About This PDF. Like all NAF curriculum materials, this PDF is for use only by NAF member academies. Please do not distribute it beyond your academy.

Transcription

1 About This PDF This PDF file is a compilation of all of the Student Resource Word documents that are a part of this NAF course. You may want to use it as a student workbook for this course. Like all NAF curriculum materials, this PDF is for use only by NAF member academies. Please do not distribute it beyond your academy.

2 Lesson 1 Course Introduction Student Resources Resource Description Student Resource 1.1 Anticipation Guide: Principles of Finance Student Resource 1.2 Example: Alphabetical Taxonomy Student Resource 1.3 Taxonomy: Principles of Finance Terms

3 Lesson 1 Course Introduction Student Resource 1.1 Anticipation Guide: Principles of Finance Student Name: Date: Welcome to the course! Over the next few months, you ll learn a great deal about finance and how it relates to and affects your life. You ll also learn about professional careers in the finance field, such as financial analyst, financial planner, and banker. This is a hands-on course. That means you ll not only learn facts and concepts but also how to manage your own finances, including evaluating banks and balancing a checkbook. You ll also explore relevant topics in the finance field in depth and present your findings at a financial literacy fair. Directions: For each of the statements below, underline I agree if you think the statement is accurate or I disagree if you disagree with it. Write one reason to explain your guess. A dollar I had five years ago is worth the same today a dollar is a dollar. My guess: I agree I disagree My reason: I learned: Investments are for wealthy people. My guess: I agree I disagree My reason: I learned: The main indication whether someone is wealthy is how much money he or she earns. My guess: I agree I disagree My reason: I learned:

4 Lesson 1 Course Introduction If you have $2,000 in the bank and you owe $1,000, that s the same as having $1,000. My guess: I agree I disagree My reason: I learned: All lenders are pretty much the same, so if you need to borrow money you should get it from whichever one will lend it to you. My guess: I agree I disagree My reason: I learned: It s always a bad idea to borrow money. My guess: I agree I disagree My reason: I learned: Buying something with a credit card is like taking out a mini-loan. My guess: I agree I disagree My reason: I learned:

5 Lesson 1 Course Introduction Student Resource 1.2 Example: Alphabetical Taxonomy A taxonomy is a list of related terms grouped into categories. You will develop taxonomies in this course to build vocabulary and to see the relationships among important terms. Your taxonomies will also be helpful tools for the writing and reading assignments you receive. Below is a taxonomy for the topic of colors, in which the terms have been categorized alphabetically. Can you think of any others? Go ahead and add them into the correct category. A B C D E F G H I J K L M N O P Q R S T U V W X Y Z aquamarine, amber, azure black, brown, beige, bronze, burgundy cobalt, chartreuse, cream, crimson ecru, emerald fuchsia gold, gray indigo, ivory jade lavender, lilac magenta, mauve navy blue ochre, olive pink, periwinkle red, rust scarlet, silver teal, tan, terra-cotta ultramarine violet, vermilion white yellow

6 Lesson 1 Course Introduction Student Resource 1.3 Taxonomy: Principles of Finance Terms Student Name: Date: Think of terms related to the topic your teacher gave you. Write them on this list in alphabetical order. A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

7 Lesson 2 Introduction to Finance Student Resources Resource Description Student Resource 2.1 Reading: Am I Financially Literate? Student Resource 2.2 Reading: Time Value of Money Student Resource 2.3 Anticipation Guide: Financial Services Industry Student Resource 2.4 Reading: Financial Services Industry Student Resource 2.5 Letter-Writing Frame: Letter to the United States Secretary of the Treasury

8 Lesson 2 Introduction to Finance Student Resource 2.1 Reading: Am I Financially Literate? On average, teens in the United States spend a total of $179 billion dollars of their own money per year. No wonder advertising companies are continually trying to market to teens. They have the money to spend. However, according to a recent nationwide survey, on average, high school seniors answered only 52.4% of questions about personal finance and economics correctly. 1 With these statistics in hand, you re probably not surprised at the newspaper headline that read, They like to spend it, but young people don t know much about how money works. Do you fall into this category? Lady Gaga is a millionaire many times over, but she was $3 million in debt and went bankrupt from overspending on her Monster Ball concert tour.. How did this happen? It all starts with a lack of financial literacy. What Is Financial Literacy? At its simplest, the term finance means the management of money. Financial literacy describes the knowledge and skills we need in order to manage our finances effectively. Being financially literate enables you to plan for your future, attain your financial goals, and make sound fiscal decisions that can affect your overall well-being. Without financial education and good money management skills, it doesn t matter how much money you make, you can still end up at the end of every month like Lady Gaga. Financial literacy is more than just having a job and earning a paycheck. It s about what you do with your money once it s in your hands. Ask yourself this: What do I do with money? Where does it go? Assessing your spending habits, budgeting, borrowing, saving, and investing are all components of sound financial planning. Financial literacy also gives you the tools to survive in the real world. Navigating the financial world along with the businesses that serve it can be complex and confusing. Throughout life you will be presented with so many different financial choices ranging from what bank to choose, to the type of insurance to pick, to selecting the best investment strategies, to understanding the vast array of mortgage options. What do you choose and whom do you trust? Obtaining the proper financial education can help you to become a confident and competent consumer, allowing you to take advantage of the vast financial products that are available. Becoming financially literate is also about changing your behavior. Every time you spend money you are making a choice. We are living in an era where we are encouraged to overspend, so discriminating between your personal needs and wants is critical. Needs are considered to be things that you can t live without, or necessities, while wants are things you desire to have. Every time you make a purchase, stop and think, Do I really need this? Understanding this difference and choosing to change your spending habits will lead to more cash in your pocket and a larger bank account! Remember, financial literacy is not only about having the right education and understanding specific financial concepts, but it is also about taking the appropriate steps to change irresponsible monetary behavior. Another benefit of financial literacy is being able to evaluate current needs and wants versus future ones and planning accordingly. Sometimes, current wants can prevent you from being able to afford future needs, such as paying for college, buying a home, or funding retirement. Having the knowledge to plan for these future needs makes it more likely that you will achieve these goals. Young people who develop good money management skills at an early age are more likely to be able to handle important adult financial decisions in the future. Going to college, buying a car or a home, 1 Bernanke, Financial Literacy,

9 Lesson 2 Introduction to Finance purchasing insurance, using credit wisely, paying taxes, investing, and saving for the future are all a part of navigating the financial world. Without a financial education, you could find yourself lost at sea.

10 Lesson 2 Introduction to Finance Student Resource 2.2 Reading: Time Value of Money The Lottery Every Friday after work Charlene Munson purchases a lottery ticket from the local convenience store. Every Friday she crosses her fingers, hoping that her string of chosen numbers will randomly be selected, entitling her to the jackpot. Finally, after eight long years of diligently playing the lottery, the current Fantasy 5 numbers are revealed: 7, 22, 18, 6, and 30! She screams in delight. She has just won $380,000. Her state s lottery quickly informs her of her choices: The take it now option (also known as the cash option) allows Charlene to receive approximately 50% of the winning amount now, minus taxes. The payment option allows her to receive the winnings over the next 20 years ($19,000 per year), of course minus taxes. (Lottery officials claim that by offering this option they are helping you to manage your money.) By reducing the immediate cash payout amount and encouraging its winners to receive the money in annual installments spread out over a long period of time, it is obvious that the lottery understands the time value of money! What Is the Time Value of Money? Basically, the time value of money refers to the idea that a dollar in hand today is worth more than a dollar given at some future time. In other words, money available now is worth more than the same amount in the future. How can this be? Any amount of money is worth more the sooner it is received based on its potential to earn interest. Interest is a payment made in exchange for using money over time. If you borrow money from a bank, you pay the bank interest; if you lend the bank money, it pays you interest. The actual trade-off between money now and money later depends on the rate of interest you can earn by saving and/or investing. For example, let s say you were given the option to receive $1,000 today or $1,000 next year. Does it really matter when you receive it? Yes. The time value of money implies that if you received the money today, you could invest it (let s assume at a 5% interest rate) and in one year it would be worth $1,050. Moreover, if you receive the money now you are taking advantage of the opportunities that you have to use your money. Aside from earning interest on your money, you could also use the money to pay off any outstanding debt, potentially avoiding some high interest charges. Future Value Future value refers to the value of an investment at some point in the future. Essentially, the value of the money you have now is not the same as it will be in the future. Future value is the amount of money to which an investment can grow, at a certain interest rate, for a certain period of time in the future. For example, given a 5% interest rate over a one-year period, the future value of $1,000 would be $1,050. Simple Interest and Compound Interest Simple interest and compound interest refer to the interest that you earn on your money.

11 Lesson 2 Introduction to Finance Simple interest is paid when the interest is not reinvested each interest period. Looking back at your $1,000 investment, with simple interest, you would have $1,050 after the first year; $1,100 after the second year; $1,150 after the third; and so on. With simple interest, the 5% interest that you earn is paid each year only on your initial $1,000 deposit. However, if you are paid compound interest, things look even better. The process of compounding refers to earning interest on your interest. Let s say that you leave the $1,050 in the bank for another year with the same 5% interest and the interest is compounded. In two years the future value of your initial investment would be $1, Leave it in for another year and after three years, you would have $1, You are essentially reinvesting the interest. As Benjamin Franklin pointed out, Money makes money. And the money that money makes, makes more money. Comparison of Interest Earned on $1,000 Initial Investment Simple Interest 5% Compound Interest 5% Invest Interest Total Invest Interest Total 1, , Year 1 1, , , , Year 2 1, , , , Year 3 1, , , , Year 4 1, , , , Year 5 1, , , , Year 6 1, , , , Year 7 1, , , , Year 8 1, , , , Year 9 1, , , , Year 10 1, , Earned $ more

12 Lesson 2 Introduction to Finance The Lottery Revisited Refer back to our lottery scenario in the first section of this reading. Based upon the time value of money, most economists would agree that Charlene should take the money now. Even though she s receiving about 50% less right off the top, she still has time on her side. If she takes the money in installments over the next 20 years, the final check that she receives will be worth far less than it is worth today. Furthermore, she can take her earnings and pay off high-interest debt or invest it!

13 Lesson 2 Introduction to Finance Student Resource 2.3 Anticipation Guide: Financial Services Industry Student Name: Date: Directions: For each of the statements below, circle whether you agree or disagree and write one reason to explain your answer. It s all right to guess. Take notes on what you learn about this topic during the presentation on the financial services industry. The financial services industry is the largest industry in the world. My guess: I agree I disagree My reason: I learned: Banks lend out the money that you deposit to make a profit. My guess: I agree I disagree My reason: I learned: A credit union is just another name for a bank. My guess: I agree I disagree My reason: I learned: The government heavily regulates the financial services industry. My guess: I agree I disagree My reason: I learned:

14 Lesson 2 Introduction to Finance Student Resource 2.4 Reading: Financial Services Industry The financial services industry includes a variety of institutions that deal with the management of money. People and businesses need these institutions for many reasons. We use them when we deposit our paychecks or borrow money to buy a house. People turn to them for help when a disaster strikes, like an accident, a death, or a hurricane. The industry also makes it possible for people to invest and grow their money. The finance industry is critical to the overall health of our economy. It is also important to individuals, young and old alike, in supporting them on their road to financial independence.

15 Lesson 2 Introduction to Finance Financial services is a broad term used to refer to the services provided by the finance industry. It is also the term used to describe organizations that deal with the management of money. The financial services industry is the largest industry in the world.

16 Lesson 2 Introduction to Finance Financial institutions provide financial services to their customers. They are responsible for the flow of money through the economy. From people to businesses or investors to companies, financial institutions handle transferring these funds. Financial institutions are heavily regulated by the government. The Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) are a few of the governing agencies. It is important that financial institutions are regulated because they rely so heavily on consumer faith and trust in the financial system.

17 Lesson 2 Introduction to Finance The financial services industry offers many services to people. Savings and checking accounts are by far the most common. A savings account is usually the first type of account you would open. When you put money in a savings account, the bank gives you interest on your money. Checking accounts allow you to write checks against the money in the account. There are some checking accounts that will even offer interest rates based on the balance of the account. ATM and debit cards are linked to your checking or savings account and allow you to withdraw cash as well as make purchases. Both ATM and debit cards are convenient! Investment opportunities are an important service offered by the financial services industry. Two examples of ways to invest are through money market accounts and certificates of deposit. Money market accounts are similar to standard savings accounts, but the interest rate changes and they tend to pay higher interest rates. Usually a fairly high minimum balance is required. Certificates of deposit require that you put your money in an account for a specific amount of time. They generally offer higher interest rates, but money can t be taken out (without penalty) until the time limit is up.

18 Lesson 2 Introduction to Finance Banks are financial institutions where you can place and borrow money and take care of other financial matters. When you put your money into a bank, the bank lends that money out for a profit. Banks profit from the difference between the interest rates paid and those charged. To give a very simple example, if you deposit $100 in an account that pays 5%, or $5, the bank can use your money to make a loan to someone else and charge, say, 8% interest, or $8. The bank has now made $3 on the transactions. Everyone wins you earn interest on your money; the bank makes a profit; and the borrower is able to procure needed funds to buy a car or start a business. The most common services that banks offer are depository (meaning, you can put or deposit your money into an account) and lending services (when you borrow money, such as personal, commercial, and mortgage loans). Banks offer credit cards, ATM and debit cards, electronic transfer services, currency exchange, safe deposit boxes, and investment and trust services. Banks also keep your money safe while allowing for withdrawals of your money when needed the FDIC insures bank deposits up to $250,000 (per depositor, per bank, per account category) in any FDIC-insured bank account.

19 Lesson 2 Introduction to Finance Banks, thrifts, and credit unions the three main types of financial institutions where you can deposit your money have become more like one another in recent decades. Though their identities have become less unique, they can still differ slightly in their specialties. Thrifts, also known as savings and loans, are financial institutions that specialize in mortgage loans and depository services, especially loans for single-family homes and other residential properties. They are referred to as thrifts because they originally offered only savings accounts (thrifty people are good at saving money). Credit unions are financial institutions formed by a group of people that have a common tie. For example, credit unions have been established based on profession, geographical region, and so on. Credit unions offer many of the same services as banks, but they are nonprofit organizations. They don t have to pay federal taxes, so they can usually offer better interest rates. The National Credit Union Administration is an independent federal agency that oversees credit unions. It regulates and supervises credit unions (much like the FDIC does for banks) and insures deposits through the National Credit Union Share Insurance Fund.

