Begin End ShowTable of Contents THE FINANCIAL SECTOR - 9.3.2 Copyright © 2013 N.S.

BeginEnd ShowTable of Contents

THE FINANCIAL SECTOR - 9.3.2

Copyright © 2013 N.S.

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Table of Contents

Stock Market Game The Financial SystemLearning Targets

The Financial SystemLearning Targets

Basics of theFinancial System

Risk and Reward

Functions of theFinancial System

Types ofFinancial Assets

FinancialIntermediaries

The Stock Market

Access PriorKnowledge

Set GoalsNew

InformationActivity Conclusion

Stock MarketExpectations

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Stock Market GameThe class will be divided into groups of 4 or 5 students. Each group member will pick and track two stocks using the list of companies from the Dow Jones Industrial Average. Each company can only be chosen once within your group. You have $1,000 for each of your two stocks ($2,000 total). Calculate the values of your two stocks each year from 2008 to 2013. The yearly values will be revealed one at a time. After the final year, add each group member’s profits (or losses) together. The group that makes the most money wins!

Go to the Data

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Stock Market Game

Show 2008 Data

Company 2008 2009 2010 2011 2012 2013

3M

Alcoa

American Express

AT&T

Bank of America

Boeing

Caterpillar

Chevron

Cisco Systems

Coca-Cola

DuPont

ExxonMobil

General Electric

Hewlett-Packard

Home Depot

Company 2008 2009 2010 2011 2012 2013

Intel

IBM

Johnson & Johnson

JPMorgan Chase

McDonald’s

Merck

Microsoft

Pfizer

Procter & Gamble

Travelers

UnitedHealth

United Technologies

Verizon

Wal-Mart

Walt Disney

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Stock Market Game

Show 2009 Data

Company 2008 2009 2010 2011 2012 2013

3M

Alcoa

American Express

AT&T

Bank of America

Boeing

Caterpillar

Chevron

Cisco Systems

Coca-Cola

DuPont

ExxonMobil

General Electric

Hewlett-Packard

Home Depot

Company 2008 2009 2010 2011 2012 2013

Intel

IBM

Johnson & Johnson

JPMorgan Chase

McDonald’s

Merck

Microsoft

Pfizer

Procter & Gamble

Travelers

UnitedHealth

United Technologies

Verizon

Wal-Mart

Walt Disney

Company 2008 2009 2010 2011 2012 2013

3M 84.24

Alcoa 36.46

American Express

52.09

AT&T 41.51

Bank of America

41.53

Boeing 87.57

Caterpillar 72.56

Chevron 93.96

Cisco Systems 27.00

Coca-Cola 30.73

DuPont 44.15

ExxonMobil 94.15

General Electric 37.10

Hewlett-Packard

50.48

Home Depot 27.13

Company 2008 2009 2010 2011 2012 2013

Intel 26.28

IBM 108.9

Johnson & Johnson

66.56

JPMorgan Chase

43.55

McDonald’s 59.48

Merck 58.15

Microsoft 35.79

Pfizer 22.76

Procter & Gamble

73.59

Travelers 53.66

UnitedHealth 57.19

United Technologies

76.64

Verizon 40.84

Wal-Mart 47.41

Walt Disney 32.32

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Company 2008 2009 2010 2011 2012 2013

