Why Don t People Save? Learning Styles Lesson Plans Folder: Section 1 Lesson Plan, p.27. Math Practice Folder: Determining Net Worth, p.10. Differentiation: Honors: Write an investment plan that best balances risk, liquidity, and return. Remediation: Explain the pros and cons of take risks with investments or having liquid assets. ELL: Define risk, liquidity, and return and explain the relationship between the three. 17

18 Unit IV SECTION 3 Personal Finance Financial Markets Aim: 2 of 3: What are stocks, bonds, and mutual funds and how do they earn investors money? SSEPF2d Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds. Key Vocabulary: Coupon rate, maturity, par value, yield, savings bond, municipal bond, corporate bond, securities and exchange commission, junk bond, capital market, money market, primary market, secondary market, share, equities, capital gain, capital loss, stock split, stockbroker, brokerage firm, stock exchange, Nasdaq, OTC market, futures, options, call option, put option Content Expectation: The student will understand that stocks are shares of ownership in a corporation. investors earn money from stocks either through dividends or capital gains. bonds are formal contracts issued by businesses and the government to repay borrowed money to investors. Core Text: Economics: Principles in Action, pp Skills Focus Instructional Strategy: (Activity) Students should begin the Stock Market Game, in which they participate in a virtual stock trading simulation, with a starting account of $100,000. Their goal is to make as much money as they can off of the buying and selling of stocks. The game lasts around six weeks. Other Instructional Suggestions: (Discussion) Discuss with students the benefits and risks of stock ownership. Then explain how stocks are traded. Help students to understand the intricacies of the options market and the recent internet phenomenon of day trading. (Activity) Create a Venn Diagram with each circle labeled Stocks, Bonds, and Mutual Funds. The circles should intersect each other. In the center, students should put all the similarities between stocks, bonds, and mutual funds. In each intersection of two circles, students should put similarities between those two financial assets. In each individual circle, students will place the unique aspects of each type of financial asset. (Activity) To help students assimilate material on how stocks are traded, organize the class into groups of five students. Have each group create a five-minute demonstration that will show various ways in which stocks are traded. They may use dialogue, narrative, signs/labels, or any other methods to illustrate the process. (Wrap-Up Question) Which type of bond is the safest and carries the least amount of risk? a. treasury bonds, because they are backed by the U.S. government. b. corporate bonds, because they are exempt from federal taxes. c. municipal bonds, because they are backed by state and local taxes. d. international bonds, because they are backed by foreign currencies. The answer is a. 18

19 (Lecture Notes) Bonds and Other Financial Assets Unit 4 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 bond s yield, which is the annual rate of return on the bond if the bond were held to maturity. Bond Ratings Standard & Poor s and Moody s rate bonds on a number of factors, including the issuer s 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 issuer s 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. Bonds also pose two main disadvantages to the issuer: 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) 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. 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. Other Types of Financial Assets Certificates of Deposit Certificates of deposit (CDs) are available through banks, which use the funds deposited in CDs for a fixed amount of time. 19

20 CDs have various terms of maturity, allowing investors to plan for future financial needs. Money Market Mutual Funds Money market mutual funds are special types of 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. Financial Asset Markets One way to classify financial asset markets is according to the length of time for which the funds are lent. Capital markets are markets in which money is lent for periods longer than a year. CDs and corporate bonds are traded in capital markets. Money markets are markets in which money is lent for periods of less than a year. Shortterm CDs and Treasury bills are traded in money markets. Markets can also be classified according to whether assets can be resold to other buyers. Primary markets involve financial assets that cannot be transferred from the original holder, such as savings bonds. Secondary markets involve financial assets that can be resold, such as stocks. Other Resources: Virtual Economics Disk-Focus-Learning, Earning, and Investing: High School. Lesson9-What is a Stock Market? Virtual Economics Disk-Focus-Learning, Earning, and Investing: High School. Lesson 7-What are Mutual Funds? Case Studies in Free-Enterprise Folder: Edward L. Bernays, pp Game and lesson resources are available to teachers Differentiation: Honors: Research a mutual fund. Find average rates of return, cost of a share, and what the fund specializes in. Remediation: Define stock, bond, and mutual fund. Explain the similarities and differences between the three. ELL: Define stock, bond, and mutual fund. Explain the similarities and differences between the three. 20

