What Happens to Pension Accounts When a Company Is Bought

							Financial Markets
Savings and the Financial System
 Savers and Financial Assets
 Savers have a multitude of ways to save their money
    Savings accounts
    Bonds
    Certificates of Deposit (CD’s)
The Circular Flow of Finance
 The financial system is made up of 3 parts
 1. The funds that a saver transfers to a borrower
 2. The Financial assets that certify the conditions of
  the loan
 3. The organizations that bring the surplus funds and
  the financial assets together.
So how does it work?
 Financial intermediaries accept the funds that people
  want to save and then loan these funds out to other
  individuals and businesses
 Examples of Financial Intermediaries
   Banks
   Credit Unions
   Life Insurance Companies
   Pension Funds
Financing Capital formation
 Any sector of the economy can borrow
 Government and businesses are the largest borrowers
 If a government or business borrows directly from a
  saver a bond is issued
 Any sector can supply savings
 Households and businesses are the largest savers
The flow of money
 Households save money
 Banks lend money to businesses
 Businesses buy things for their business from other
  businesses
 The “other business” deposits the money in the bank
 The bank lends the money to someone else
 FYI Money has just been CREATED!!!!!!!
Nonbank Financial Intermediaries
 Examples: Finance companies, life insurance
 companies, pension funds
Finance Companies
 A firm that specializes in making loans directly to
  consumers
 They also buy installment contracts from merchants
  who sell goods on credit
   When merchants can’t wait years for their customers to
    pay off their debt, finance companies buy the debt
   Finance companies make loans at a much higher
    percentage rate than do banks
Life Insurance companies
 Its primary function is to provide protection for the
  insured
 They also bring in LOTS of cash
 When a policy is purchased, the premium is the price
  of that policy
 The company will often lend out the surplus cash.
Pension funds
 This is a regular payment intended to provide income
  security to someone who has worked until retirement
 Typically, employers hold a certain percentage of a
  worker’s pay to deposit in the fund
 During the 30 - 40 year period the money is typically
  invested in bonds and stocks
Basic investment considerations
 There are 4 basic considerations:
 Consistency, Simplicity, The Risk Return Relationship,
  and Investment Objectives
 Consistency
   Successful investors invest consistently over long periods
    of time.
   Compound interest table shown on page 293
Simplicity
 Most investors stick with what they know
 Many investors will ignore investments that seem too
  complicated
 If the investment seems too good to be true, it
  probably is.
 Some people do get lucky, but in risky investments
  more people lose than those that win
The Risk Return Relationship
 As investments become more risky, investors demand
  to earn more from the gamble.
 The investor will get greater compensation from high
  risk investments
 As an investor, you must calculate how much risk you
  can tolerate.
Investment Objectives
 Consider why you are investing
 Are you trying to cover living expenses during the
  periods of unemployment?
   You need to have assets that can easily be converted into
    cash
 Are you trying to retire?
    You might want to buy stocks that pay dividends and
     increase in value over time.
Financial Markets and Their Assets
Bonds as Financial Assets
 Bonds are loans to the government or a corporation
 that pay an investor an amount of interest at regular
 intervals for a fixed amount of time.
Three components of Bonds
 Coupon Rate – the interest rate that the bond issuer
  will pay to the bondholder
 Maturity – the time at which payment to the
  bondholder is due. Bonds usually have a 10, 20, or 30
  year maturity rate
 Par Value – This is the amount that an investor pays to
  purchase the bond.
Example
 You buy a bond
 The coupon rate is 4.5%
 The Maturity is 20 years
 The par value is $1000


 How much do you have at the end?
Bonds at Maturity
 Not all are held to maturity
 They might be bought and sold
 During this period the price might change
 Investors are interested in the yield to maturity.
Discount Bonds
 Interest Rates are always changing. If a person needs
 to sell their bonds and the interest rates have risen,
 they may have to sell the bond at a discount.
Bond Ratings
 Two companies publish bond Ratings, Moody’s and
    Standard and Poor’s.
   AAA is the best rating
   D is the worst rating (Means the bond is in default)
   The higher the bond rating, the lower the interest rate
   Bonds with higher ratings will sell for a higher price AAA
    bonds might sell for $1100, where a BBB might sell for $950.
Advantages to the issuer
 When the bond is sold the coupon rate will not change
  so the company can plan on fixed payment.
 Bond holders don’t own a portion of the company.
  This means that the company does not have to share
  profits if they do particularly well.
Disadvantages to issuers
 The company must make fixed interest payments, even
  when times are tough
 If the firm does not keep up with the payments the
  bonds might be downgraded and more difficult to sell.
Types of Bonds
 Savings bonds – Low Denomination ($50-$10,000)
 issued by the US Government. Almost no risk.
 Interest is not paid in payments, the purchaser obtains
 the bond for less than value.