Intel 26.28

IBM 108.9

Johnson & Johnson

66.56

JPMorgan Chase

43.55

McDonald’s 59.48

Merck 58.15

Microsoft 35.79

Pfizer 22.76

Procter & Gamble

73.59

Travelers 53.66

UnitedHealth 57.19

United Technologies

76.64

Verizon 40.84

Wal-Mart 47.41

Walt Disney 32.32

Company 2008 2009 2010 2011 2012 2013

3M 84.24

Alcoa 36.46

American Express

52.09

AT&T 41.51

Bank of America

41.53

Boeing 87.57

Caterpillar 72.56

Chevron 93.96

Cisco Systems 27.00

Coca-Cola 30.73

DuPont 44.15

ExxonMobil 94.15

General Electric 37.10

Hewlett-Packard

50.48

Home Depot 27.13

Stock Market Game

Show 2010 Data

Company 2008 2009 2010 2011 2012 2013

3M 84.24 57.55

Alcoa 36.46 11.36

American Express

52.09 19.20

AT&T 41.51 28.74

Bank of America

41.53 13.92

Boeing 87.57 42.80

Caterpillar 72.56 44.91

Chevron 93.96 74.23

Cisco Systems 27.00 16.41

Coca-Cola 30.73 22.70

DuPont 44.15 25.42

ExxonMobil 94.15 80.06

General Electric 37.10 16.51

Hewlett-Packard

50.48 36.25

Home Depot 27.13 23.07

Company 2008 2009 2010 2011 2012 2013

Intel 26.28 14.69

IBM 108.9 83.89

Johnson & Johnson

66.56 60.13

JPMorgan Chase

43.55 31.19

McDonald’s 59.48 62.38

Merck 58.15 30.46

Microsoft 35.79 19.53

Pfizer 22.76 17.88

Procter & Gamble

73.59 61.69

Travelers 53.66 45.26

UnitedHealth 57.19 26.70

United Technologies

76.64 53.46

Verizon 40.84 31.88

Wal-Mart 47.41 55.98

Walt Disney 32.32 22.76

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Company 2008 2009 2010 2011 2012 2013

Intel 26.28 14.69

IBM 108.9 83.89

Johnson & Johnson

66.56 60.13

JPMorgan Chase

43.55 31.19

McDonald’s 59.48 62.38

Merck 58.15 30.46

Microsoft 35.79 19.53

Pfizer 22.76 17.88

Procter & Gamble

73.59 61.69

Travelers 53.66 45.26

UnitedHealth 57.19 26.70

United Technologies

76.64 53.46

Verizon 40.84 31.88

Wal-Mart 47.41 55.98

Walt Disney 32.32 22.76

Company 2008 2009 2010 2011 2012 2013

3M 84.24 57.55

Alcoa 36.46 11.36

American Express

52.09 19.20

AT&T 41.51 28.74

Bank of America

41.53 13.92

Boeing 87.57 42.80

Caterpillar 72.56 44.91

Chevron 93.96 74.23

Cisco Systems 27.00 16.41

Coca-Cola 30.73 22.70

DuPont 44.15 25.42

ExxonMobil 94.15 80.06

General Electric 37.10 16.51

Hewlett-Packard

50.48 36.25

Home Depot 27.13 23.07

Stock Market Game

Show 2011 Data

Company 2008 2009 2010 2011 2012 2013

3M 84.24 57.55 83.09

Alcoa 36.46 11.36 16.47

American Express

52.09 19.20 40.81

AT&T 41.51 28.74 28.41

Bank of America

41.53 13.92 15.24

Boeing 87.57 42.80 55.72

Caterpillar 72.56 44.91 57.65

Chevron 93.96 74.23 78.20

Cisco Systems 27.00 16.41 24.11

Coca-Cola 30.73 22.70 28.58

DuPont 44.15 25.42 33.98

ExxonMobil 94.15 80.06 68.72

General Electric 37.10 16.51 15.22

Hewlett-Packard

50.48 36.25 51.54

Home Depot 27.13 23.07 29.15

Company 2008 2009 2010 2011 2012 2013

Intel 26.28 14.69 20.79

IBM 108.9 83.89 131.2

Johnson & Johnson

66.56 60.13 64.71

JPMorgan Chase

43.55 31.19 41.79

McDonald’s 59.48 62.38 62.63

Merck 58.15 30.46 36.82

Microsoft 35.79 19.53 30.62

Pfizer 22.76 17.88 18.27

Procter & Gamble

73.59 61.69 61.11

Travelers 53.66 45.26 50.15

UnitedHealth 57.19 26.70 31.38

United Technologies

76.64 53.46 70.21

Verizon 40.84 31.88 31.21

Wal-Mart 47.41 55.98 53.74

Walt Disney 32.32 22.76 32.50

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Company 2008 2009 2010 2011 2012 2013

