simple/compound interest & investments/risk v return

Insurance Clicker Quiz

Grab Your Clickers

1) What type of insurance should you get to cover medical expenses?

• A) Life

• B) Health

• C) Property

• D) Disability

2) What type of insurance should you get to cover your loss of

income in case of injury or illness?

• A) Life

• B) Health

• C) Unemployment

• D) Disability

3) Your insurance provider paid $2,600 of your hospital bill, but

you had to pay the other $300 of it. What is the word for the amount

you paid?

• A) Premium

• B) Deductible

• C) Liability

• D) Subsidy

4) You pay $12 a month for property insurance on your record collection. What is the word for

this payment?

• A) Premium

• B) Deductible

• C) Liability

• D) Subsidy

5) While delivering the mail, a postman gets struck in the arm by a passing car. An ambulance takes him to the hospital, and after x-rays and other tests are done, thedoctor states that no bones were broken and no permanent damage was done.

Which of the following types of insurance would be MOST beneficial for the postman as a result of this accident?

• A) Auto• B) Disability

• C) Health• D) Life

6) Carlton is injured while working at a retail store. Which type of insurance is

MOST LIKELY to provide benefits while he is temporarily out of work?

• A. life insurance

• B. disability insurance

• C. property insurance

• D. automobile insurance

7) Alicia owns a home in the suburbs. If a neighbor wrecks an automobile in Alicia's yard and

damages property, Alicia is protected from financial loss by

• A. the neighbor's automobile liability policy.

• B. the neighbor's property insurance policy.

• C. Alicia's disability insurance policy.

• D. Alicia's automobile liability policy.

“Can I Afford It?”

Video Clip

“How To Be A Millionaire” Challenge

(On Clickers)

ActivityHow to Really Be A Millionaire

• Most millionaires are college graduates.

• T

• F

ActivityHow to Really Be A Millionaire

• Most millionaires work fewer than 40 hours a week.

• T

• F

ActivityHow to Really Be A Millionaire

• More than 1/2 of all millionaires never inherited any money from anybody.

• T

• F

ActivityHow to Really Be A Millionaire

• More millionaires have American Express Gold Cards than Sears cards.

• T

• F

ActivityHow to Really Be A Millionaire

• More millionaires drive Fords than Cadillacs.

• T

• F

ActivityHow to Really Be A Millionaire

• Most millionaires work for big Fortune 500 companies.

• T

• F

ActivityHow to Really Be A Millionaire

• Many poor people become millionaires by winning the lottery.

T

F

ActivityHow to Really Be A Millionaire

• College graduates earn about 65% more than high school graduates earn.

• T

• F

ActivityHow to Really Be A Millionaire

• Day traders usually beat the stock market & many of them become millionaires.

• T

• F

ActivityHow to Really Be A Millionaire

• If you want to be a millionaire, avoid the risky stock market.

• T

• F

ActivityHow to Really Be A Millionaire

• At age 18, you decide not to smoke & save $1.50 a day. You invest this $1.50 a day at 8% annual interest until you are 67. At age 67, your savings from not smoking are almost $300,000.

• T

• F

ActivityHow to Really Be A Millionaire

• Single people are more often millionaires than married people.

• T

• F

• -Compound interest lesson, FF4L how to really be a millionaire

Investment Vocabulary• Principal: money borrowed or invested. Does

not include interest paid.

• Interest: The price of borrowing money, stated as a percentage.

• Simple interest: calculated based on principal only.

• Compound interest: interest calculated based on principal + previous interest earned. – Monthly better than quarterly better than yearly

(for savers/lenders).

Bean Activity

Compound Interest

Compound Interest Video Clip

Basic Investment Considerations

Who likes what best????

• Savers

• Borrowers

• Simple Interest

• Compound Interest

Basic Investment Considerations

• Consistently invest

• Start investing early

• Diversify (invest in different types of things)

Source: Bureau of Economic Analysis, Data through July 2009

U.S. Households Saving More of Disposable Income (Chinese Save

25%)

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Critical Need to Build Savings and Investment

• 1/3 of adults have no savings.

• Only 11% of workers under age 35 contribute to a 401-K plan.

• Medicare hospital coverage funded only through 2018.

• Social Security currently funded only through 2040.

• Unless economic growth speeds up dramatically, policy makers will either have to raise taxes or reduce benefits.

• Conclusion: young people must begin to save and invest earlier.

• But, in order to save, young people must spend less….Opportunity Cost.

34

Risk vs. Return

• Risk: the probable frequency and probable magnitude of future loss.

• Return: to bring in (as profit).

• What is the relationship between these two???????????????????????????????

The GREATER the risk, the GREATER the possible reward.

• In careers.

• In relationships.