Treasury Bonds, bills, and notes
 Issued by the US Treasury. One of the safest when it
 comes to default risk
Municipal Bonds
 Issued by state and local governments
 Funds highways, parks, schools, etc.
 Tax Exempt from the Federal Government.
 Also referred to as “munis”.
 Usually rated as safe with Standard and Poor’s and
  Moody’s
Corporate Bonds
 Corporations issue these to help expand their business
 Issued in fairly large denominations
 Interest is taxed as ordinary income
 Corporations have no tax base to guarantee their loans.
  (Moderate level of risk)
 Corporations that sell these are closely monitored by
  the SEC.
Junk Bonds
 Also known as high yield securities
 Lower Rated
 Higher yield (sometimes 9% to the Government’s 4%)
 Some have allowed companies to complete tasks that
 would have been impossible to complete
Other types of assets
 Certificates of Deposit
    Attractive to small investors
    Available through banks
    For fixed amounts of time
    Investors can choose between many different terms of
     maturity
Money Market Mutual Funds
 These are made up of short term financial assets.
 Gives a slightly higher interest rate than does a savings
  account
Financial Asset Markets
 This is where assets such as bonds CD’s, and Money
 Market Mutual funds are traded
Capital and money markets
 Capital Markets – Money is lent for periods longer
 than a year.
   Long term CD’s and Corporate and Government Bonds
 Money Markets – Money is lent for periods less than a
 year.
   Includes Short term CD’s, T-Bills, and Money Market
    Mutual Funds
Primary and Secondary Markets
 Primary Markets – Sells financial assets that can only
 be sold to the original purchaser.
   Includes Savings bonds and small CD’s
 Secondary Markets – Financial Assets that can be
 resold
Investing in Equities and Options
Stocks and Efficient Markets
 Share Values
    Several different ways to buy equities
        Stock Broker- buys securities for clients
        Internet account – allows the investor to invest their own
         portfolio from their computer. Costs less than having a
         broker, but no professional advice.
Share Values cont.
 Why does the stock price go up and down?
 If lots of people want to buy the stock, they are willing
  to pay more for it so the price goes up
 If lots of people want to sell the stock, they are willing
  to take a loss to get rid of it. In this case, the price goes
  down.
Stocks and making money
 There are obviously many different ways to make
  money in the stock market
 The value of one stock can differ on a day by day or
  hour by hour basis depending on the news that is
  affecting that particular security
Efficient Market Hypothesis
 This is the argument that stocks are usually priced
  correctly and deals are very hard to find because the
  market is followed so closely by so many investors
 In theory, this means that it does not matter what
  stocks you buy
 If you use portfolio diversification this allows you to
  absorb the hit from stocks that decrease in value with
  the stocks that increase in value
Mutual Funds
 A mutual fund is a company that sells stock in itself to
  individual investors
 It takes the money from that sale and purchases stocks
  and sometimes bonds
 Mutual fund share holders receive the dividends
  earned from the mutual fund’s investments.
 Shareholders can sell Mutual fund shares just like
  stocks
401k plans
 This is a tax deferred investment that acts as a personal
  pension fund.
 Often times these are company matched
 The employee authorizes payroll deductions
 Taxes are not paid on this portion of the income until
  the money is withdrawn from the fund.
Stock Markets
 Historically, investors would meet at an organized
    stock or securities exchange
   Members pay a fee to join and only trades may take
    place on the floor of the exchange
   The oldest and largest stock market is the New York
    Stock Exchange (NYSE)
   The NYSE lists about 2,700 stocks
   The firms have to pay a membership fee
   This makes sure that these firms are some of the most
    profitable
Other Markets
 American Stock Exchange (AMEX)
 Also in New York
 Companies are smaller than those on the NYSE
 Other regional exchanges are in Chicago, Philadelphia,
  and Memphis.
 They list much smaller companies
Over the counter Markets
 OTC markets trade the majority of stocks in the US
 This is an electronic marketplace for securities that are
  not traded on an organized exchange
 The most important OTC market is the NASDAQ
Measures of Performance
 Two popular indicators
 Dow Jones Industrial Average
    Most popular
    Began in 1884
    Samples 30 of the largest industrial stocks
 Standard & Poor’s 500
    Uses the price changes of 500 representative stocks
    From many different exchanges
Trading in the future
 If the exchange does not take place right away it
  happens with a Futures Contract
 This is an agreement to buy or sell at a specific future
  date at a pre determined price. If you agree to
  purchase an item at a specific price, you hope that the
  market price is higher when the time comes
 An option is a type of futures contract that gives the
  buyer the option to cancel the contract
More on Options
 A call option is the right to buy something at a specific
  future price
 A put option is the right to sell something at a specific
  future price
 If the contract is not advantageous at the time it is to
  be exercised it may be torn up