Intel 26.28 14.69 20.79

IBM 108.9 83.89 131.2

Johnson & Johnson

66.56 60.13 64.71

JPMorgan Chase

43.55 31.19 41.79

McDonald’s 59.48 62.38 62.63

Merck 58.15 30.46 36.82

Microsoft 35.79 19.53 30.62

Pfizer 22.76 17.88 18.27

Procter & Gamble

73.59 61.69 61.11

Travelers 53.66 45.26 50.15

UnitedHealth 57.19 26.70 31.38

United Technologies

76.64 53.46 70.21

Verizon 40.84 31.88 31.21

Wal-Mart 47.41 55.98 53.74

Walt Disney 32.32 22.76 32.50

Company 2008 2009 2010 2011 2012 2013

3M 84.24 57.55 83.09

Alcoa 36.46 11.36 16.47

American Express

52.09 19.20 40.81

AT&T 41.51 28.74 28.41

Bank of America

41.53 13.92 15.24

Boeing 87.57 42.80 55.72

Caterpillar 72.56 44.91 57.65

Chevron 93.96 74.23 78.20

Cisco Systems 27.00 16.41 24.11

Coca-Cola 30.73 22.70 28.58

DuPont 44.15 25.42 33.98

ExxonMobil 94.15 80.06 68.72

General Electric 37.10 16.51 15.22

Hewlett-Packard

50.48 36.25 51.54

Home Depot 27.13 23.07 29.15

Stock Market Game

Show 2012 Data

Company 2008 2009 2010 2011 2012 2013

3M 84.24 57.55 83.09 86.75

Alcoa 36.46 11.36 16.47 15.82

American Express

52.09 19.20 40.81 43.30

AT&T 41.51 28.74 28.41 29.68

Bank of America

41.53 13.92 15.24 13.85

Boeing 87.57 42.80 55.72 66.15

Caterpillar 72.56 44.91 57.65 94.38

Chevron 93.96 74.23 78.20 91.66

Cisco Systems 27.00 16.41 24.11 20.45

Coca-Cola 30.73 22.70 28.58 32.94

DuPont 44.15 25.42 33.98 50.05

ExxonMobil 94.15 80.06 68.72 73.72

General Electric 37.10 16.51 15.22 18.49

Hewlett-Packard

50.48 36.25 51.54 42.22

Home Depot 27.13 23.07 29.15 35.20

Company 2008 2009 2010 2011 2012 2013

Intel 26.28 14.69 20.79 21.01

IBM 108.9 83.89 131.2 147.2

Johnson & Johnson

66.56 60.13 64.71 62.63

JPMorgan Chase

43.55 31.19 41.79 43.00

McDonald’s 59.48 62.38 62.63 77.10

Merck 58.15 30.46 36.82 36.29

Microsoft 35.79 19.53 30.62 28.05

Pfizer 22.76 17.88 18.27 17.70

Procter & Gamble

73.59 61.69 61.11 64.39

Travelers 53.66 45.26 50.15 56.09

UnitedHealth 57.19 26.70 31.38 36.38

United Technologies

76.64 53.46 70.21 79.19

Verizon 40.84 31.88 31.21 36.06

Wal-Mart 47.41 55.98 53.74 54.23

Walt Disney 32.32 22.76 32.50 37.74

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Company 2008 2009 2010 2011 2012 2013