20 Lesson 2 Introduction to Finance Insurance is a form of risk management. It protects your finances if you, your family, or your business experience unexpected events such as death, natural disasters, theft, car accidents, and much more. When you have insurance, you pay an insurance company a premium, or the amount of money the insurance company charges in order to give you insurance. In return you expect the insurance company to pay your bills should an unplanned event happen. In this way, insurance companies provide risk coverage to you or your family in the event of a financial loss or other risk. There are many different types of insurance available. Some of the most common are life, business, auto, home, health, property disability, and casualty insurance. Casualty insurance is for covering losses resulting from injuries to people. Other types of insurance range from earthquake to vacation to pet insurance. Before purchasing insurance, make sure to research the company. Some insurance companies are more stable and reliable than others. The stability and strength of the insurance company is very important, since a premium paid to the insurance company provides coverage for losses at some future date.

21 Lesson 2 Introduction to Finance The financial services industry is important to the overall well-being of the economy. It helps people manage and invest their money. It makes it possible for people to spend their money or invest it today and pay their debts off in the future, which encourages the economy to grow. The economy grows because the money we deposit or invest gets loaned to other people so they can buy homes, start businesses, go to college, and meet other financial goals. The financial services industry makes life easier and more convenient with ATM, debit, and credit card services. People can bank online now and even use their cell phones for money transactions! Finally, this industry allows people to make necessary purchases to cope with life s financial challenges.

22 Lesson 2 Introduction to Finance Student Resource 2.5 Letter-Writing Frame: Letter to the United States Secretary of the Treasury Directions: Use the following guide to help you organize your letter to the United States treasury secretary about the importance of financial literacy. Once you have completed this guide, copy the information onto a blank piece of paper or type your letter using word processing software. Make sure that you clearly understand the assessment requirements before beginning your letter. Date: Dear Secretary of the Treasury, I am currently enrolled in a Principles of Finance class at (name of school). I am writing to you today [Clearly explain your purpose for the letter. Draw from your notes, readings, discussions, and/or presentation.] There are many reasons why financial education is important. To begin [Write your first reason here. Remember to include at least one accurate fact (taken from the readings, notes, or presentation) that effectively supports one of your claims regarding the importance of financial literacy.] Secondly/Furthermore/Also [Write your second reason here.]

23 Lesson 2 Introduction to Finance Thirdly/Lastly/Finally [Write your third reason here.] In conclusion, after giving this topic much thought, one way to increase the financial literacy levels of our teens is to [Write down your suggestion for the treasury secretary.] Thank you for your time, and I hope that you can consider my suggestion. Sincerely, (Your Name) Before you turn in your letter, make sure it meets or exceeds the following assessment criteria: Offer three detailed reasons why financial literacy is important. Include at least one accurate fact (taken from the readings, notes, or presentation) that effectively supports one of your claims regarding the importance of financial literacy. Offer a realistic and/or appropriate solution to improve the financial literacy levels of our youth. Use the correct letter-writing format (refer to the note-taking frame). Ensure that your letter is neat and legible, and uses proper spelling and grammar.

24 Lesson 3 Financial Intermediaries Student Resources Resource Description Student Resource 3.1 Reading: Financial Intermediaries Student Resource 3.2 Directions: Brochure Student Resource 3.3 Peer Review: Financial Intermediaries Gallery Walk Student Resource 3.4 Reading: Importance of Capital to Financial Intermediaries

25 Lesson 3 Financial Intermediaries Student Resource 3.1 Reading: Financial Intermediaries Directions: Read the following resource individually. As you read, highlight any new words and ideas and underline two important sentences or phrases that will help you remember the meaning of the new term. When you have completed the reading, reconvene with your original partner and share your responses. Your friend has been getting into a lot of trouble lately, and he has just received some more bad news. He lost his science textbook and the replacement fee is $100. He has turned to you for some help. After some thought, you decide to capitalize on your friend s misfortune and ask your uncle if you can borrow $100. Your uncle agrees to lend you money but explains that he will charge you 5% interest. As expected, your friend asks if he can borrow some money from you and in exchange he agrees to pay you 10% interest on the amount borrowed. The following week your friend lives up to his promise and pays you back $110 and in turn you pay your uncle back $105. With a smile on your face, you realize that you have just acted as a financial intermediary. You were the bank and your friend was the borrower. You have made an easy $5 profit by managing the flow of cash between your relative and friend. The following day you receive a $50 check from your great-grandmother for your outstanding report card. You decide that you need to do something with it other than keep it stashed under your mattress. You make a decision to visit your local savings and loan bank. Once there you open an account and deposit your money. Unbeknown to you, you have just made your neighbor Mrs. Lopez extremely happy. The local savings and loan has taken your money and aggregated it with 5,000 other people who have made deposits and has now loaned Mrs. Lopez the money that she needs to purchase her first home! Financial Intermediary The term financial intermediary refers to an institution or even an individual who acts as the middleman between those who want to lend money and those who want to borrow it. Financial intermediaries make their profit from the difference between the interest paid and the interest earned in the transaction. The borrower who borrows money from the financial intermediary pays a higher amount of interest than that received by the actual lender. Although many of the financial intermediaries listed below provide basic banking needs, they also specialize in specific services and products. Knowing this difference can help you make informed and educated decisions that can best serve your financial needs. Common Financial Intermediaries and Their Functions As you have learned, commercial banks are one of the most common financial institutions. Banks take in deposits from people who want to save their money or keep it in a safe place, and use them to make loans to people who want to borrow. Some of the most common banking services include personal and business checking accounts, personal and business lending services, savings and investment accounts, credit card services, and currency exchange services (this is when you exchange one currency for another, for example 100 US dollars for the equivalent in euros or Canadian dollars). Banks offer ATM machines and a variety of online services to their customers. Some banks also offer a variety of nontraditional services, such as insurance, financial planning, and much more. Commercial bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC). Thrifts are typically savings institutions and include savings and loans and savings banks. You might recall that they are called thrifts because they originally offered only savings accounts (and thrifty people are good at saving money). They specialize in saving accounts and real estate financing. Most

26 Lesson 3 Financial Intermediaries savings and loans institutions are known for specializing in home mortgages; however, many thrifts are diversifying, or branching out and participating in traditional banking services as well. Thrift accounts are insured by the FDIC. Credit unions are financial institutions formed by an organized group of people with a common bond such as the one that exists between teachers, government employees, or even people residing in a particular geographical location. Credit unions are not-for-profit cooperatives that are owned by their members. Because of this, credit unions can usually offer lower loan rates and higher savings rates. Although credit unions offer many of the same financial services as banks, they are known for specializing in consumer deposit and loan services. Insurance companies are designed to protect individuals and businesses from risks. By buying an insurance policy, an individual or a business can partially or completely protect itself from monetary damages resulting from fire, theft, lawsuits, or various other risks. They are considered financial intermediaries because they invest the money they collect as premiums (similar to how banks invest the money you deposit into your account), and because they sell investment products such as annuities. Annuities are a type of investment where you put down a lump sum of money in exchange for a series of equal payments over time. These payments often include interest on the original sum plus income from investments. People purchase annuities to provide retirement income and to shift the responsibility for investing to the investment company, in this case an insurance company. A mutual fund is a professionally managed investment company that pools money from investors and invests the money into stocks, bonds, or other securities. Stocks are shares of ownership in a company that companies sell in order to raise money. Individuals and organizations buy and sell stock with the goal of making a profit. A bond is a loan an investor makes to a government or corporation for a specified amount of time for the purpose of raising money for the government or corporation. In return, the investor is repaid the initial investment plus interest. When you buy bonds, you are not purchasing a piece of ownership as you do with stocks. Mutual funds allow people with small amounts of money to diversify their investments (in other words, reduce their risk by not putting all their money into one investment) and make it easier for people to invest without spending a lot of money. Mutual funds are not guaranteed by the FDIC and carry some level of risk. In other words, you may lose some or all of the money you invest. Pension funds are workplace plans designed to provide income for employees when they retire. They function by gathering periodic payments from employers, and sometimes workers; they then invest these payments so that they can accumulate to an amount that would provide enough money at retirement. Pension funds control large amounts of capital and represent the largest institutional investors in many nations. TIAA-CREF is an example of one such pension fund. As you see, the financial system in the United States is made up of many different types of financial institutions that help to manage the flow of money between the savers and the spenders. All financial intermediaries have their own role in society, and the health of these institutions is important to the overall health of the economy. Financial intermediaries ultimately create money in the economy by making loans to others who can then use it to buy homes, support businesses, send children to college, plan for retirement, and much more.

27 Lesson 3 Financial Intermediaries Student Resource 3.2 Directions: Brochure Student Names: Date: Businesses often use brochures to educate their audience about a specific subject, and people usually pick up brochures because they are interested in receiving a quick overview on a topic. For this assignment, your group is required to create an informational brochure on a particular type of financial intermediary. Your goal is to inform your fellow classmates (your audience) about your particular financial intermediary and the function and services that it provides. Remember that with brochures, you don t have room for long responses. With this in mind, your group must synthesize and evaluate the information that you gather and develop content that is presented in an organized and effective manner. It will be up to you to educate your classmates on the most important aspects of your particular institution. Before you begin, make sure to read through the directions, review the assessment criteria, and refer to the example provided by your teacher to help guide you. Your group may choose one of the following intermediaries to research: Commercial banks Credit unions Thrifts (savings and loans or savings banks) Insurance companies Mutual funds Pension funds Once your group has chosen which financial intermediary to research, take a few minutes and write down what you already know about your financial institution. We know

28 Lesson 3 Financial Intermediaries Research The content of your brochure will be developed around the following five key questions. Your group must answer each question thoroughly and then have them approved by your teacher. Once this step has been completed, your group may begin the construction of the brochure. What is the main function of the financial intermediary? What types of services and products does it offer? How does it benefit society? (Think in terms of the individual, family, business, and overall economy.) What makes it unique? Other: (List any interesting facts and/or list specific branch names and locations in your area.)

29 Lesson 3 Financial Intermediaries Construction Your group will be constructing a trifold brochure. A trifold brochure is created with a standard 8.5 x 11 piece of paper, which is folded twice, creating six panels in which to place information. Of the six panels, four will be used for content, while the front panel will be reserved for your cover and the back panel will include information such as student names, date, class, and teacher. Before beginning your brochure, keep in mind that the following elements will be assessed. The brochure must contain: A title panel (front cover) that effectively introduces and creates interest in the topic (interest could be generated from a catchy headline, interesting graphic, etc.; it should make your reader want to know more) Four information panels (inside) that include appropriate headings outlining the content with short descriptive paragraphs, lists, graphs, or charts Content that is informative and accurate and effectively answers the five key questions A balanced combination of text and graphics, graphs, or charts that is organized in a neat and visually appealing manner Proper spelling and grammar

30 Lesson 3 Financial Intermediaries Student Resource 3.3 Peer Review: Financial Intermediaries Gallery Walk Student Name: Date: Reflecting On Other Groups Brochures Directions: Review your classmates brochures on specific financial intermediaries. Be sure to note the particular intermediary of focus and one thing you liked or learned from another group s work. Financial Intermediary: One thing I liked or learned: Financial Intermediary: One thing I liked or learned: Financial Intermediary: One thing I liked or learned: Financial Intermediary: One thing I liked or learned: Financial Intermediary: One thing I liked or learned: Financial Intermediary: One thing I liked or learned: Financial Intermediary: One thing I liked or learned:

31 Lesson 3 Financial Intermediaries Student Resource 3.4 Reading: Importance of Capital to Financial Intermediaries Let s say you re looking to start your own lawn-mowing business. Take a moment to think about the type of capital that you ll need. It s likely you ll need a few things, most importantly a lawn mower and gasoline. Depending on your business you may also want to purchase some garden supplies: lawn seed, fertilizer, rakes, hedgers, and shovels. Capital is a business s cash or property. Capital is something that touches everyone, from individuals to small businesses to financial institutions to government. Capital is necessary to start and run a business. When a business has enough capital it can purchase items to produce more capital. Without capital, businesses cannot build inventory or purchase new materials. The fact of the matter is that all firms, and all individuals, need capital. Capital and Financial Intermediaries One of the roles that financial intermediaries perform is to facilitate the transfer of capital from those who have excess to those who need it. If a financial institution is struggling, the money it needs to support itself and the economy becomes unavailable. The result is that consumers have trouble getting financing for their activities and then the economy slows down and purchasing stops. When consumers stop purchasing, businesses don t have that money coming in, and as a consequence some businesses fold and others might lay off workers, resulting in more of an economic slowdown. Without financing, people cannot purchase homes or cars or acquire loans for college. Small businesses cannot get financed and existing businesses cannot grow. All of this has a profound effect on the overall health of the economy which was demonstrated during the financial crisis of One of the most profound challenges to banking is raising and maintaining sufficient capital. Because of this, there has always been a fair amount of debate between banks and regulators over how much capital banks should be required to hold. With this in mind, governments attempt to reduce risks associated with financial intermediaries by regulating the levels of capital that banks maintain. In other words, the government places regulations, or rules and laws, that dictate how much capital banks should hold. With government regulations in place, consumers have a tendency to trust that their money will be safe and borrowing practices can continue. In terms of banking regulations, the Federal Deposit Insurance Corporation (FDIC) is one of the primary regulators. The FDIC works independently of the federal government and was created in 1933 by Congress as a result of the bank failures of the 1920s and 1930s. The FDIC now monitors and regulates banks and ensures that a depositor s money is safe. The FDIC is needed by the government to ensure as well as restore consumer confidence in the banking system. This element of trust is crucial to a bank s and a nation s economic stability.