21 Unit IV SECTION 3 Personal Finance Financial Markets Aim: 3 of 3: How do investors measure the performance of stocks, bonds, and mutual funds? SSEPF2d Evaluate a variety of savings and investment options; include stocks, bonds, and mutual funds. Key Vocabulary: Bull market, bear market, The Dow, S&P 500, great crash, speculation Content Expectation: The student will understand that stocks are traded on various different stock exchanges. the Dow Jones Industrial Average and S&P 500 measure the performance of stocks. stock tables show the dividends and prices of stocks. Core Text: Economics: Principles in Action, pp Skills Focus Instructional Strategy: (Activity) Students should begin the Stock Market Game, in which they participate in a virtual stock trading simulation, with a starting account of $100,000. Their goal is to make as much money as they can off of the buying and selling of stocks. The game lasts around six weeks. Other Instructional Suggestions: (Activity) Have students create a simple graphic titled How Stock Performance Is Measured. Explain to them that their graphic should compare and contrast the Dow Jones Industrial Average with Standard & Poor s 500 and should define a bull market and a bear market. Have pairs of students exchange graphics and evaluate the clarity and accuracy of each other s efforts. (Activity) After showing students how to read a stock table, have students complete a scavenger hunt on the stock tables in the newspaper. Have students find various stock closing prices, highs, lows, PE ratios, etc. (Activity) Have students use the internet to conduct research on stocks of various corporations such as Coca-Cola, Ford, Sony, Nike, Johnson + Johnson, etc. Yahoo! Finance is a very useful tool here. (Handout)Have student read and summarize handout Reading stock tables (Unit 4 Supplemental Materials #8) (Worksheet) Have students complete worksheet on stock selection (Unit 4 Supplemental Materials #9) (Discussion) Explain how stock performance is measured. Discuss the meaning of bull and bear markets, and explain how an unrestrained bull market resulted in the Great Crash of (Wrap-Up Question) Loans extended for longer periods of time often involve higher interest rates in order to a. compensate the lender for greater risk. b. compensate the buyer for using savings to make a purchase. c. encourage consumers to buy durable goods for extended period of time. d. encourage savings. The answer is a. 21

22 (Lecture Notes) The Stock Market 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 Stocks Stocks may be classified either by whether or not they pay dividends or whether or not the stockholder has a say in the corporation s affairs. Dividend 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. 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. Stock Exchanges The 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. Day trading Day traders use computer programs to try and predict minute-by-minute price changes in hopes of earning a profit. Future 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. 22

23 2. Put options give buyers the option to sell shares of stock at a specified time in the future. Unit 4 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 Great Crash The collapse of the stock market in 1929 is called the Great Crash. Causes 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. Other Resources: Virtual Economics Disk-Learning, Earning, and Investing: High School. Lesson 2-Investors and Investments. Learning Styles Lesson Plans Folder: Section 3 Lesson Plan, p.28. Unit 4 Folder: Economic Cartoon, p Game and lesson resources are available to teachers Differentiation: Honors: List five stocks you would invest in. Find the high and low 52 week price, the current price, the change in price, and the stock symbol. Explain why you would invest in each stock. Remediation: Explain how stocks are traded. ELL: Define all vocabulary in Chapter 11, Section 3. 23