Intel 26.28 14.69 20.79 21.01

IBM 108.9 83.89 131.2 147.2

Johnson & Johnson

66.56 60.13 64.71 62.63

JPMorgan Chase

43.55 31.19 41.79 43.00

McDonald’s 59.48 62.38 62.63 77.10

Merck 58.15 30.46 36.82 36.29

Microsoft 35.79 19.53 30.62 28.05

Pfizer 22.76 17.88 18.27 17.70

Procter & Gamble

73.59 61.69 61.11 64.39

Travelers 53.66 45.26 50.15 56.09

UnitedHealth 57.19 26.70 31.38 36.38

United Technologies

76.64 53.46 70.21 79.19

Verizon 40.84 31.88 31.21 36.06

Wal-Mart 47.41 55.98 53.74 54.23

Walt Disney 32.32 22.76 32.50 37.74

Company 2008 2009 2010 2011 2012 2013

3M 84.24 57.55 83.09 86.75

Alcoa 36.46 11.36 16.47 15.82

American Express

52.09 19.20 40.81 43.30

AT&T 41.51 28.74 28.41 29.68

Bank of America

41.53 13.92 15.24 13.85

Boeing 87.57 42.80 55.72 66.15

Caterpillar 72.56 44.91 57.65 94.38

Chevron 93.96 74.23 78.20 91.66

Cisco Systems 27.00 16.41 24.11 20.45

Coca-Cola 30.73 22.70 28.58 32.94

DuPont 44.15 25.42 33.98 50.05

ExxonMobil 94.15 80.06 68.72 73.72

General Electric 37.10 16.51 15.22 18.49

Hewlett-Packard

50.48 36.25 51.54 42.22

Home Depot 27.13 23.07 29.15 35.20

Stock Market Game

Show 2013 Data

Company 2008 2009 2010 2011 2012 2013

3M 84.24 57.55 83.09 86.75 83.76

Alcoa 36.46 11.36 16.47 15.82 8.94

American Express

52.09 19.20 40.81 43.30 48.30

AT&T 41.51 28.74 28.41 29.68 30.46

Bank of America

41.53 13.92 15.24 13.85 5.75

Boeing 87.57 42.80 55.72 66.15 74.70

Caterpillar 72.56 44.91 57.65 94.38 92.77

Chevron 93.96 74.23 78.20 91.66 108.7

Cisco Systems 27.00 16.41 24.11 20.45 18.55

Coca-Cola 30.73 22.70 28.58 32.94 35.08

DuPont 44.15 25.42 33.98 50.05 46.58

ExxonMobil 94.15 80.06 68.72 73.72 85.97

General Electric 37.10 16.51 15.22 18.49 18.23

Hewlett-Packard

50.48 36.25 51.54 42.22 26.32

Home Depot 27.13 23.07 29.15 35.20 42.41

Company 2008 2009 2010 2011 2012 2013

Intel 26.28 14.69 20.79 21.01 24.62

IBM 108.9 83.89 131.2 147.2 186.7

Johnson & Johnson

66.56 60.13 64.71 62.63 65.59

JPMorgan Chase

43.55 31.19 41.79 43.00 34.06

McDonald’s 59.48 62.38 62.63 77.10 101.3

Merck 58.15 30.46 36.82 36.29 37.88

Microsoft 35.79 19.53 30.62 28.05 26.55

Pfizer 22.76 17.88 18.27 17.70 21.86

Procter & Gamble

73.59 61.69 61.11 64.39 66.30

Travelers 53.66 45.26 50.15 56.09 60.11

UnitedHealth 57.19 26.70 31.38 36.38 51.24

United Technologies

76.64 53.46 70.21 79.19 74.91

Verizon 40.84 31.88 31.21 36.06 40.28

Wal-Mart 47.41 55.98 53.74 54.23 59.97

Walt Disney 32.32 22.76 32.50 37.74 37.97

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Company 2008 2009 2010 2011 2012 2013