32 Lesson 4 Wealth, Income, and Cash Flow Student Resources Resource Description Student Resource 4.1 Reading: Wealth, Income, and Cash Flow Student Resource 4.2 Reading: The Function of Money Student Resource 4.3 Note-Taking Guide: Three-Column Graphic Organizer Student Resource 4.4 Reading: Money Sources and Uses Student Resource 4.5 Assignment Sheet: Reflecting on Money

33 Lesson 4 Wealth, Income, and Cash Flow Student Resource 4.1 Reading: Wealth, Income, and Cash Flow Alvaro and Sasha have been struggling with their finances lately. Every month they seem to fall short on cash and have resorted to using their credit cards for necessities such as food and transportation costs. In the last year they have racked up an enormous amount of debt. Although they both are earning more money than they ever have before, they can t seem to figure out what is wrong. All of their friends think that they are wealthy, but they sure don t feel like it. In desperation, Alvaro decides to call upon his Aunt Arcelia, a financial planner, for help. Arcelia begins by clarifying the term wealth. She points out that people can make a large annual income and have little wealth, just as individuals can earn a low income and still have some wealth. She explains that the term wealth refers to the value of everything people own their assets minus what they owe their liabilities. Net worth, or wealth, is often defined as the items of value that are left over after all of the bills are paid. Arcelia then points out that, while Alvaro and Sasha may be wealthy in other ways, they unfortunately have no financial wealth right now. Arcelia continues by explaining that they have a cash flow problem. She describes cash flow as the available money flowing into and out of a business or a household. Cash flow is essential to the health of any business and/or household, and it is apparent that Alvaro and Sasha have a major cash flow problem! All of the cash that they have coming in does not equal the amount of cash that is going out. This fact is putting them in a position where they run out of money and go into a little more debt each month. She explains that the first step the couple must take to manage their finances is to understand the inflows and outflows of their money. Understanding where your cash is coming from and going to is critical to good money management. She tells them that as soon as they understand their cash flow problem they can look at some ways to fix their financial issues. Arcelia explains that they need to either increase their income or cut some of their spending. Cash flows out of a home through general living expenses like mortgage, rent, food, utilities, insurance taxes, retirement, and, of course, purchases, and cash is generated through three types of income. Any money that they make will fall into these three income categories. Earned income is the most common way to earn money and refers to any income that is made by working. It is your salary made from working a job, owning a business, or any other activity that pays based on your time and effort spent completing a task. Earned income allows you to save up cash to generate the other two types of income. Portfolio income is any income that is made by actively managing different types of investments. Buying and selling real estate, stocks, bonds, mutual funds, saving accounts, money market funds, and even some collectibles like antiques or cars and then selling them for a higher price can result in portfolio income. The stock market is one of the most common ways to actively manage your portfolio income. Passive income includes money that you get from items that you have purchased or created. If you buy a house and then rent it out for more money than the mortgage payments, the money or profit that you make is passive income. You can also earn passive income by selling or creating an idea or a product, like writing a book and then earning money or royalties off of each sale. Arcelia explains that Alvaro and Sasha should begin by cutting their spending and looking at ways to focus on making a bit more earned income. Once they are earning more and spending less they can focus on creating some portfolio and passive income for themselves. With this plan in place, coupled with perseverance, patience, and motivation, they will be on the road to achieving wealth.

34 Lesson 4 Wealth, Income, and Cash Flow Student Resource 4.2 Reading: The Function of Money Money flows in and out of our hands on a daily basis in a variety of different ways. But what defines money and what is its true function? Money can be categorized as having three general functions: as a medium of exchange, a unit of account, and a store of value.

35 Lesson 4 Wealth, Income, and Cash Flow Money can be characterized in the following ways: Durable: Money should be able to last a long time and should be able to withstand many exchanges and transactions from person to person and business to business. Portable: Money should be easy to carry around. Consumers must be able to transport their money around from shop to shop with ease. Scarce: Money needs to be scarce enough to be valuable. Money needs to retain its value. Divisible: Money needs to be able to be divided into small units, meaning that consumers must be able to get their change after making a purchase.

36 Lesson 4 Wealth, Income, and Cash Flow Bartering is a type of trade in which goods and/or services are exchanged for other goods and/or services. Bartering dates back to over 100,000 years ago. Stones, shells, livestock, and tea leaves have all been used as money during one time or another. Before money was created, people found ways to obtain the goods and services that they needed through bartering. After a while bartering proved to be inefficient, inconvenient, and unsuccessful, and the evolution of money began. From shells to stones, from livestock to tea leaves, money gradually evolved into what it is today.

37 Lesson 4 Wealth, Income, and Cash Flow The most important job of money is to serve as a medium of exchange. Money makes trading easier by replacing the barter system with a system that involves currency, coins, or checks. Money makes it faster and easier to buy and sell things. As a medium of exchange, everyone must have faith that everyone else will accept it for their goods and services. Money also encourages specialization and efficiency. People who are really good at making a product can just sell their product for cash in order to get what they need rather than try to make other products that they are not very efficient at making. In this way, individuals can specialize in one area and increase productivity with that item.

38 Lesson 4 Wealth, Income, and Cash Flow Money is a store of value. Something that is stored is put away to be used later. It s valuable now, and it will be valuable later too. Money can store value that you use in the future. As a store of value, money can be held until an individual chooses to exchange it for a good or service. Money makes it easier for people to save and then make purchases in the future.

39 Lesson 4 Wealth, Income, and Cash Flow Money serves as a way to measure and compare the value of specific goods and services. When comparing prices, individuals can compare values of goods and services and determine if one good is a better buy than another. In other words, money provides a common unit for measuring the value of every good and service. Without money, the worth of an item would have to be valued in terms of other goods and services.

40 Lesson 4 Wealth, Income, and Cash Flow With the evolution of money came an ease of purchasing goods and services. In some respects, life became more convenient and efficient. Unlike livestock, shells, fur, and stones, money was easy to transport, lasted a long time, was widely accepted, and was easily converted into smaller units. However, money can also be complex and confusing by nature. It is very important to manage your money effectively, to make responsible spending choices, and to be deliberate about your financial goals for the future.

41 Lesson 4 Wealth, Income, and Cash Flow Student Resource 4.3 Note-Taking Guide: Three-Column Graphic Organizer Student Name: Date: Directions: Complete the following three-column organizer as you read Student Resource 4.4, Reading: Money Sources and Uses. Before List three things you know about money and its sources and uses before reading. During Write down new information you learned during the reading about the sources and uses of money. After Write two or three questions that you still have about the reading.

42 Lesson 4 Wealth, Income, and Cash Flow Student Resource 4.4 Reading: Money Sources and Uses Directions: Individually read the following document. While you are reading, use the three-column graphic organizer (Student Resource 4.3) to help you organize your thoughts. Once you have completed both tasks, share your thoughts from the note-taking guide with your partner. Money and Its Sources Think of all the money that you have received in the past month. Where did it come from? Did your parents give it to you? Did you earn it by working at a part-time job? Did you receive it as a gift? Did you work around the house and receive an allowance? Or, maybe you earn your money from a variety of sources. Whatever the source of your money, it is important to realize that there are many different ways for a young adult to earn money. Just as you receive money in different ways, households rely on various sources of income. Some households rely solely on earned income, where the only source of money is from an individual s job. Other households get their money from a combination of passive, portfolio, and earned income. For example, a household can receive income from a job, a rental property, and dividends from stocks. All three of these sources flow into a household as forms of income. Income can be generated through a person s wages, stocks, bonds, mutual funds, rental income, social security income, public assistance, gifts, retirement income, and child support, just to name a few. There are also ways to earn income seasonally. Landscaping, snow and ice removal, and picking up a retail job to help with holiday sales are examples of seasonal jobs. All of these represent some of the sources of possible personal and household income. Money and Its Uses Now think about all the money that you have spent in the past month. You probably did a lot of different things with it. Did you save it? Did you spend it on clothes or entertainment? Did you give it away or donate it to a church or a charity? Did you spend it on your family by purchasing groceries or other necessities? Whatever you did with your money, it is important to realize that uses for money can generally be placed into three different categories: spending, saving, and giving. Households use money in various ways as well. According to the US Department of Labor Bureau of Labor Statistics, households spend their money in eight major categories. These categories are food, housing, apparel and services, transportation, health care, entertainment, personal insurance, and pensions. Housing, transportation, and food top the list. What does your household spend most of its money on? There s really not a formula for how an individual or a household should use its money, but one thing remains true: saving a portion of your income is important. It is always a good idea for an individual to save a portion of the money he or she makes each month, or, in other words, pay yourself first! Realizing the importance of saving and following through with this concept will help individuals and households to better manage their money for the future. Remember, knowing where your money is going and how it is spent is just as important as realizing where your money is coming from.

43 Lesson 4 Wealth, Income, and Cash Flow Student Resource 4.5 Assignment Sheet: Reflecting on Money Student Name: Date: Directions: For this assignment you will write a one-page reflective essay in which you apply some of the concepts learned in the lesson to your own lives. You will be given a selection of topics to choose from and you must choose one topic that best applies to you. Remember to choose a topic that you have something to say about! Make sure to thoroughly read the assignment directions and example before you begin writing, and ask questions if there s something you don t understand. A reflective essay lets writers express how they feel about a particular issue. In other words, this essay will allow you to show how you feel about what you ve learned. When writing a reflective essay you must: Think about what you have learned. Describe in detail what you know about the topic. Make some sort of conclusion about how it relates to you personally. Be careful not to just list your opinions about the issue but to make interpretations and evaluations about how the issue or topic affects your life. Choose one of the following topics to write about. If you feel strongly about another issue that pertains to the lesson, you must get approval from your teacher. Describe you own personal spending habits. In what ways do your own personal spending habits affect your household? What is your main source of income? What steps could you personally take to improve your income? In your opinion, what is the function of money? Have your views of money changed from the beginning of the lesson to now? What does it mean to be wealthy? What steps should people take if they want to have wealth? To Begin Before you begin writing your essay, respond to the following questions. Doing a thorough job will help you to organize your thoughts for your essay. What topic did you choose to write about? Why did you choose your topic?

44 Lesson 4 Wealth, Income, and Cash Flow What do you know about this topic? Cite evidence, data, personal observations, and experience. Why is knowing about or being aware of this topic important? In what ways does this topic apply to your life? How will this new learning affect your financial decisions in the future? Assessment Criteria As you begin writing your essay, make sure that: Your essay clearly explains the topic. Your essay shows evidence of understanding regarding the topic. Your essay includes accurate details and knowledge and uses relevant examples to support your claims. Your essay maintains a clear and consistent viewpoint throughout. Your essay shows adequate insight into the topic and reflects on the significance of learning upon your own life. Your essay is neat, legible, and presentable and uses proper grammar and spelling. Example The following is an example of a reflective essay. Although the essay topic is not listed as one of the options, the essay still meets all of the assessment criteria for the assignment.

45 Lesson 4 Wealth, Income, and Cash Flow Topic: What steps could you take to manage your cash flow better? It happened again. Ten days away from the end of the month and my husband Alvaro and I are out of money. Once again we have resorted to using our credit cards to purchase groceries, pay our cell phone bill, and get gasoline. How does it happen? Where does our money go? We have finally made a resolution to manage our money responsibly. The first step that we must take is to understand the inflows and outflows of our money. Understanding the cash flow, or the available money that is flowing into and out of our home, is important to grasp before we can even begin to make any financial changes. To start we must identify our sources of income. Where does our money come from? From our monthly earned income to Alvaro s yearly bonuses and even the monetary gifts that we receive, how much money do we actually make each month? We have made a promise to one another that next Friday we will have a household financial meeting and write down our yearly, monthly, and weekly inflows. Once we understand the sources of our cash inflow and the total cash inflow we actually have to spend, we will have taken the first step to understanding our cash flow problem. Secondly, before we can begin to cut back on our spending, it is imperative that we understand exactly what we are spending our money on, or our total cash outflows. Where is our money going? What percentage of our income is spent on housing and utilities? How much are we spending on transportation costs? How much dining out do we actually do? How much money do we spend on birthday gifts for our friends and family? These are just a few of the questions that we must investigate and resolve in order to make any other financial decisions. Once we understand where our money comes from (inflows) and how much we actually have to spend (outflows), we can create a budget that can allow us to manage our money more effectively. No longer will we resort to using credit cards every month for basic living expenditures. In fact, hopefully we can toss out our credit cards altogether! The credit cards give us temporary access to money, but it is not income, it is a loan. These credit card loans add up quickly and become our future cash outflows. We know that we will never be able to match our cash inflows to our outflows if we keep borrowing money against our credit cards. It is unfortunate that we have put ourselves in such a terrible financial situation. We have made irresponsible purchases and have lived beyond our means and the result is debt, high interest rates, and material possessions that are worth one third of what we paid for them in the first place. But, there is a silver lining. This new financial awareness has put us in a place where hopefully within the next few years we will be in a much better financial situation one where we understand the power of money and consumerism and choose not to spend more than we have; one where we choose to save and invest in our future; one where we hope to have more than just possessions but instead a newfound sense of financial freedom!

46 Lesson 5 Personal Budgeting Student Resources Resource Description Student Resource 5.1 Reading: SMART Financial Goals Student Resource 5.2 Writing Activity: SMART Goals Student Resource 5.3 Note-Taking Guide: Budgeting Student Resource 5.4 Reading: Budgeting Student Resource 5.5 Group Activity: Monthly Budget Example Student Resource 5.6 Directions: Budget Analysis Summary

47 Lesson 5 Personal Budgeting Student Resource 5.1 Reading: SMART Financial Goals SMART Goals Everyone makes goals all the time. Whether the goals are short-term and easy to accomplish, like getting to school on time, or long-term and challenging, like getting an A in a difficult subject or saving enough money to buy a car, our goals help us organize our lives. Some goals are barely formed thoughts I d better run or I ll miss the bus and others are formal, well-thought-out plans that, if accomplished, will make us and those we care about happier. For example, most of us want to have enough money to not have to worry about how we re going to pay for the things we need. This is a goal. But what can you do to achieve it? Think back to the last goal that you created. Maybe it was to get better grades, or eat nutritious meals, or save enough money to purchase a car. Regardless of the goal, the question is, was it ever achieved? Was it specific enough? Could you measure your success? Was it something that you could truly attain? Did you give yourself a realistic time frame? Finally, was it SMART? What is a SMART goal? The SMART strategy is a popular method used by individuals and even companies to help provide a framework for how a goal should be created. SMART goals must be: Specific: The goals are clear and detailed and explain what you are going to accomplish and how. For example, consider the following goals: My goal is to save a lot of money. My goal is to save $100 each month from my earnings for the next 12 months so I can purchase a new laptop computer. Obviously the second goal is more specific. It clearly defines what you are going to do, how you are going to do it, when you are going to do it, and why. Measurable: Progress that you can measure helps you to stay on track and reach your goal. Measurable goals allow you to gauge your progress as you work towards achievement. Goals that are not measurable are difficult to accomplish. For example, saving a lot of money is not measurable, but saving $100 each month is definitely measurable. Attainable: Goals that are attainable should be challenging but not too easy either. Attainable goals should also not be so far off from your own personal values that you can t accomplish them. Realistic: Goals that make sense for who you are and what you are doing are considered realistic. For example, if you don t have a steady job and just babysit on occasion to make a little bit of extra spending money, then saving $100 each month may not be a realistic goal for you. However, saving 20% of what you earn from each babysitting job may be realistic. Time-bound: You must have a time frame for your goal. A time frame gives you a clear target to work towards. Without a time limit, your goal is indefinite and you could lose your motivation and focus. Placing a time frame on your goal also allows you to review your progress as time passes. Factors That Influence Goal Setting There are many factors that influence your goal setting. Your personal values along with your family, age, habits, hobbies, and culture all contribute to the types of goals that you will create. Also, your peers, along with peer pressure, all can affect the type of goals that you will want. For example, if you are someone who values what your friends think and all of your friends have smart phones except for you, obtaining a smart phone would probably be one of your priorities.