24 Unit IV SECTION 4 Personal Finance Financial Planning Aim: 1 of 3: How will you insure yourself against financial loss? SSEPF5 Describe how insurance and other risk management strategies protect against financial loss. List various types of insurance. Explain costs and benefits of insurance. Key Vocabulary: Premium, deductible, co-payment Content Expectation: The student will understand that Insurance and other risk-management strategies protect against financial loss types of insurance include automobile, health, life, disability and property costs of insurance include premiums and co-pays Core Text: Virtual Economics CD-Rom (published by NCEE): Virtual Economics: Insurance Lessons - Lessons 1 4, Principles of Economics, pp Skills Focus Instructional Strategy: Activity: Read Buying Insurance pp and create a chart that shows the opportunity cost of buying auto insurance, health insurance and property insurance. Create another two-column chart showing the advantages of having insurance and the disadvantages of not having insurance. Other Instructional Suggestions: (Warm-up) Ask students to think about two of their favorite possession, one that they paid for and one that was brought for them. Ask them what the value of each possession is, how they come up with this value, and what they would do if the possession was lost. Relate the student answers to the idea of insurance. (Activity) Have students inventory all of their valuable possession. Have them figure out how much it what cost them to replace each possession. This is the amount of coverage they would need in order to be properly insured. (Activity) Provide copies of an insurance contract (car, home, medical, etc.). Have students find information such as coverage levels, deductibles, copayments, additional charges, etc. Discuss findings with the class. (Worksheet) Have students complete worksheet on Car Insurance (Unit 4 Supplemental Materials #11) (Wrap-Up Question) How can competition in a scarce labor market affect wages? a. Wages will go down because productivity is lower. b. Wages will remain level because firms want to keep supplies even and cost under control. c. Wages will go up as firms fight to attract new workers and keep existing workers. d. Wages will go down to discourage new, non-skilled labor from entering the labor force. The answer is c. 24

25 (Lecture Notes) Ways to handle risk: Avoid Accept Reduce Transfer Share Unit 4 Insurance is a way to share and transfer risk. Insurance coverage by a contract that guarantees payment if an insured loss occurs Types of insurance: Automobile Health Life Homeowners Renters Disability How insurance works: 1) Choose a coverage level. 2) Pay a premium (monthly, biannually, or annually). 3) In the case of a loss, collect payment. 4) Sometimes, must pay a co-payment or a deductible in order to collect insurance payment. *As a rule, the more the coverage and the lower the co-pay or deductible, the higher the premium. Other Resources: Virtual Economics Disk: Focus-Your Credit Counts Challenge: Trainer s Guide. Section 5-Strategies for Wealth Building. Personal Finance Activities Folder: Creating a Budget, p.2. Personal Finance Activities Folder: Opening and Managing a Checking Account, p.4. Differentiation: Honors: Read about life insurance (Unit 4 Supplemental Materials #10) and answer the included questions. Remediation: List the three types of insurance on page 525. Explain why someone would need each type of insurance. ELL: List the three types of insurance on page 525. Explain why someone would need each type of insurance. 25

26 Unit IV SECTION 4 Personal Finance Financial Planning Aim: 2 of 3: How will you spend your money and how much money will you need? SSEPF1 Explain that people respond to positive and negative incentives in predictable ways. Use a rational decision making model to select one option over another. Create a savings or financial investment plan for a future goal Key Vocabulary: Budget, monthly expenditure, current expenses Content Expectation: The student will understand that budgets are spending and savings plans Core Text: Economics: Principles in Action, pp , Skills Focus Instructional Strategy: (Activity) Have students list all of the things they would want and need to buy every month (food, rent/housing, utilities, entertainment, clothing, car payments, insurance, savings etc). For each good they list, have them write the price of the good per month. Add up the price of all goods and multiply that number by 12. Tell students this is the amount of money they need to make after taxes in order to live the lifestyle that they want to live. Provide students with a list of salary ranges for common jobs. Have students select a job that will support the lifestyle they want and have them conduct research about the requirement for that job. For further direction, see attached lesson plan and worksheet (Unit 4 Supplemental Materials #2 and #7) Other Instructional Suggestions: (Warm-up) What is a budget? What is your current budget? How much do you spend on necessities? List them. How much do you spend on luxuries? List them. (Activity) Have students list the four ways people save money and which way is most efficient among the different income levels. (Activity) After reading pp , students should create a personal budget that fits their current monthly earnings and expenses. We will share these budgets with the class. Afterward, we will put together a budget for an imaginary adult in their twenties, living on their own, using a salary commensurate with a selected education level. (Lesson Plan) Use sample lesson plan Budget (Unit 4 Supplemental Materials #15) (Wrap-Up Question) What happens when you use your debit card to make a purchase? a. Your card sends a message to your bank to transfer money from your checking account directly into the store s bank account. b. Your bank receives notice that funds need to be withdrawn from your checking or savings account at the end of the business day. c. Your bank immediately pays the funds required to the store and then bills you for the amount on your next bank statement. d. Your bank confirms that money is available in your account and then adds this amount to an electronic transfer of funds that it wires to the store each week. 26