Intel 26.28 14.69 20.79 21.01 24.62

IBM 108.9 83.89 131.2 147.2 186.7

Johnson & Johnson

66.56 60.13 64.71 62.63 65.59

JPMorgan Chase

43.55 31.19 41.79 43.00 34.06

McDonald’s 59.48 62.38 62.63 77.10 101.3

Merck 58.15 30.46 36.82 36.29 37.88

Microsoft 35.79 19.53 30.62 28.05 26.55

Pfizer 22.76 17.88 18.27 17.70 21.86

Procter & Gamble

73.59 61.69 61.11 64.39 66.30

Travelers 53.66 45.26 50.15 56.09 60.11

UnitedHealth 57.19 26.70 31.38 36.38 51.24

United Technologies

76.64 53.46 70.21 79.19 74.91

Verizon 40.84 31.88 31.21 36.06 40.28

Wal-Mart 47.41 55.98 53.74 54.23 59.97

Walt Disney 32.32 22.76 32.50 37.74 37.97

Company 2008 2009 2010 2011 2012 2013

3M 84.24 57.55 83.09 86.75 83.76

Alcoa 36.46 11.36 16.47 15.82 8.94

American Express

52.09 19.20 40.81 43.30 48.30

AT&T 41.51 28.74 28.41 29.68 30.46

Bank of America

41.53 13.92 15.24 13.85 5.75

Boeing 87.57 42.80 55.72 66.15 74.70

Caterpillar 72.56 44.91 57.65 94.38 92.77

Chevron 93.96 74.23 78.20 91.66 108.7

Cisco Systems 27.00 16.41 24.11 20.45 18.55

Coca-Cola 30.73 22.70 28.58 32.94 35.08

DuPont 44.15 25.42 33.98 50.05 46.58

ExxonMobil 94.15 80.06 68.72 73.72 85.97

General Electric 37.10 16.51 15.22 18.49 18.23

Hewlett-Packard

50.48 36.25 51.54 42.22 26.32

Home Depot 27.13 23.07 29.15 35.20 42.41

Stock Market GameCompany 2008 2009 2010 2011 2012 2013

3M 84.24 57.55 83.09 86.75 83.76 94.19

Alcoa 36.46 11.36 16.47 15.82 8.94 8.88

American Express

52.09 19.20 40.81 43.30 48.30 58.33

AT&T 41.51 28.74 28.41 29.68 30.46 34.39

Bank of America

41.53 13.92 15.24 13.85 5.75 12.05

Boeing 87.57 42.80 55.72 66.15 74.70 76.55

Caterpillar 72.56 44.91 57.65 94.38 92.77 92.95

Chevron 93.96 74.23 78.20 91.66 108.7 110.3

Cisco Systems 27.00 16.41 24.11 20.45 18.55 20.12

Coca-Cola 30.73 22.70 28.58 32.94 35.08 36.99

DuPont 44.15 25.42 33.98 50.05 46.58 45.95

ExxonMobil 94.15 80.06 68.72 73.72 85.97 87.79

General Electric 37.10 16.51 15.22 18.49 18.23 21.51

Hewlett-Packard

50.48 36.25 51.54 42.22 26.32 14.83

Home Depot 27.13 23.07 29.15 35.20 42.41 63.57

Company 2008 2009 2010 2011 2012 2013

Intel 26.28 14.69 20.79 21.01 24.62 21.15

IBM 108.9 83.89 131.2 147.2 186.7 194.1

Johnson & Johnson

66.56 60.13 64.71 62.63 65.59 71.02

JPMorgan Chase

43.55 31.19 41.79 43.00 34.06 44.98

McDonald’s 59.48 62.38 62.63 77.10 101.3 89.4

Merck 58.15 30.46 36.82 36.29 37.88 41.86

Microsoft 35.79 19.53 30.62 28.05 26.55 27.25

Pfizer 22.76 17.88 18.27 17.70 21.86 25.53

Procter & Gamble

73.59 61.69 61.11 64.39 66.30 68.65

Travelers 53.66 45.26 50.15 56.09 60.11 73.09

UnitedHealth 57.19 26.70 31.38 36.38 51.24 54.88

United Technologies

76.64 53.46 70.21 79.19 74.91 83.43

Verizon 40.84 31.88 31.21 36.06 40.28 44.49

Wal-Mart 47.41 55.98 53.74 54.23 59.97 68.93

Walt Disney 32.32 22.76 32.50 37.74 37.97 50.80

Answer the Conclusion questions at the bottom of your sheet.