48 Lesson 5 Personal Budgeting Obviously, economic factors can influence your goal setting as well. Consumer prices, your own money supply, the demand for goods and services, and even the unemployment rate are all economic factors that can affect how and when you achieve your goals. Financial goals are similar to other goals that you have created in that they represent a result that you are hoping to achieve. The difference is that financial goals state what you want to accomplish with your money. Creating financial goals forces you into adhering to a financial plan and/or a budget because you realize that the money you save now will help you to achieve your goal for the future. Essentially, setting goals helps you to get what you want!

49 Lesson 5 Personal Budgeting Student Resource 5.2 Writing Activity: SMART Goals Student Name: Date: Directions: Abraham Lincoln once said, A goal properly set is halfway reached. With this in mind, think back to the three financial goals that you already wrote. Begin by writing down the basic goals and then transform them using the SMART strategy. Basic goal: Next, transform your goal into a SMART goal by rewriting it using the following questions to guide you. Specific: Include who, what, when, where, and why, as applicable. Measurable: How will you measure your progress? Attainable: Can it really happen? What steps are needed to complete it? Realistic: What knowledge, resources, skills, people, and/or abilities are needed to achieve this goal? Time-bound: What type of deadline did you attach to it? SMART goal:

50 Lesson 5 Personal Budgeting Basic goal: Next, transform your goal into a SMART goal by rewriting it using the following questions to guide you. Specific: Include who, what, when, where, and why, as applicable. Measurable: How will you measure your progress? Attainable: Can it really happen? What steps are needed to complete it? Realistic: What knowledge, resources, skills, people, and/or abilities are needed to achieve this goal? Time-bound: What type of deadline did you attach to it? SMART goal: Basic goal: Next, transform your goal into a SMART goal by rewriting it using the following questions to guide you. Specific: Include who, what, when, where, and why, as applicable. Measurable: How will you measure your progress? Attainable: Can it really happen? What steps are needed to complete it? Realistic: What knowledge, resources, skills, people, and/or abilities are needed to achieve this goal? Time-bound: What type of deadline did you attach to it? SMART goal:

51 Lesson 5 Personal Budgeting Student Resource 5.3 Note-Taking Guide: Budgeting Student Name: Date: Directions: Review the terms below and take your best guess at what they might mean. After you read Student Resource 5.4, Reading: Budgeting, add any new information that helps to clarify the definitions. These terms appear in bold in the reading. Term Definition Budget My best guess: What I learned from the reading: Inflows My best guess: What I learned from the reading: Outflows My best guess: What I learned from the reading: Fixed expenses My best guess: What I learned from the reading:

52 Lesson 5 Personal Budgeting Term Definition Variable expenses My best guess: What I learned from the reading: Discretionary income My best guess: What I learned from the reading: Discretionary expenses My best guess: What I learned from the reading: Net savings My best guess: What I learned from the reading: Deficit My best guess: What I learned from the reading:

53 Lesson 5 Personal Budgeting Term Definition Financial planners My best guess: What I learned from the reading: Insolvent My best guess: What I learned from the reading:

54 Lesson 5 Personal Budgeting Student Resource 5.4 Reading: Budgeting How do you decide when to spend money and when to save? Maybe you skip dessert when you re out to dinner with your friends. Maybe you eat at home rather than at a restaurant in order to save money to buy a computer. If you want that computer, how do you know how much to save? How do you know where to cut back? What Is a Budget? Making a budget will give you a systematic way to answer those questions. Simply put, a budget is a record of how much you earn, spend, and save and a plan for your future earnings and expenses. Not only will a budget help you set your financial goals but it will also help you make sure you avoid financial problems. You can begin budgeting by tracking and recording two major pieces of information: your inflows and outflows. Your inflows include your income, the amount of money you earn after taxes (which can also include tips and overtime pay), and any other sources of income that you may have. Your expenses can also be referred to as your outflows and include food, rent, entertainment, and anything else you might spend money on. Each month, some of your expenses will stay the same and some will vary. For example, rent, insurance, and loan repayments are fixed expenses, also known as fixed costs, because they are the same each month. If you spent $75 on auto insurance last month, you ll spend the same amount next month, even if you drove 700 miles last month and only plan to drive 100 miles this month. Since fixed expenses stay the same each month, you can plan for them easily in your budget. In contrast, variable expenses, or variable costs, change from month to month depending on how little or how much of something you use. While your auto insurance will stay the same regardless of how much you drive, you will spend more money on gas and car maintenance if you drive more. You can estimate next month s variable expenses by looking at your variable expenses from the previous few months. Variable expenses also include those expenses that only happen a few months a year, such as holiday gifts or back-to-school clothes. After your fixed expenses and your essential living expenses have been paid, the money you have left over is your discretionary income. And what about the things that you want to buy but don t need? These are called discretionary expenses, or discretionary costs, because these are nonessential purchases that you make for fun. Discretionary expenses can range from major purchases such as a computer to smaller purchases such as a meal at a restaurant instead of at home. Your discretionary expenses can fluctuate from month to month, both in terms of how much you spend and in terms of what you decide to buy. Once you know your income and your expenses, you can calculate your net savings at the end of each month. For instance, let s say a family earns $2,800 in income and spends $2,500 in outflows for a net savings of $300 a month. On the other hand, if they spend more than they make, they would have a monthly deficit. How Can You Use This Information? As you can see from the information above, by saving $300 per month, the family can save about $3,600 a year, which can grow even more when deposited in an interest-bearing bank account! If they decide they want to save $4,800 next year to put toward a college savings account, they can look to their budget and make adjustments accordingly. First, they can calculate that to save $1,200 more a year, they ll want to save $100 a month. From there, they can look at a variety of options. Maybe they could cut their fixed expenses by switching car

55 Lesson 5 Personal Budgeting insurance carriers to save $25 a month. They could save another $75 a month by brewing coffee at home each morning instead of buying coffee at a local cafe. That s one of the powers of budgeting. Saving $1,000 sounds hard, but by making a budget and tracking expenses, it is easy to see how small purchases add up over time. Sticking to Your Budget To stay on track, financial planners (professionals who examine the finances of their clients and suggest steps to reach their financial goals), recommend that you record your expenses and income regularly on a computer or in a notebook. Be careful to note any regular expenses, such as a cup of coffee that costs $2 every morning. Over the course of a year, that cup of coffee will add up to more than $700! When tracking your expenses, carefully note whether your expenses are fixed, variable, or discretionary. Be realistic when listing these expenses, particularly with your discretionary spending. Financial planners often recommend rewarding yourself by making a discretionary purchase at least once a week. Doing this will help you avoid spending too much at one time and will make sure you enjoy your money. Financial planners also recommend that you save at least 10% of your income each month. Planning your budget this way will help ensure that you don t run into financial problems if you have unexpected expenses such as car repairs, medical problems, or other unplanned expenses. Good budgeting will help you make sure you can buy what you need and at least some of what you want. Without a budget, it s easy to lose track of your spending and run a monthly deficit. Over time, spending more than you make will make it impossible to purchase major items such as a car or a home. Worse yet, you run the risk of becoming insolvent, and you may find yourself unable to pay your debts as they fall due.

56 Lesson 5 Personal Budgeting Student Resource 5.5 Group Activity: Monthly Budget Example Student Name: Date: Directions: Work with your group to assess the financial situation given to you on the scenario card. Use the following budget table in conjunction with your scenario card to complete the assignment. Remember, depending upon the information given to you, not all of the columns or rows will necessarily need to be filled in. Although you should work collaboratively with your group, each member will need to complete the resource individually, as you will be referring back to it later in the lesson. Sources of Income Budget Amount Actual Amount Difference Salary Interest income Investment income Other: Income subtotal: Fixed Expenses Mortgage or rent Taxes Insurance Car payments Auto insurance Medical insurance (dental and vision) Child support Loans

57 Lesson 5 Personal Budgeting Sources of Income Budget Amount Actual Amount Difference Other: Fixed expenses subtotal: Savings Emergency fund Savings Other: Savings subtotal: Variable Expenses Budget Amount Actual Amount Difference Utilities (water, sewer, gas, electricity) Telephone (cell and land) Transportation costs (gas, maintenance, tolls, bus, etc.) Groceries Day care Other: Variable expenses subtotal: Discretionary Expenses Entertainment

58 Lesson 5 Personal Budgeting Variable Expenses Budget Amount Actual Amount Difference Dining out Education Pet (food, grooming, boarding, vet) Gifts and donations Clothing Beauty/hygiene (toiletries, haircuts, manicures, etc.) Other: Discretionary expenses subtotal: Total expenses: (add all subtotals) Your balance: (subtract all expenses from income)

59 Lesson 5 Personal Budgeting Student Resource 5.6 Directions: Budget Analysis Summary Student Name: Date: Directions: Imagine that you are a financial planner and that you have just been asked by the individual(s) described in your scenario to give an overview of their financial situation. Use the information that you filled out in Student Resource 5.5, Group Activity: Monthly Budget Example, along with the scenario card to compose a summary that analyzes their financial situation. Be sure to read through the assessment criteria and ask the teacher any questions you have before you start writing. Before You Begin 1. Jot down three facts, opinions, and observations that you remember about your specific scenario and/or budget outline Also write down any financial goals mentioned in your scenario and evaluate them against the SMART criteria (specific, measurable, attainable, realistic, and time-bound). Improve the language of the goals so that they meet the SMART standards New observation: Next, reconvene with your original group. Share your responses with one another and add one new observation to your list. Which of these observations or financial goals do you think you will or could incorporate into your budget analysis summary? Assessment Criteria Your budget analysis summary must include the following: A general and accurate overview of the financial information as presented on the scenario card Two realistic actions that the individual or family could do to improve their financial health (for example, cut down on discretionary expenses, create a college fund, etc.)

60 Lesson 5 Personal Budgeting A specific and realistic description of how the action can be achieved (for example, if you suggest that an individual should create a college fund, you must also describe the steps that could be taken to achieve this) An objective and professional voice throughout Must be neat and legible and use proper spelling and grammar Example George and Maria, a newly married couple, have just decided to combine their finances. They both have steady full-time jobs and are looking to purchase their own home within the next five years. George manages a ski shop and Maria is an X-ray technician at the local community hospital. George s takehome pay is $2,200 per month and Maria s monthly take-home pay averages between $2,300 and $2,800, depending on whether or not she works overtime. Their credit card debt totals $3,000, against which they only pay the minimum balance of $69 per month, and their fixed and variable expenses are pretty typical: car payment, insurance, rent, food, transportation costs, utilities, and so on. One of the major financial issues facing George and Maria is that they have not been able to save any money. Because they don t have any money in their savings account, the thought of purchasing a home within the next five years does not seem realistic. George and Maria need to do two things before they can begin thinking of purchasing a home. First, they must take control of their spending, particularly their discretionary spending. In fact, George and Maria spend over $400 a month on average eating out. They can easily cut this expense down by cooking at home more often. George and Maria also need to pay off their credit card debt. By only paying the minimum balance each month they will never pay it off! Instead, they should use the money they save by not dining out and pay off their high-interest debt. The combination of these two small actions, not dining out and paying off their credit card, will clear up close to $500 per month that they could place in a savings account. This money could then serve as a down payment for their home in the future, which should be motivation enough to pass up that expensive meal at their favorite restaurant!

61 Lesson 6 Banking Student Resources Resource Description Student Resource 6.1 Reading: Choosing a Bank Student Resource 6.2 Assignment: Banking Poster Student Resource 6.3 Graphic Organizer: Investigating Banking Services Student Resource 6.4 Reflection and Peer Review: Banking Poster Student Resource 6.5 Example: Bank Statement Student Resource 6.6 Independent Practice: Check Register and Reconciliation Form

62 Lesson 6 Banking Student Resource 6.1 Reading: Choosing a Bank After working all summer, Ruby had managed to save nearly $400. Her best friend Tia had recently opened her own bank account and had been telling Ruby all about the cool services that it provided her. Tia had her own ATM card that she used almost everywhere. She could write her own checks, and she even had a special savings account for teens. Tia could also access her account online, which allowed her to double-check her balance as well as her spending and deposit transactions. Ruby had always felt comfortable with her own savings method of stashing her money in a box in her dresser drawer. She could pull from it whenever she wanted. She liked the feeling of being in control of her own cash. However, with all of the positive things that Tia was saying about her own bank account, Ruby decided that she should research opening up an account for herself. With nearly $400 stashed in her drawer, now seemed like the perfect time to do it. Ruby knew that Tia was very happy with the services that her bank offered, but she wondered if it was the right bank for her. Ruby s parents had been banking at the local credit union and seemed content there. Her uncle completed all of his banking needs online. And her older sister held an account at a commercial bank that had ATMs all over town. How would she know what bank to choose? How would she know what types of accounts she should open? All of these questions and more flooded her mind. Firms That Offer Banking Services There are many different options available to someone who is looking to open up a bank account. You may remember that commercial banks, credit unions, and savings banks/thrifts offer banking services. But so do online-only banks, mutual fund companies, and even investment and mortgage companies. Originally, banks specialized in certain products and services. In the last couple of decades, though, many institutions have broadened their offerings to meet most people s needs and attract more customers. But even though many of these firms offer the same overall services, each institution has its own unique characteristics that customers should be aware of. How Do I Choose a Bank? Most of your parents have a particular grocery store or market where they shop on a regular basis, and the reasons for choosing this store are probably different for each parent. Maybe it has a great meat department or a wonderful health food section. Maybe it has great special deals, or it s in a convenient location. People have a wide range of reasons for shopping in one store instead of another. This is true for institutions that offer banking services as well. People have different reasons for choosing where they will place their money. A person s choice of bank is most often determined by the products and services offered (including related fees) and the convenience (branch location, hours, website, etc.). Services and Products Offered by Banking Institutions The services that banks offer can be confusing and complex, but as long as you do your research you should be able to find the right institution for you. The following will give you a general overview of some of the services that banks generally offer. Savings account services give you a safe place to store your funds. One of the main benefits to opening a savings account is the money that you earn from the interest. As you may remember, interest is the money the bank pays you so that they can use your money to loan out. Banks will even pay you interest on the money that they ve paid you in interest, which is called compound interest. The amount