• In sports.

• In investments.

Investment Options• CD (Certificate of Deposit): like a savings

account you agree not to withdraw from for a certain period of time.

• Mutual Fund: a corporation that exists only to buy stock in other corporations (easy way to diversify)

• IRAs & 401(k)s: tax sheltered retirement plans• Bond: JUST A LOAN

– to corporation (corporate bond)– to government (Treasury bond)– to local government (municipal bond)

Risk vs. Return Activity

• Risk Return

• Bonds

• Stocks

• Savings Acct’s

• CD’s

• Mutual Funds

Basic Investment Considerations - Continued

The Relationship Between Risk & Return

Return

Risk

Savings Accounts

CD’sMutual Funds

Bonds

Stocks

Asset Pyramid: Proceed from Bottom Up

40

Not A Gamble: U.S. Stock Market History

41

Why Stay with Stocks? Long-Term Annual Returns (1925-2008)

• Small Company Stocks: 11.7% (most risk)• Large Company Stocks: 9.6%• Long Term Corp. Bonds: 5.9%• US Treasury Bills: 3.7% (least

risk)• Inflation: 3.0%

Real Gambling: The Odds(about 50% of American adults spend $45 billion /year on

lotteries)

• Mega Millions (Jackpot): 1 in 175,711,536• U.S. Powerball: 1 in 80,089,128• The Big Game (GA): 1 in 76,275,360• Being killed by lightning: 1 in 10,000,000• Mega Millions ($250K): 1 in 3,900,000• Getting a royal flush in poker on first five cards: 1 in 649,740• House being struck by lightning: 1 in 280,000• Becoming a professional athlete: 1 in 22,000• Dying in car accident: 1 in 18,585• Being murdered: 1 in 18,000

• Source: MSN Money

Consider Investment Options Around the Room

Move to the point in the room that best represents your desired mixture of investments between the ages of

20 and 30.

Consider Investment Options Around the Room

Move to the point in the room that best represents your desired mixture of investments between the ages of

50 and 60.

• If you choose to invest money, your two big options are stocks and bonds.

• Why is this guy recommending what he’s recommending?

1) A man has $100 to invest and hopes to receive 10 times the amount back ($1,000) by the end of 5 years. This

could be BEST accomplished by• A placing the money in a savings and loan account

• B depositing the money in a commercial bank account

• C purchasing $100 worth of stock in a start-up company

• D buying $50 worth of bonds and investing $50 in a mutual fund

2) Bob has $25,000 that he would like to invest in a diversified manner. Bob's BEST investment option to accomplish this goal

would be to

• A. purchase $25,000 worth of a company's stock.

• B. purchase $25,000 worth of zero coupon bonds.

• C. purchase $25,000 worth of shares in a mutual fund.

• D. purchase $25,000 worth of U.S. government securities.

3) Eric has $2,000 that he wants to place in a savings account. He has researched two

accounts, and both pay 3.5% interest. Account X pays simple interest. Account Y pays compound interest. Eric should choose

• A. account X because it would pay tax free interest.

• B. account Y because it would pay interest on interest.

• C. account X because the interest rate would increase over time.

• D. account Y because the interest rate would decrease over time.

4) Why does consistent investing over long time periods yield large

returns for investors?

• A) Simple Interest

• B) Compound Interest

5) Bonds are most like

• A) stocks

• B) insurance

• C) savings accounts

• D) loans

6) Which would be the best deal for the borrower on a 2 year loan for

$5,000:

• A) 7% simple interest

• B) 7% compounded monthly

• C) 7% compounded quarterly

7) Which would be the best deal for the lender on a 2 year loan for

$5,000:

• A) 7% simple interest

• B) 7% compounded monthly

• C) 7% compounded quarterly

End

Higher Returns Require Taking More Risk; Diversify to Reduce

Risk

56

Basic Investment Categories1.Stocks (Equities): You own part of a co.

1.Mutual Funds, index funds (one way to diversify)

2.ETFS3.Individual Stocks

2.Bonds (Fixed Income): You lend to gov’t or corp.1.Government2.Corporate3.High Yield

3.Commodities1.Mutual funds, ETFs

4.Real Estate1.Direct Investment2.ETFs

5.Cash

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Huge Advantage From Starting Early (Saving $100/month at age 25, assumes 8% return/year

vs. starting at age 35)

Source: Massena Education58

Bell Ringer• You’re going to be saving money pretty soon (if

you’re not already).• Which of these places will you keep your money,

and why?– Stock Market (you pick the stocks)– Stock Market (mutual funds, or let an advisor pick the

stocks)– Savings Account– Checking Account– Cash Hidden Somewhere– Retirement Account– Some combination of the above (which ones?)– None of the above (what then?)