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“The Financial System” Targets

KnowledgeUnderstand the importance and features of the financial system.

ReasoningExplain how supply and demand, risk, and expectations about the future determine the interest rate (and price) for financial assets.

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Basics of the Financial System

The stock market is just one part of the financial system. The institutions and markets that bring savers and investors together is the financial system.

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1) Financial markets are where people invest their accumulated savings, or wealth.

Some financial markets and institutions include the stock market, the bond market, and banks.

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Whenever you deposit money in the bank, you are “buying” a financial asset for yourself.

2) Most investments are financial assets, meaning the buyer gets future income from the seller.

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When investing in physical assets, such as real estate, you can use the object however you wish,

such as renting it or selling it.


3) People can also invest in physical assets, such as a house or machinery.

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3) People can also invest in physical assets, such as a house or machinery.

4) A liability is a requirement to pay someone in the future.

If you were to take a loan out from the bank to buy a new car, the loan is a liability from your point of view

and an asset from the bank’s point of view.

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Functions of the Financial System

The purpose of the financial system is to reduce transaction costs, reduce financial risk, and provide liquidity.

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1) Reduce Transaction CostsThese are the costs of negotiating and executing a legal deal.

Such costs may include paying legal fees, drawing up documents, or negotiating the terms of a deal.

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People are generally risk-averse, meaning they prefer lower returns on a safe investment than the

higher returns on a riskier investment.

2) Reduce Financial RiskPeople are more willing to make investments if risk is minimized.

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2) Reduce Financial RiskPeople are more willing to make investments if risk is minimized.

3) Provide LiquidityLiquid investments can be easily turned into cash without a loss. Illiquid investments cannot.

Investments must be somewhat liquid since the future is uncertain.

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Types of Financial AssetsFinancial assets have value because of a contractual agreement between two

parties. (They have no physical value, like physical assets.)

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1) Bank DepositsIncludes checking, savings, and money market accounts.

Bank deposits are viewed as an asset by the depositor, and they are viewed as a liability by the

bank.

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Most loans are made by banks to individuals or to firms. Banks view loans as an asset, and the

individual or firm view them as a liability.

2) LoansMoney given to another in return for future payment with interest.

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This bond has not been filled out, but we can see that it matures 30 years from the issue date. Bonds come

in a variety of denominations and interest rates.


3) BondsBondholders loan money to a firm (or government) and are repaid with interest on a specified date.

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Owners of stock are referred to as shareholders. The percentage of shares of stock you own

determines the percentage of assets you are entitled to.


3) BondsBondholders loan money to a firm (or government) and are repaid with interest on a specified date.

4) StocksStockholders have part ownership of the company and its profits.

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Financial IntermediariesFinancial intermediaries are institutions that gather together money from

many people and transform those funds into financial assets.

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1) Mutual FundsCreates a diversified financial portfolio and resells shares of the portfolio to investors.

If an individual wanted to create a diversified portfolio, it would be very difficult. Mutual funds make it possible for small investors to achieve

diversification.

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Pension funds are established by employers for their employees. They pay into it during their working years and receive money from it after retirement.

2) Pension FundsIs similar to a mutual fund, and provides retirement income.

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Because financial difficulties often arise as a result of a death in the family, life insurance policies are a

great way to reduce financial risk.


3) Life InsuranceGuarantees payment to a client’s beneficiaries upon death.

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Banks use the liquid assets of its depositors to finance the illiquid investment needs of its borrowers. Thus, money deposited in banks is lent out as loans.


3) Life InsuranceGuarantees payment to a client’s beneficiaries upon death.