63 Lesson 6 Banking of interest that your money earns depends upon the banking institution. It also depends upon the type of savings account that you choose. Savings account services generally include regular savings accounts, which allow you the flexibility to take your money out quickly and easily. The downside is that the interest earned is fairly low. You may recall that certificates of deposit (CDs) require that you leave your money in for a certain amount of time (or term). The date that the term is up is known as the maturity date. CDs offer higher interest rates than a regular savings account, but when you can have access to your money is restricted. If you take your money out before the maturity date, you will have to pay a penalty. Money market accounts require a higher minimum balance than a typical savings account but usually pay a bit more interest. With a money market account the interest is not set; it varies from month to month as the market rates change. With any type of savings account service that you choose, you must do your research to find the product that will offer you the very best interest rate as well as not penalize you when you occasionally withdraw cash. The most common payment service that banking institutions offer is a checking account. When you place money in a checking account, you can withdraw it at any time and write checks against the balance. Some institutions require that you keep a minimum balance in your checking account, and will charge you a fee if your account balance falls below this level. Some have no minimum balance requirement. There are also types of checking accounts that only allow you a certain number of checks per month. There are many different types of checking accounts. The fees and charges can vary from institution to institution, so it is critical to research restrictions and fees. Loan services generally fall into two categories: secured loans and unsecured loans. Secured loans are loans that are secured by collateral (property such as automobiles and real estate), while unsecured loans are loans obtained without collateral. In most cases, using a credit card to make a purchase is considered an unsecured loan. Banks can lend you money for your short-term needs as well as your long-term needs. If you are in the market to buy a home or a car, you would definitely research the longterm loan services. Interest rates, loan fees, and loan terms are some of the topics that you would want to know about. Again, doing your research and comparing interest rates and fees for loan services is critical. Electronic banking services include, but are not limited to, ATM access, direct deposit, automatic payment services, and online account access. ATM services allow you to withdraw cash from your account at specific computer terminals. Be careful with this service, because it is common for banks to charge as much as $3 per transaction for this convenience when you use a bank other than your own. Direct deposit allows government-issued checks or payroll checks to be deposited directly into your account. If you opt for this service, some banks will even waive your checking account service charge. Automatic payment allows the banks to draw a certain amount of money from your account to pay your bills. For example, many people choose to have their utility bills, car payments, and even mortgage payments automatically deducted from their accounts on a monthly basis. The Bottom Line One of the most important steps to choosing the right banking institution is to do your research. Visit the bank branch and speak to a customer service representative about the bank s services and go online and get specific information about the bank s fees and charges. You should look for competitive interest rates and inquire about the specific fees and restrictions that are associated with the specific services and products that you need. You should also take into consideration your lifestyle. For example, if you use the ATM frequently and you choose a small credit union to handle your money, you may be stuck with some very large ATM fees, since many small institutions do not have multiple locations. If you have an extremely busy schedule, you may value a bank that has extended hours or online services. Most of all, doing the proper research will ensure that you choose the right bank.

64 Lesson 6 Banking Student Resource 6.2 Assignment: Banking Poster Directions: Your work team is to create an informational poster that highlights the specific banking institution that you researched. Begin by using Student Resource 6.3, Graphic Organizer: Investigating Banking Services, and review and discuss the information you found. As a group, decide how you would like your poster to look. Next, create a rough draft of how your poster will be laid out, including the language that you will use and how you will use color and graphics to enhance the visual presentation of your work. Make sure to carefully read through the following instructions before beginning your poster, and if you have any questions, ask your teacher before you begin. Use the following guidelines to construct your poster: Include the name and website of the institution. Choose two savings account services, two payment services, and two loan services to highlight. Choose two other services to highlight. Make sure to describe all services in terms of what they offer, along with their fees, interest rates, special restrictions, and benefits to the consumer. Use color and graphics to enhance your poster s appeal. As a group, review your poster before you consider it finished. Make sure your assignment meets or exceeds the following assessment criteria: The name and website of the institution are clearly and correctly displayed on the poster. The poster accurately and effectively describes the savings account, payment, and loan services that are offered by the institution. The poster accurately and effectively describes two other services and/or products that are offered by the institution. The poster presents the fees, interest rates, and other benefits to the customer as they pertain to each product that is highlighted. The poster is well organized and is designed to make it easy to find information. The poster is neat and legible, and uses proper spelling and grammar.

65 Lesson 6 Banking Student Resource 6.3 Graphic Organizer: Investigating Banking Services Student Names: Date: Directions: Use the following resource as a place to organize your research on banking firms and their services and products. Remember, your group is required to research the savings account, payment, and loan services of your chosen institution. Although within each of these services you will find many choices, your group will need to choose only a couple of these options to highlight. Once you have completed the investigation of the required services, you will then have the opportunity to pick two other services that your group would like to highlight. All products and services must first be described in terms of what they offer, their fees, interest rates, special restrictions, and benefits to the consumer, and any other pertinent information may be added as needed. Name Website Location and Hours (nearest to you) Type of Firm (commercial bank, credit union, etc.) Describe the savings account, payment, and loan services of your specific institution. Products and Services Description of services, including fees, interest rates, special restrictions, and benefits to consumer Savings Account Services (regular, CDs, money market)

66 Lesson 6 Banking Payment Services (checking accounts) Loan Services Research two other services and/or products offered by your specific institution. For example, electronic banking services, credit cards, investment services, mortgages, individual retirement accounts, insurance, and/or financial planning. Products and Services Description of services, including fees, interest rates, special restrictions, and benefits to consumer Other product and/or service: Other product and/or service:

67 Lesson 6 Banking Student Resource 6.4 Reflection and Peer Review: Banking Poster Student Name: Date: Reflection As a result of creating our poster, I learned the following: About the subject matter: About conducting research: About working in a group: Peer Review For each poster, respond to the following: Name of banking institution: Which product offered by this banking institution is the best value and why? Name of banking institution: Which product offered by this banking institution is the best value and why?

68 Lesson 6 Banking Name of banking institution: Which product offered by this banking institution is the best value and why? Name of banking institution: Which product offered by this banking institution is the best value and why? Name of banking institution: Which product offered by this banking institution is the best value and why? Name of banking institution: Which product offered by this banking institution is the best value and why? Name of banking institution: Which product offered by this banking institution is the best value and why?

69 Lesson 6 Banking Student Resource 6.5 Example: Bank Statement Introduction One way to keep track of your spending and earning is to review and balance your monthly bank statement. A bank statement is a document issued by a bank to its customers. It is a record of an individual s debit (money paid out) and credit (money received) transactions over a given period of time. Bank statements give you a summary of every transaction that has taken place in your bank account. When you receive your bank statement, you should read and review it as soon as possible so that you can contact your bank immediately if you notice any errors in the record of transactions. Although the bank statement is a very helpful service that banks offer to help you manage and monitor your money, it is critical to keep careful records of your own spending and earning transactions. Every now and then even banks make mistakes. Banks statements are usually issued on a monthly basis and generally include the following information: Statement record dates Your name, address, and account number Account summary, which gives you a quick snapshot of your beginning balance, your total deposits and withdrawals (money taken out of the account), the total service charges and/or fees, and your ending balance for the specific statement record dates All deposits, including direct deposits, credits, ATM deposits, and deposits made in a branch store Withdrawal list, including ATM withdrawals, detailed check list, debit card transactions Interest earned Fees, if any

70 Lesson 6 Banking Sample Bank Statement

71 Lesson 6 Banking Student Resource 6.6 Independent Practice: Check Register and Reconciliation Form Student Name: Date: Reconciliation It was a typical afternoon for Sam. He was rushing from school to work and needed to make a quick stop at the gas station. He had been driving on empty for some time now and knew that there was no way that he would make it to work today without filling up. He took his ATM card out, inserted it into the pump and waited. After a long silence out came his card, accompanied by a high-pitched tonal sound. Sam inserted his card again, only to experience the same effect. Feeling frustrated, he brought his card to the attendant to see what the problem was. Apparently, Sam s account was empty. Insufficient funds, the attendant replied. What? I know that I have money in my account. How could that be? asked Sam. The young businessman behind him replied, I don t mean to eavesdrop, but have you reconciled your account lately? Have I done what? Sam said. Account reconciliation is a process that compares two sets of forms to make sure that they correspond. The act of reconciling your bank account is very important because it helps to ensure that the money leaving your account matches the actual money that was spent. In order to reconcile your account, you must keep careful records of how and when you spend your money. There are two parts to most personal checkbooks. There are the checks, of course, where all the relevant information date, payee, amount is written. But checks can t be used to keep track of the account, because as soon as a check is written it is handed over to someone else. Can you imagine keeping all that information in your head? That s where the second part of the checkbook the check

72 Lesson 6 Banking register comes in. The check register is a separate place where the account holder writes down the information that went on the check. By keeping track of this information separately, account holders can reconcile their accounts by comparing check registers (their records) against their statements (the bank s records). Banks make mistakes sometimes, so smart account holders keep track of all their transactions and save all their receipts. There s an additional complication to check reconciliation, and that is lag time. It s very likely that between the time the bank closes the month, prints your statement, mails it, and you receive it, you will have written more checks, made deposits, used your debit card, or taken money out of the ATM. It s also possible you wrote a check a while ago that the payee hasn t cashed, so the bank hasn t debited it from your account yet. With all these variables, how do you reconcile the balance you show in your checking account today with the bank statement you received today that reflects the balance the bank showed last week? The process is pretty easy for people who record their transactions in their check registers. By removing the transactions that happened during the lag time by backing them out of the records an account holder can reconcile his or her records with those of the bank. Check Register The following is a hypothetical check register that reflects the credit and debit transactions that are shown on Student Resource 6.5, Example: Bank Statement. Use the sample below, the model bank statement, and the reconciliation form to reconcile the account. When you have completed the exercise, compare your answers with a partner. Date Transaction Description Payment Debit Balance 1/03 Deposit /07 Cinema /07 ATM /12 ITA car insurance /12 FX clothing Debit 1/13 Sam s Burgers /15 Deposit /20 Withdrawal /22 Payroll deposit /22 Books-n-More /28 KC s Music /28 Deposit-return /30 Jack s Grill /30 Deposit /1 Deposit /1 Visa payment Interest earned Bank fees

73 Lesson 6 Banking Follow the steps on the forms below to reconcile the hypothetical account. In your checkbook, check off all of the checks paid and deposits credited that appear correctly on your bank statement. Then list all the outstanding checks (the ones that haven t been charged to your account) below. You can identify them as the ones left without a check mark. Now list all of your deposits or other credits that you have recorded in your checkbook but were not shown on the statement.

74 Lesson 7 Credit and Debt Student Resources Resource Description Student Resource 7.1 Reading: Credit and Debt Student Resource 7.2 Reading: The Truth about Credit Student Resource 7.3 Web Quest Activity: Credit Reports and Credit Agencies Student Resource 7.4 Directions: Public Service Announcement Student Resource 7.5 Reference: Financial Literacy Quotes Student Resource 7.6 Guide: Project Workflow

75 Lesson 7 Credit and Debt Student Resource 7.1 Reading: Credit and Debt Credit and debt have become a way of life for nearly everyone. It seems almost impossible to live debt free. According to the Federal Reserve, the average household in 2014 has more than $15,000 in credit card debt, and personal bankruptcies have hit record highs. With this in mind, being knowledgeable about credit and debt is crucial. Awareness of the various sources of credit as well as the different types of credit available is important for effectively managing your money. Being informed about the costs associated with credit and debt can ultimately save you hundreds and even thousands of dollars in the long run.

76 Lesson 7 Credit and Debt Debt refers to the amount that is owed as a result of borrowing. In most cases, debt refers to a sum of money, although debt can sometimes be repaid in the form of goods or services (have you ever worked off money you owed?). Either way, a debt is created when a creditor agrees to lend assets to a debtor. The most common form of debt is a loan. With a basic loan, an agreement is made for money (or other goods and/or services) to be lent for a fixed period of time and then paid back (generally with interest) at a certain date. Another type of debt is a bond. Bonds are loans that investors make to corporations or governments. With bonds, the lenders earn interest and the borrowers get the cash they need. Debt lets people, businesses, and even the government do things that they would otherwise not be able to do. For instance, debt allows people the ability to purchase homes, cars, and even an education. Unfortunately, many overextend themselves and rely on debt to support their everyday living expenses by charging groceries, clothing, or health care on their credit cards, which is considered a form of loan. Others even use debt to take vacations and purchase frivolous items that they don t really need.

77 Lesson 7 Credit and Debt Debt can both improve and diminish your quality of life. The key to managing debt is to take control of your personal finances. An important part of this step is to understand the difference between debt that appreciates assets (good debt) and debt that wastes assets (bad debt). Good debt buys assets that usually appreciate or hold value over time. Good debt can also include things like a college education, because educational loans can help you to earn more money in your lifetime. Acquiring some debt with the goal of increasing your future income or building your credit is looked upon as positive. For example, purchasing a home can be considered good debt because homes generally (over time) increase in value. However, purchasing a home that you cannot afford, or accepting a loan for a home with an outrageous interest rate, can both be considered bad debt since these purchases don t increase your wealth. On the flip side, when you buy something that goes down in value or is consumed, you have taken on bad debt. The biggest culprit of bad debt comes from purchases using credit cards. Using debt to purchase items such as clothes, groceries, toys, and vacations can cost you much more in the end. A good financial habit is to not charge more on your credit cards than you can pay off in the next month. This way you avoid interest charges, establish a good credit history, and don t spend more money than you have. You are simply using credit cards as a convenience (to consolidate purchases into one payment) and not as a short term crutch that will create a long term problem. Whether good or bad, remember that you should never allow your debt to outweigh your income or your assets.

78 Lesson 7 Credit and Debt Credit means that someone is willing to lend you money in exchange for your promise to repay it, generally with interest. There are many sources of credit, including commercial banks, credit unions, insurance companies, savings and loan associations, investment companies, and credit cards. Even your family and friends can be a source of credit. Credit cards are a common form of credit. Although there are hundreds of institutions that offer credit cards, there are only three main credit card companies. It is important when applying for credit to do your research and shop around. Different institutions offer different terms for which you can borrow money. Doing your research and finding the best interest rates with the most appropriate terms for your lifestyle and budget can, in the long run, save you a lot of money in high interest and finance charges.

