SECTION 4B HIGHLIGHTS
Assignment: Read about “Algebra with Powers and Roots” on page 236-237.
Do pp. 246 BSC (15-33 odd). Read about Savings Plans and Investments in Section
4B of the text. Do pp.
245-250 RQ(1-5), BSC(39-42,43-46,49,52,59,63,73,75,77,79,83,85,87-92),
ITN(101).
In The News #101 Link: INVESTMENT WEBSITE
Vocabulary: Savings Plan, Total Return, Annual Return, Stock, Capitol Gain, Dividend, Bond, Face Value, Coupon Rate, Maturity Date, Current Yield, Mutual Fund, Cash Investment, Liquidity, Risk, Return, Deposit, Future Value, Retirement Plan
Notes:
In section 4B of the text we work with two different forms
of the saving plan formula. The first form ( box on page 228 of the text)
can be used to calculate an accumulated saving plan balance. The second
form (page 232) can be used to calculate the amount that must be deposited at
regular intervals in order to achieve a desired balance. These formulas
can be employed through the use of a calculator or through the use of the Excel
spreadsheet that has been provided.
In this section we also looked at strategies that might be used when
saving for retirement. We learned that the earlier you start saving the
better your money can work for you to generate interest.
When considering an investment three factors should be considered:
Liquidity: The ease with which the investment can be turned back into cash.
Risk: Is the money invested safe or is there a good possibility it might be
lost.
Return: The amount the the investment can be expected to grow.
In this section there are two calculations that we will make related to the return on an investment. They are as follows:
Total Return is the percentage change in value of the investment over the investment period.
Total Return = 100*(new value - previous value)/previous value
Annual Return is the percentage change per year in investment values.
Annual Return = (total return + 1)^(1/Y) - 1
where Y is the number of years of the investment.
This spread sheet for section 4B includes calculators for Total Return and Annual Return for an investment along with calculators for Total Return on a Stock, Bond Yield and Bond Interest.
Along with cash, three types of investments are considered in this section of the text. It is recommended that an investor create a diversified portfolio in order to balance the elements of liquidity, risk and return. The three types of investments considered are Stocks, Bonds and Mutual Funds.
Stocks: In a corporation the owners of the corporation may hold stock shares to reflect their percentage of ownership. The market price of a stock reflects the current level at which at least some shareholders are willing to sell their shares and at which some buyers are willing to pay. You can make money from stocks if you are able to sell them for more than you paid for them or if the stock pays a dividend. You can also lose money on stocks if the price dips lower than the price you paid for it.
Bonds: If you purchase a bond you are essentially lending out money. The face value of the bond is the price you must pay. The coupon rate is the simple interest rate that the issuer of the bond promises to pay each year to the bond holder. The maturity date is the date upon which the issuer promises to repay the face value of the bond.
Mutual Funds: In a mutual fund your money is pooled with the money of
other investors. A fund manager invests this pool of money.
The fund manager makes the decisions about how the money is invested.
There are many types of mutual funds in which to invest.
Skills to be mastered:
1. Calculate total worth of various annuities.
2. Compare annuity options.
3. Determine regular investment amount needed to attain various levels of
savings.
4. The student will be able to identify various levels of liquidity, risk
and return for stocks, bonds and mutual funds.
5. The student will be able to calculate the total return on an
investment.
6. The student will be able to calculate the annual return on an
investment.
7. The student will be able to calculate the current yield of a bond.