4) BanksBanks provide liquid assets and also meet investment needs.

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The Stock MarketRemember that stock is a financial asset. Any owner of stock can hold onto or

sell his/her shares of stock at any time.

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1) A stock has value because of its ability to generate future income.

The value of financial assets is derived from their future consumption. This is different from goods and

services, which are consumed in the present.

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A) The company may pay interest or dividends to its shareholders.

Many companies pay dividends to all or some of their shareholders at various times. Dividends are payouts of some of the company’s earnings.

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The goal of any investor is to buy low and sell high. When the stock market is rising, it is called a bull

market. When it is falling, it is called a bear market.

B) The shareholder may sell the stock for a profit.

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D1

S1





Supply and demand determine equilibrium in the stock market. Shareholders who want to sell their

stock “supply” it to investors who “demand” it.


2) A stock’s price is determined by expectations about the future.

E1

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D1

S1





Suppose Verizon announces higher future earnings. Investors will surely want to purchase their stock, while current shareholders will be reluctant to sell.


D1

S1

DGood

SGood


A) If expectations are good:i) Demand increasesii) Supply decreases

EGood

E1

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Suppose Verizon announces bankruptcy. Investors will purchase other stocks, while current

shareholders will sell in order to cut their losses.



A) If expectations are good:i) Demand increasesii) Supply decreases

B) If expectations are bad:i) Demand decreasesii) Supply increases

D1

S1

D1

S1

DBad

SBad

EBad

E1

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Stock Market ExpectationsCurrent stock prices are determined by expectations about the future, but how

are these expectations formed?

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1) Efficient Markets Hypothesis

A) Stock prices always reflect all publicly available information.

Such information might include the changing price of a company’s inputs, the time of year, new product

lines, or the strength of competition from other firms.

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Notice how stock prices are very erratic in the short run, making them very difficult to predict. In the long

run, however, the stock market consistently rises.

B) Only new information changes price. Thus, the value of stock follows a random walk.

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Because of the unpredictability of the future, the efficient markets hypothesis contends that no

investor can consistently outsmart the stock market.


C) Thus, it is impossible to “beat the market.”

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Stock prices decreased by one half in less than two years. Many question whether such a drop in prices accurately reflected changes in available information.



2) Irrational Markets

A) Many investors think stock prices are not always rational.

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Warren Buffett, here seated with Barack Obama, has become a billionaire by purchasing under-priced

stock and selling it later for a large profit.



2) Irrational Markets

A) Many investors think stock prices are not always rational.

B) Evidence suggests that smart investors can “beat the market.”

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Risk and RewardDIRECTIONSThroughout your lifetime you will likely have many opportunities to invest your money in the hopes of earning interest (or dividends). Some options will give you a guaranteed return on your investment, but the interest rate will be quite low. Others, however, will offer the chance of making a high interest rate, but the risk of losing some or all of your money will be a real possibility. Some investment options you may encounter are listed below (along with a brief explanation). Using the table, categorize each one as either a physical asset, one of the types of financial assets, or as an investment that utilizes a combination of assets.

DIRECTIONSUsing the investment options from the front side, list which investments you think you will utilize during the following decades of your adult life. For each one you choose, explain why you think that particular investment will be a good choice for that time in your life.

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“The Financial System” Targets

KnowledgeUnderstand the importance and features of the financial system.

ReasoningExplain how supply and demand, risk, and expectations about the future determine the interest rate (and price) for financial assets.

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Resources

http://commons.wikimedia.org/wiki/File:EE_Savings_Bond.jpg - bond notehttp://finance.yahoo.com/q/hp?s=%5EDJI+Historical+Prices - Dow Jones Industrial datahttp://en.wikipedia.org/wiki/File:Buffett_%26_Obama.jpg - Picture of Warren Buffett with Barack Obama

Begin End ShowTable of Contents THE FINANCIAL SECTOR - 9.3.2 Copyright © 2013 N.S.

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