79 Lesson 7 Credit and Debt There are many different types of credit that are available to consumers, and each has a specific purpose. Here are just a few of the main types of credit available: Installment loans are generally used for large purchases such as a car or a home appliance. With an installment loan, the terms can vary from a few months to years, and monthly payments are often set. The interest is usually a bit lower than that of a credit card. Student loans are used for tuition and college expenses. Most student loan terms will let you delay payment until after graduation. Typically, student loans have low-interest rates and often you can get a tax break on the amount of money you spend on the interest. A mortgage is a loan for a home. There are many different mortgages available with a variety of different terms. The monthly payment can be fixed or it may fluctuate, depending on the type of loan and/or interest rate that you get. Mortgages typically need to be repaid over years. Credit cards are a form of consumer credit. Credit cards generally have high interest rates and fees attached to them. Interest rates vary significantly. Some cards have introductory rates to reel you in, but then increase after 6 12 months. Read the fine print carefully to know what you are getting into. Credit cards have no payoff deadlines, because the longer you take to pay, the more money the credit card company makes. Monthly payments vary depending on the balance and interest rates. Paying only the minimum payment required (typically 2% of the balance) will cause you to pay excessive interest over the life of the debt.

80 Lesson 7 Credit and Debt From interest charges to loan and processing costs, there are many different fees associated with credit and debt. When you make the decision to purchase an item using credit, the item will generally cost you more in the long run. Before you take out a loan or apply for credit, you need to be sure that you can afford it. Can you afford the added monthly payments that a loan will cost? Can you afford the processing fees of a loan or the annual fees and other hidden costs associated with credit cards? Do your research, evaluate your budget, and shop around for the best interest rate and the lowest fees. Aside from the financial cost of credit, there is also an emotional side. One of the most common forms of household stress results from the stress caused by debt. In fact, USA Today reports that over 10 million Americans are suffering from stress-related health issues as a result of their debts.

81 Lesson 7 Credit and Debt There are many different ways to measure and manage your debt. Debt-to-income ratio refers to the amount of debt a person or business has in relation to overall income. To figure out your debt-to-income ratio, add up all your monthly debt (mortgages, car loans, credit card payments, student loans, etc.) and then divide it by your gross (pretax) monthly income. Your debt-toincome ratio should not exceed 36%. Lenders use the debt-to-income ratio as one of the factors when deciding whether or not they will lend you money. Although you may be able to qualify for a loan if your ratio exceeds 36%, you will probably be paying a higher interest rate. Just remember that the key to managing your debt is to take control of your personal finances. Setting goals, budgeting, spending less than you earn, and making wise financial decisions are all important aspects to consider.

82 Lesson 7 Credit and Debt Student Resource 7.2 Reading: The Truth about Credit People use and depend on credit for countless reasons. When you make the choice to use credit, you are entering into an agreement to purchase a good (or service) now and pay for it later. People can use credit to purchase just about anything. From homes to cars, from clothes to entertainment, you name it and credit can probably be used to obtain it. However, what many people don t seem to understand is that when you make the choice to borrow money you are also agreeing to pay any fees that are associated with borrowing that money. Before you take out a loan or apply for a credit card, make sure you understand the costs. In order to better understand these costs, let s follow Mario as he enters into the world of credit and debt. Mario is an 18-year-old college freshman. By the time he finishes his first year, he will have been offered credit cards more than 48 times. The credit card representatives will attempt to reach him by mail, by phone, by confronting him on his college campus, through advertisements, through the Internet, and in the airport like the Visa ad says, they re everywhere he wants to be! They will try to tempt him with free T-shirts, water bottles, gift cards, phone minutes, magazine subscriptions, and much more just for filing out one of their applications! To state it bluntly, credit and debt is extremely profitable to credit card companies, and their goal is to hook people when they re young and keep them hooked for as long as possible! Mario at 18 On his way to class, Mario notices a group of his friends huddled around a table. They excitedly greet him and explain that by simply applying for this credit card they are receiving a free $20 gift card to itunes! The credit representative then explains that through his application, Mario will be given the opportunity to begin building his credit report, which is imperative if he ever wants to purchase a car or buy a home. The representative explains that a credit report records an individual s borrowing and repayment behavior and is looked at by lenders and even employers as a reflection of a person s character. Establishing a credit history sounds like a good idea to Mario, and he can t deny his excitement at receiving a free $20 gift card. Within a few days, Mario receives a congratulatory letter in the mail explaining that he has been approved for the credit card and has been given a $1,000 limit! Mario knows a little bit about credit and understands that when you borrow money, you generally have to pay interest, or a fee, for borrowing the money. He carefully reads through the literature that accompanies his card and learns that he has been given an introductory interest rate of 3.9%. Meaning that for the first three months only, the credit card company is offering him a special interest rate of $3.90 for every $100 spent. Mario realizes that he must be very careful about paying off his balance, as the interest will be compounded monthly. That is, every month he will also be charged interest on the interest that accumulates on his unpaid balance. By reading the fine print, Mario also learns that after the introductory rate expires, the rate will jump up to 18%. Also, he can be charged an over-the-limit fee if his balance exceeds his $1,000 limit. A late fee will also be applied anytime his payment is received past the due date. Finally, Mario learns that after the first year, he will be charged a $50 annual fee, or a once-per-year cost, for just having the card. With all of these hidden fees and costs, Mario is disappointed by the true value of his free $20 gift card. Mario at 25 The good news for Mario is that he has graduated from college and has been a responsible user of credit. He has paid his bills on time and has made wise spending choices. In fact, by taking advantage of the credit card company s 25-day grace period, or the period of time before interest begins to accrue, Mario has actually managed to borrow some money for free. Many of his friends have made the mistake of making the minimum payment, or the smallest amount that you can pay to keep your account in good

83 Lesson 7 Credit and Debt standing, and are now complaining about how much they have spent in interest. Also, by making late payments, his friends have interest rates close to 25% and some have even defaulted (failed to pay), which has undoubtedly damaged their credit reports. At 25, Mario has just landed a job as an insurance claims adjuster. He also wants to buy a new car. He was surprised during the interview that he had to give his permission for the company to run a credit report. He found out that many positions in finance and in the government require favorable credit histories. A positive credit report is an indicator of character and can reflect an individual s honesty and sense of responsibility. Along with calling references, many companies look at an applicant s credit history as part of the overall background check. Mario is relieved that his credit is good a bad credit report could have cost him the job! Mario understands that to buy a car he will have to take out a loan, or an agreement to repay borrowed money, to purchase the car. Mario quickly realizes that banks, credit unions, and even the dealer are all eager to lend him money. However, each lender seems to have its own terms, which vary according to the length of the loan, the desired monthly payment, and the APR, or annual percentage rate. Like the credit card companies, they too want to make as much profit as possible! He was also surprised that on the application for his new apartment he had to give his landlord permission to run a credit report if his credit was bad, he might not be able to move out of his parents house. Mario learns that the APR is the actual interest rate he will pay on the unpaid balance of the loan. The APR tells him how much the credit will cost him on a yearly basis and is expressed as a percentage. By law the APR must be calculated in exactly the same way, allowing consumers a standard with which to compare loan costs. After researching many loan options, Mario decides to accept an offer from his credit union. He has qualified for a $10,000 loan, with an APR of 7.4% for 48 months. Through his research, Mario realizes that the interest rate is only one factor in the cost of a loan and that getting a low interest rate might not save him any money in the long run. For instance, many dealers offer low-interest loans, but then compensate for this by establishing longer terms for repayment or raising the purchase price for the car. No wonder his parents always told him to be careful of those 0% loan advertisements! Mario at 30 Mario has continued to maintain a positive credit history by paying his bills on time, managing his debt wisely, and monitoring his purchases. He has avoided charging many items that will not hold their value or appreciate over time and is now ready to invest in a home. Again Mario decides to shop around for the best loan options available. Because Mario has a steady job and his debt-to-income ratio is good, he has qualified for a low interest rate. Mario decides on a fixed rate of 4.25% with a 30-year term. Securing a fixed interest rate means that his lender must charge him the same amount of interest throughout the life of the loan. The stability of this type of loan coupled with its predictable repayment terms will make budgeting easier for Mario. He decides that a loan with a variable interest rate seems too risky. Having a loan where the interest rate is tied to the current federal lending rates (the rate charged by the federal government to major financial institutions) would mean that his interest rate could easily move up or down based on the health of the economy. Furthermore, securing a fixed rate seems to fit his current lifestyle better. Mario knows what he can afford and what type of payment his budget will allow. Mario realizes that this is just the beginning of a life full of credit and debt use. Through education and careful research, Mario can continue to use credit as an instrument that can help him to achieve his financial goals.

84 Lesson 7 Credit and Debt Student Resource 7.3 Web Quest Activity: Credit Reports and Credit Agencies Student Name: Date: Directions: Use your favorite search engine to research and answer the questions below. 1. What is a credit report, and why is it important? 2. What does the acronym FICO stand for and what is its primary use? 3. Visit one of the following websites and write down the names and contact information for three major credit-reporting agencies below: o o o Credit Reporting Agency #1 Credit Reporting Agency #2 Credit Reporting Agency #3 4. What is the main service provided by each of these agencies?

85 Lesson 7 Credit and Debt List three factors that can affect your credit score What are the 4 Cs of credit and why are they important? 7. In what ways can a negative credit report affect your financial goals?

86 Lesson 7 Credit and Debt Student Resource 7.4 Directions: Public Service Announcement A public service announcement (PSA) is an advertisement that is designed to educate people about important issues. You have probably seen or heard a few PSAs in your lifetime, and some of the more common PSA slogans include Friends don t let friends drive drunk, A mind is a terrible thing to waste, and Only you can prevent forest fires. For this assignment, you will be creating a PSA advertisement that will inform your peers about some of the specific risks and/or rewards of credit use. Use the following guidelines when designing your PSA: Create a slogan that is 15 words or less that highlights one aspect of credit, debt, and/or borrowing. Include a graphic or a picture that exemplifies your slogan. Write a paragraph that describes the meaning of the slogan in greater detail. Write a statement that explains the slogan s importance to a person s financial education. Make sure that the layout of your PSA is graphically appealing and organized well. Make sure your PSA meets or exceeds the following assessment criteria: The PSA includes a slogan that effectively and creatively highlights one aspect of credit, debt, and/or borrowing. The PSA includes a graphic or a picture that properly represents the message being conveyed. The PSA includes a four- or five-sentence paragraph that accurately describes your PSA s intent in greater detail. The PSA includes a statement that explains the significance of the slogan when evaluating a person s understanding of credit and/or debt. The PSA is well organized and designed to make it easy to find information. The PSA is neat and legible, and uses proper spelling and grammar.

87 Lesson 7 Credit and Debt Student Resource 7.5 Reference: Financial Literacy Quotes Student Names: Date: Directions: Carefully read the following quotes. After you have read the quotes, discuss with your group the general concern that is expressed by each quote s author. Express the author s concern in your own words and write it in the space provided. Americans need to sharpen their financial know-how to help them best use their money as the global economy continues to experience turbulence the need has never been greater for initiatives that help consumers learn to manage their money wisely. Ben Bernanke A compelling body of evidence demonstrates a strong association between financial literacy and household well-being. Survey after survey shows that households that demonstrate low levels of financial literacy are those that tend not to plan for retirement, borrow at high interest rates, and acquire fewer assets. Shawn Cole We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and to become financially literate. Robert Kiyosaki The single biggest difference between financial success and financial failure is how well you manage your money. It s simple: to master money, you must manage money. T. Harv Eker

88 Lesson 7 Credit and Debt Student Resource 7.6 Guide: Project Workflow Student Name: Date: Directions: Use the following guide to help your group manage and organize the project deadlines. As you complete each item, be sure to place a check in the completed box. Due date Items to complete Comments and notes Completed Choose your topic Identify the topic that your group will research. Financial consultants planning sheet As a group, discuss roles and divide labor. Fast facts Begin learning about your topic. Complete Student Resource 8.3, Culminating Project Guide: Fast Facts Research. Research guide Begin in-depth research on your topic. Complete Student Resource 8.4, Culminating Project Guide: Becoming Experts.

89 Lesson 7 Credit and Debt Due date Items to complete Comments and notes Completed Research guide Continue in-depth research. Complete Student Resource 8.5, Culminating Project Guide: Thinking in Threes. Synthesize and discuss findings Highlight key points from research. Complete first drafts of each culminating project product As a group, complete the rough drafts of your display board, brochure, and individual talking points. Updates and peer review Continue to add new learning (as it applies) to each draft. Participate in peer review activities. Create final drafts Complete final drafts for the three-panel display board and brochure.

90 Lesson 7 Credit and Debt Due date Items to complete Comments and notes Completed Finalize individual talking points Complete the final draft and practice individual talking points. Presentation/financial literacy fair Dress appropriately and practice. Peer review and selfreflection Complete the progress report.

91 Lesson 8 Good Practices in Personal Finance Student Resources Resource Description Student Resource 8.1 Three-Column Chart: Culminating Project Products Student Resource 8.2 Reading: Citing Sources Student Resource 8.3 Culminating Project Guide: Fast Facts Research Student Resource 8.4 Culminating Project Guide: Becoming Experts Student Resource 8.5 Culminating Project Guide: Thinking in Threes Student Resource 8.6 Assignment: Culminating Project Display Board Student Resource 8.7 Assignment: Culminating Project Public Service Brochure Student Resource 8.8 Assignment: Culminating Project Talking Points

92 Lesson 8 Good Practices in Personal Finance Student Resource 8.1 Three-Column Chart: Culminating Project Products Student Names: Date: Directions: Use the three-column chart below to compare and contrast the culminating project products. Analyze each product and list its characteristics according to the categories presented below. Display Board Brochure Talking Points Format What do you notice about the structure and layout? How is the information presented and organized? Purpose What are the goals and objectives of the product in terms of the audience? Information What do you notice about the type, depth, and breadth of information that is presented?

93 Lesson 8 Good Practices in Personal Finance Student Resource 8.2 Reading: Citing Sources Directions: As you work on your culminating project, you will need to write down the source of every piece of information you use. Otherwise you will be taking credit for someone else s work. This is called plagiarism and it is against the law. The examples below show you how to cite sources from the Internet, from magazines and newspapers, and from books. All college students and professionals cite their sources using these formats, so it is an excellent skill to learn and feel comfortable with now. How to Cite Articles from Websites with an Author Malmsten, Stefan. Financial lessons for all ages, CNNMoney, (accessed March 27, 2014). How to Cite Information Published on a Website with No Author and No Publication Date What is Financial Literacy? PBS.org, (accessed March 27, 2014). How to Cite a Book Foster, Chad. Financial Literacy for Teens. New York: Rising Books, Burkett, Larry, and Todd Temple. Money Matters Workbook for Teens. New York, NY: Moody Publishers, How to Cite an Article from a Magazine Kadlec, Dan. Weak Financial Literacy Scores Threaten a Global Education Movement. Time, May 7, How to Cite an Article from a Newspaper Podmolik, Mary Ellen. Agencies working to boost financial literacy. Chicago Tribune, October 25, 2013, E01. Avoiding Plagiarism If you use someone else s words, data, and so forth, use quotation marks and make sure to include the source on your Sources page. Example: According to Tom Jasper, vice chairman of TCF Bank, Every high school student, and every adult, should have a firm understanding of money management. Even if you don t use an exact quotation, but borrow someone else s ideas, you still need to include the source on your Sources page.

94 Lesson 8 Good Practices in Personal Finance Student Resource 8.3 Culminating Project Guide: Fast Facts Research Student Names: Date: Directions: Use the following resource as a guide while researching your group s topic. You will be using this information to complete your culminating project products, so doing a thorough job with this guide will help you as you complete your three-panel display board and brochure. Remember to always cite your sources (as discussed in Student Resource 8.2) and to continue to add new words to your taxonomies as you come across them. Make sure to carefully read through the entire resource and make sure you understand the assessment criteria before beginning your research. Before You Start Our research topic is: Some things we already know about our topic: Two questions we want to answer: Use This Chart to Guide Your Research Key ideas to consider Information Describe three or four reasons why your topic deserves to be taught to people learning about financial literacy. Sources:

95 Lesson 8 Good Practices in Personal Finance Key ideas to consider Information Describe your topic and list some key ideas, main points, facts, and/or statistics about your topic. Sources: Describe the ways in which your topic affects people in their day-to-day lives. Sources: What are some of the positive aspects of your topic? (For example, the services it provides, the lifestyle that it affords, the benefits that it offers, etc.) Provide a minimum of three detailed aspects. Sources: What are some of the negative aspects of your topic? (For example, fees for services, risks with investing, overspending, etc.) Provide a minimum of three detailed aspects. Sources:

96 Lesson 8 Good Practices in Personal Finance Key ideas to consider Information List three interesting facts that you have gained from your research. Sources: List any new words to be added to your taxonomies. Sum It Up As you complete your research, highlight information that you believe is most important to a person s understanding of finance. Our topic is particularly important to a person s understanding of finance for the following reasons: Make sure your guide meets or exceeds the following assessment criteria:: The guide accurately conveys the topic s importance to an individual s understanding of personal finance as well as its relevance to the industry. The overall research provides a balanced analysis of the topic and its effect on the individual. The personal finance topic has been effectively described and relevant key ideas, main points, facts, and/or statistics have been included. Every section of the guide has been thoroughly completed and the information for each question has been addressed appropriately. The guide is neat and uses proper spelling and grammar.

97 Lesson 8 Good Practices in Personal Finance Student Resource 8.4 Culminating Project Guide: Becoming Experts Student Names: Date: Directions: The following resource will help focus your research and provide you with a more in-depth understanding of your topic. Once you have answered the following questions and/or completed the specific prompts, state which project product(s) (the display board, the brochure, and/or the talking points) the information would best be suited for. Make sure to carefully read through the entire resource and make sure you understand the assessment criteria before beginning your research. Our research topic is: Think about your research from the previous class period and identify two areas that you would like to know more about. Begin your research by exploring these topics. Based upon our previous research, we would like to know more about Our findings Source: Based upon our previous research, we would like to know more about Our findings Source: How can being knowledgeable about your topic improve a person s financial well-being? In other words, why is it important for everyone to learn this information? This information would be most appropriate for: Source:

98 Lesson 8 Good Practices in Personal Finance Describe your topic s relevance to the finance industry: This information would be most appropriate for: Source: People who work in this industry generally: (Focus on the specific finance industry that serves your topic. For example, if your topic revolves around credit and debt, you may want to research credit counselors.) This information would be most appropriate for: Source: Current issues and/or new developments affecting your topic include: This information would be most appropriate for: Source: Describe a call to action. In other words, describe the steps and/or actions that an individual should take to experience the benefits from being knowledgeable about your topic. For example, some tax-saving strategies would include keeping careful records of tax-deductible items and understanding deductions and credits. This information would be most appropriate for: Source:

99 Lesson 8 Good Practices in Personal Finance How would a person who wants to know more about this topic find information? What different sources are available? This information would be most appropriate for: Source: What else do you need to include to make your information beneficial to the community as well as your peers? New words to be added to your taxonomy include: Make sure your guide meets or exceeds the following assessment criteria:: The overall research reflects a solid understanding of the topic and its importance to an individual s financial well-being. Relevant and current issues surrounding the topic are effectively described. The research includes appropriate steps and/or actions that an individual can take to achieve the benefits that result from being knowledgeable about the topic. The information has been recorded accurately and a variety of information sources have been used. Every section of the guide has been thoroughly completed and the information for each question has been addressed appropriately. The guide is neat and uses proper spelling and grammar.

100 Lesson 8 Good Practices in Personal Finance Student Resource 8.5 Culminating Project Guide: Thinking in Threes Student Names: Date: Directions: This guide will be the last in-class opportunity dedicated to researching your culminating project topic. It is intended to provide your group with additional information that supports and illustrates your project topic. It will focus on the use of data, statistics, tables, charts, graphics, and quotes to supplement the research that you have already completed. Make sure to carefully read through the entire resource and make sure you understand the assessment criteria before beginning your research. Three relevant facts and/or statistics that support our information include: Sources: Three relevant quotes about our topic include: Sources: To support the information on our display board or brochure we could include (or create) the following charts, tables, and/or graphics: 1. 2.

101 Lesson 8 Good Practices in Personal Finance 3. Sources: Three alternative, differing, or diverse perspectives regarding our topic include: Sources: In relation to our topic, three common traps and scams that consumers should be aware of include: Sources: Make sure your guide meets or exceeds the following assessment criteria:: The overall resource reflects a solid understanding of the topic and uses alternative sources of information to support prior research. The research includes appropriate and relevant data, statistics, tables, charts, graphics, and/or quotes. The information has been recorded accurately, and a variety of information sources have been used. Every section of the resource has been thoroughly completed and the information for each question has been addressed appropriately. The resource is neat and uses proper spelling and grammar.

102 Lesson 8 Good Practices in Personal Finance Student Resource 8.6 Assignment: Culminating Project Display Board Directions: One of the main components of your culminating project is to create a three-panel display board to present at the upcoming financial literacy fair. Your display board should provide an organized overview of your focus area and should demonstrate that you have thought deeply about your topic and its relevance to a person s understanding of finance. It should illustrate the learning that you have experienced in this course and reflect your understanding of your audience and their needs. Remember, it is also the focal point of your booth, and its effectiveness will draw people to your booth to learn more about your research topic. Before beginning your draft, make sure to carefully read through the entire resource and review the list outlining what your final draft must include. Three-Panel Display Board By this point, your team will have completed the majority of the research on your topic, and it is now time to synthesize your findings. The first step that you will tackle will be to complete a written draft of your three-panel display board. Remember that one of the main purposes of the display board is to provide your audience with information on your topic. However, in order to accomplish this task, you must create a display board that is eye-catching. Your display board must draw people over to your booth! If people don t visit your booth, your message cannot be communicated. Before you begin your draft, make available your research guides, taxonomies, notebooks, prior assignments, readings, and any other applicable material. Use the following steps to guide you as you create the first draft of your display board: Create four or five intriguing headings (and/or subheadings) that are no more than 15 words in length. They should capture the audience s attention and convey a central message that is appropriate for your topic. Draft a layout of your display board. The layout should be functional as well as informational and the material should be presented in a logical and organized manner. Use your headings and subheadings as placeholders while you sketch the rough draft of your display board. Refer to your headings and rough sketch to create written drafts for each section of your display board. Although your display board must address the information listed below, how you present the information is up to you. Your display board must include: o A title that will grab your audience s attention o A description and/or overview of your topic o Your topic s importance to an individual s understanding of finance (the need to know) o o o o Current issues affecting your topic (this may include new laws and regulations, cautions, traps and scams, and/or other consumer awareness points) Wise actions to take (for example, steps to take to start a budget, how to shop around for the best interest rates) A minimum of two graphics to support your information (this could include, but is not limited to, charts, tables, graphics, and quotes) Helpful Tips Remember your audience and choose the information that is the most relevant. Keep it professional. You can be creative, but don t overdo it. Frilly borders, fancy fonts, too much color, and pop-ups are not appropriate for a professional setting.

103 Lesson 8 Good Practices in Personal Finance Think about where the viewer will look. Headings and subheadings should be readable from at least two feet away, and remember that the size of the text can indicate a subject s importance. Keep your titles and headings short, and don t crowd too much information on your display board. Eliminate redundant or unimportant information. Use only graphics, tables, charts, and quotes that help explain or support your main points. Final Draft Make sure that the final draft of your display board includes: A complete description of your topic that accurately describes its significance to an individual s understanding of finance A statement that accurately highlights some of the current issues that are relevant to your topic An appropriate and realistic description of an action to take in regard to your topic A title that grabs the audience s attention and provokes further inquiry on the topic Labels, headings, and subheadings that are concise and outline the content accurately A professional and visually appealing look that utilizes a balanced combination of text and graphics Language that effectively communicates the topic to the target audience Appropriate graphics, tables, charts, and so forth to support the information presented on the display board

104 Lesson 8 Good Practices in Personal Finance Student Resource 8.7 Assignment: Culminating Project Public Service Brochure Directions: Your brochure is another one of the main components of your culminating project. Your brochure should contain information that will supplement your three-panel display board and should be available for guests to pick up at your financial literacy fair booth. The content of your brochure must reflect your team s understanding of your topic as well as the needs of your audience. Make sure to carefully read through the entire resource before beginning your draft. Brochure Your brochure should provide your audience with in-depth information about your topic. While your display board provides the viewers with an initial introduction to the topic and draws them in, the brochure is designed to offer your audience more extensive information that they can take with them and read later. Like the brochure you created in Lesson 3, your brochure must follow the trifold format. You will use four of the six panels for content. The front panel is reserved for the cover and the back panel will include the following information: student names, date, and class period. Remember that the front of the brochure should be attractive and simple and should encourage the reader to pick it up. Use the following steps to guide you as you create the first draft of your brochure: As a group, carefully review the information from your research guides, taxonomies, notebooks, prior assignments, readings, and any other applicable material. Also, review the written drafts from your display board to ensure that you don t repeat any unnecessary information. Discuss which information is best suited for your brochure. Remember that your readers will want to know why they should read the information that will be in the brochure. In other words they will be asking themselves, how will this information benefit me? Once you have established what information is the most appropriate for your brochure, create four to five intriguing headings (and subheadings if appropriate) that will capture the readers attention and convey a central message that is appropriate for your topic. Follow the trifold format and draft a layout of your brochure. The layout should be functional as well as informational, and the material should be presented in a logical and organized manner. Use your headings and subheadings as placeholders while you outline the rough draft of your brochure. Once your layout has been outlined, refer to your headings to create written drafts for each section of your brochure. Divide the labor among group members so that each person is responsible for completing a specific written draft of the brochure.

105 Lesson 8 Good Practices in Personal Finance Helpful Tips Many people skim rather than read brochures, so the titles and headings that you create are very important. Do your best to make them grab the reader s attention. Make sure that your front cover is attractive and eye-catching and encourages the reader to pick it up. Be consistent with your language and design. Your brochure should look professional, which will encourage your audience to trust the information that you provide. Use the sample brochures for models of professional design. Brochures don t have room for long descriptions. Using bullets to highlight specific information is acceptable, and be sure to eliminate unnecessary wording that detracts from your message. The purpose of a brochure is to not only convey information but also to encourage the reader to take some kind of action. Whether it is to open a savings account, create a budget, or become familiar with tax-savings strategies, the brochure should contain a section that clearly communicates a desirable benefit that can result from reading and acting upon the information provided. Final Draft Make sure that the final draft of your brochure includes: A title panel (front cover) that effectively introduces and creates interest in the topic (Interest could be generated from a catchy or benefit-loaded headline or interesting graphic; it should make your reader want to know more.) Four informational panels (inside) that include headings that outline the content with short descriptive paragraphs, lists, graphs, and/or charts Informative, accurate, and relevant information that effectively communicates the topic to the target audience A balanced combination of text and graphics that is organized in a neat and visually appealing manner Information that supplements as well as compliments the information that is provided on your display board Group members names, date, and class period on the back panel

106 Lesson 8 Good Practices in Personal Finance Student Resource 8.8 Assignment: Culminating Project Talking Points Directions: The final component of your culminating project product is to create individual talking points that will complement and support the information on your display board and brochure. Creating talking points is an important skill that you will most likely use throughout your life no matter what profession you choose. Effective talking points organize and focus your thoughts and allow the key message that you want to convey to be communicated to your audience. Taking the time to create good talking points will allow you to be better prepared and increase your confidence during the literacy fair. Make sure to carefully read through the entire resource before beginning your draft. Talking Points Having a set of clear, concise, and well-supported talking points will earn you the respect of your audience. As you begin the first draft of your talking points, make sure to keep your audience in mind. Use the following steps to guide you as you create the first draft of your talking points: Your talking points should be based on the research that you ve done. Refer to your display board and brochure drafts, research guides, taxonomies, notebooks, prior assignments, readings, and any other appropriate material. Remember that the purpose of your culminating project is to educate your audience on the importance of your topic. Once you have the focus for your talking points established, begin by building four or five simple statements that revolve around your focus. After you have established these statements you can start accessing supporting material to explain and expand on your main points. Refer to your research guides and any other applicable material for supporting information on your topic. By sticking to the facts and providing examples that support your statements, you can ensure that your talking points will be professional and your audience will trust the information that you are providing. Carefully plan how your talking points will be organized. The first talking point should include a statement or two describing why the information that you are about to tell them is important and worthy of their time. After that, you should organize your talking points in order of importance. Use short, easy-to-understand sentences and stay focused on your topic. Final Draft Before turning in the final draft of your talking points, make sure that it includes: A minimum of five talking points that contain informative, accurate, and relevant information that effectively communicates the topic to the target audience Information that supplements as well as complements the information that is provided on your display board and brochure Statements, statistics, and/or data that support your main idea and/or central message An opening statement that introduces yourself, your topic, and its relevance

107 Lesson 9 Investment Banking Student Resources Resource Description Student Resource 9.1 Reading: Introduction to Investment Banks and Their Services Student Resource 9.2 Graphic Organizer: Cause and Effect Student Resource 9.3 Reading: Evolution of Investment Banking

108 Lesson 9 Investment Banking Student Resource 9.1 Reading: Introduction to Investment Banks and Their Services Perhaps you ve seen some of the headlines: Surprise $2 billion loss at JPMorgan sets off calls for heavier regulation of banks ; Bank of America Corporation, the biggest US consumer bank, agreed to acquire Merrill Lynch ; or Citigroup may sell its Japanese investment bank. JPMorgan? Merrill Lynch? Investment bank? What does all of this mean? To begin, let s take a look at what an investment bank really is and the role that it plays in our economy. What Is an Investment Bank? An investment bank is a financial intermediary that performs a variety of services. One of the most common services that an investment bank performs is that of helping wealthy individuals, companies, organizations, and even governments raise capital by issuing and selling securities, or financial instruments like stocks and bonds. An investment bank is different from a commercial bank in that it doesn t offer checking and savings accounts or auto and home loans to its customers. However, similar to commercial banks, investment banks do play a crucial role in the general banking process by matching those who want to borrow money with those who are able to lend money. Capital-Raising Methods Companies rely on the services provided by investment banks for a variety of reasons. For example, let s take a look at New World Sounds. New World Sounds is an established audio company that manufactures microphones, headphones, and audio accessories. The company has shown promise and growth over the past 10 years and is now looking for some ways to expand and increase its sales. Essentially, New World Sounds needs funds! One way that New World Sounds can raise capital is to solicit some help from an investment bank. Although not all companies need to utilize the services of an investment bank, an investment bank can make the process of raising capital much easier. Investment banks can help a company raise capital through equity financing. With equity financing, money is raised by selling stock, or a share of ownership in the company. The selling of stocks generally begins with an IPO (initial public offering), where stock of the company is first introduced to the public. With the IPO process, a company decides to go public and then calls upon an investment bank to underwrite the offering. The underwriting operation can be a bit complicated and includes a series of steps. Essentially, when an investment bank underwrites the offering, they are setting up the structure for the sale of the securities by establishing an offering price for the new security, registering with the Securities and Exchange Commission (a federal agency that is responsible for regulating the securities industry and enforcing federal securities laws), and negotiating the terms under which the security will be distributed. The distribution can occur in two different ways. The investment bank can agree to purchase the securities on either a firm-commitment or best-efforts basis. In a firm-commitment offering, the investment bank agrees to purchase company shares at a discount and resell them for a higher price. When using a best-efforts basis, the investment bank agrees to do its best to sell all of the securities, but does not guarantee it. Another type of financing is debt financing. With debt financing, the investment bank has to find investors who would like to loan money to the company (or government) by selling bonds. A bond is a certificate of debt whereby the company promises to pay the holder a specified amount of interest for a certain amount of time. The debt must be repaid on its maturity date, or the date that the bond reaches its face value.

109 Lesson 9 Investment Banking There are some private investment firms that may offer venture capital to help finance new businesses. Venture capital is money provided by venture capitalists to start-up firms and small businesses. Due to the high risk involved with funding new start-ups, the expected return can be quite high. Venture capital is an important source of funding for new businesses that are not able to acquire the funding through primary lenders. Mergers and Acquisitions Aside from raising capital, investment banks also help to bring separate companies together to form larger ones and break up large companies to form smaller, more specialized 9ones. These services are generally referred to as mergers and acquisitions. When one company takes over another company, the purchase is referred to as an acquisition. A merger happens when two firms agree to combine and form one company. With a merger, both companies stocks are dissolved and a new company stock is issued. For example, on July 29, 2008, two satellite radio services, Sirius and XM, completed a merger to create a single satellite radio network, SiriusXM. In this situation, both companies would enlist the help of an investment bank to mediate the process. The investment bank would offer financial advice and complete company valuation research. Accurately researching the value of a business is one of the most important aspects of mergers and acquisitions, since this information will impact what the company will be sold for. Mergers and acquisitions can be worth millions of dollars and can generate huge profits for both companies as well as the investors that are involved. Types of Investment Banks Investment banks can come in many different styles and sizes, and this aspect of the industry seems to be constantly changing. For example, up until 2008 you would commonly hear the term bulge bracket in reference to investment banks. This type of investment bank included some of the largest and most prestigious investment banks in the world. Goldman Sachs, Merrill Lynch, and Lehman Brothers were all considered bulge bracket investment banks. However, as a result of the subprime mortgage crisis, the list of bulge bracket banks is now virtually nonexistent. Prior to the subprime mortgage crisis, mortgage lenders began accepting risky subprime mortgages, meaning that they were lending money to individuals with lower credit ratings or a poor credit history. To offset this risk, many commercial banks sold these loans to other banks, including investment banks. Many investment banks decided to accept this risk, because in exchange for the higher risk, the borrower was paying much more in interest. However, in 2006, subprime mortgages began to fall apart. People couldn t pay their loans; home prices dropped and home foreclosures soared. Thus, a number of investment banks that invested in subprime loans incurred millions and billions of dollars of losses. These losses ultimately created a worldwide financial crisis commonly known as the subprime mortgage crisis. Out of necessity, many of these investment banks were bought by commercial banks and are now referred to as financial holding companies. A financial holding company is a financial institution that typically owns one or more banks and is regulated by the Federal Reserve Board. Financial holding companies have the ability to offer a wide range of banking services, from general commercial banking activities to investment and insurance services. The Bank of America Corporation and Wells Fargo Company are examples of financial holding companies. Finally, the term boutique banks refers to very small investment banks that don t typically provide full investment banking services but specialize in a certain area of investment banking. For example, a boutique bank may concentrate in a specific geographical area or specialize in investment services for technology companies. Investment banking plays a crucial role in our society. Companies, business owners, individuals, and even the government rely on the service investment bankers provide. Although investment banks may disappear, the investment banking function performed by banks most likely will not.

110 Lesson 9 Investment Banking Student Resource 9.2 Graphic Organizer: Cause and Effect Student Name: Date: Directions: As you listen to the presentation on the evolution of investment banking, use the following cause-and-effect chart to help you organize your notes. Remember, you may use this graphic organizer as a study guide as you prepare for your short-answer quiz at the end of the lesson. Event #1 Event #2

111 Lesson 9 Investment Banking Event #3 Event #4

112 Lesson 9 Investment Banking Student Resource 9.3 Reading: Evolution of Investment Banking Throughout the years the investment banking industry has seen many changes. From its beginnings as a form of government financing to the complex capital-raising methods of today, the health of the investment banking industry affects individuals, businesses, and even the government. Many of the changes made to the investment banking industry are a result of major events, like a global stock market crash or a bankers panic. However, the failure (or even speculative failure) of a specific industry or company or the fraudulent activity of one investor or investment bank can cause change and produce new regulations for the entire financial services industry.

113 Lesson 9 Investment Banking Some of the earliest investment banking practices began in Europe. During the 12th and 13th centuries, European banks made long-terms loans to various rulers. In the 1300s Florence, Italy was a banking hub. King Edward III borrowed vast sums of money from the great banks of Florence to fund his war with France. He could not pay the money back, and the three biggest banks in Florence collapsed. During the 18th century, intermediaries would buy government-issued debt and then resell it to investors at a profit. This process soon spread to the United States, where investment bankers quickly copied the practice. In the early 19th century, the financing of US railroads was dependent upon this investment method, which comprised mainly investors overseas as well as wealthy US traders and ship owners. A prominent investment firm located in Philadelphia, Jay Cooke and Company, played a large role in financing the American Civil War by marketing and then selling hundreds of millions of dollars in government bonds.

114 Lesson 9 Investment Banking The Panic of 1873 began with the failure of a prominent investment firm located in Philadelphia called Jay Cooke and Company. Once the US had recovered somewhat from the Civil War, which ended in 1865, the government looked to Cooke to help finance railroad construction across the country. Cooke began raising money, through the sale of bonds, for the Northern Pacific Railway. The bank overspeculated and bought millions of dollars in railroad securities, which demand really couldn t support. By 1873 investors grew weary. A panic hit America and Jay Cooke and Company went bankrupt, along with 37 other banks and two investment banks, the stock market closed for 10 days, and within the next two years over 15,000 businesses failed. Although there were many causes that ultimately led to the Panic of 1907, one of the main causes was the failed attempt by bank owner F.A. Heinz to corner the market of United Copper Company. Heinz invested $50 million into the Copper Company in an attempt to manipulate the price of the company s shares. When his attempt failed, the stock market crashed, causing a panic, which led to runs on banks across the nation. In other words, businesses and individuals all tried to withdraw their money at the same time. This run caused banks to collapse, the stock market to crash, and businesses to fail. Due to these events, many people realized the need for creating a mechanism for maintaining stability within the industry, and a centralized banking system was established.

115 Lesson 9 Investment Banking On December 22, 1913, Congress passed the Federal Reserve Act, which increased government oversight of the financial system. The Federal Reserve Act created the Federal Reserve, the central banking system of the United States. The Federal Reserve comprises 12 privately owned Federal Reserve Banks, which are located throughout the nation. One of the main functions of the Federal Reserve is to help control and manage the nation s monetary supply. Having a more regulated financial system allows the government to expand and contract the money supply as needed. In other words, as the economy grows and expands, the monetary supply should expand to support it. The Federal Reserve also created a nationalized check-clearing system. During periods of economic instability, many banks refused to cash and clear checks from other banks. Finally, establishing the Federal Reserve created a bank that could provide the government and other banks the specific financial services that they need. The Federal Reserve helps to create confidence among borrowers and lenders and helps to support a more stable and efficient national monetary system.

116 Lesson 9 Investment Banking Both commercial banks and investment banks expanded during the 1920s. Everyone wanted to invest in the stock market. Banks began issuing securities and placed huge sums of money into this branch of their business. Consumer spending and credit sales were high. The US economy became dependent on investments from the wealthy. During this time there were few regulations placed on investment firms and brokers. Many brokers and bankers were privy to inside information that was not available to the general public. Investors were searching for huge returns on their investments, which led to widespread market speculation. Investors took big risks on their investments but in return expected big profits. Although there were many causes of the Great Depression, one of the main ones was the stock market crash of The stock market crash created a lack of public confidence in the government and businesses across the nation. Consumers stopped purchasing goods and people lost their jobs. Banks became conservative with their lending and struggled to survive. As banks failed, people simply lost their savings. The stock market crash of 1929 played a major role in the development of modern investment banking.

117 Lesson 9 Investment Banking The Federal Securities Act was the first major federal law created to regulate the sale of securities. The Securities Act required that full and accurate information regarding stocks and bonds be made available to purchasers. In other words, the issuing company offering the securities must provide investors with information about the securities so that they can make informed decisions related to their investments. The Glass-Steagall Act stated that commercial banks and investment banks could not participate in each other s activities. This meant that commercial banks could not engage in the securities business and investment banks could not accept deposits. The hope was that commercial banks would become more stable by not participating in the risky sale of securities, creating a safer environment for depositors. The Glass-Steagall Act also established the Federal Deposit Insurance Corporation. The FDIC provides deposit insurance and guarantees the safety of a consumer s deposit, up to a certain amount. Because of the number of bank failures during the Great Depression, the government understood the need to restore the public s confidence in the banking system. With the FDIC established, depositors could be confident that their money was safe as long as they were banking at an FDIC-insured bank.

118 Lesson 9 Investment Banking During the 1940s most economists believed that the economy was improving and once again America was experiencing a period of prosperity. Investment banking and commercial banking expanded and experienced large profits. The whole financial services industry seemed to grow as investment banks competed against insurance companies, pension funds, and other intermediaries. During 1975 in an attempt to further deregulate the industry and protect the investor, the Securities and Exchange Commission ended the fixed-rate brokerage fee. There are many types of brokerage fees that can be charged to complete the transaction between buyers and sellers; however, with this new law, brokerage fees could be negotiated, often resulting in huge savings for the investor. In 1999, the Gramm-Leach-Bliley Act repealed part of the Glass-Steagall Act; Glass-Steagall was designed to protect depositors from the risks associated with the stock market. The Gramm-Leach-Bliley Act was seen as a way to modernize the industry and was created to allow commercial banks, investment banks, and insurance companies to offer some of the same services.

119 Lesson 9 Investment Banking The investment banking industry is still experiencing many changes. We have seen how the large investment banking firms have become virtually nonexistent and how smaller, more specialized investment banks have found their niche. Although these dramatic changes seem to surprise and shock society, when we take a closer look at some of the historical events that the industry has survived, one can begin to accept these changes as a part of the constant evolution of the industry in general.

120 Lesson 10 Financial Markets Student Resources Resource Description Student Resource 10.1 Reading: Investment Risk Factors Student Resource 10.2 Chart: Investment Risk Factors Student Resource 10.3 Note-Taking Guide: Investment Instruments Student Resource 10.4 Reading: Investment Instruments Student Resource 10.5 Reading: Understanding Financial Markets Student Resource 10.6 Assignment: Investment Poster Student Resource 10.7 Research Guide: Investment Poster Student Resource 10.8 Feedback Form: Investment Posters

121 Lesson 10 Financial Markets Student Resource 10.1 Reading: Investment Risk Factors There are certain risks associated with every choice you make in life. From the friends you choose to the sports you play to even the foods you eat, there is an element of risk involved with each decision. The same holds true with money. Whether you spend, save, donate, or invest your money, there is always an element of risk attached. For example, if you choose to spend $150 on a pair of concert tickets you are accepting a level of risk. What if you get sick on the day of the show, what if the tickets get posted on ebay for half the price, or what if your car breaks down unexpectedly and you need that money for repairs? Even if you keep your money stashed at home hidden in your dresser drawer, you risk that you could lose it or that it could be stolen. Investing is a way for you to increase the amount of money you have it s a way to put your hard-earned money to work for you. But there is risk involved in investing because you can never be completely sure of the return the investment will provide. This type of risk is commonly referred to as financial risk. In fact, every investment carries with it some level of risk. (There s even risk in not investing what if inflation goes crazy and the value of your money drops dramatically?) What s more, the market sometimes rewards risk takers the greater an investment s risk, the greater the possible reward as well as the greater the chance of decline in value. Most investors decide the level of risk they re comfortable with and invest according to that risk level. So how much risk should you take with your money? That depends on your age, financial goals, existing economic conditions, financial resources, financial responsibilities, and risk tolerance level. Risk tolerance level refers to your ability and willingness to accept risk. Most investors feel that if you are losing sleep over your investments or if your investment portfolio is causing you to feel anxious or worried, then your investments risk level probably exceeds your risk tolerance, and you should think about adjusting accordingly. You can evaluate the overall risk of an investment by understanding and being knowledgeable about some of the major risk components described below. Economic Risk and Market Risk Sometimes the value of an investment (stock, bond, mutual fund, real estate) can fluctuate just because of the state of the economy and/or the financial markets. Many factors can influence this type of risk such as war, inflation, political changes, and recessions, to name a few. Economic risks (the investment risk associated with the overall health of the economy) affect the entire market, whereas market risks (the risk that the value of an investment will decrease due to changes in the market) may affect just one sector of the market. Stock prices, interest rates, and exchange rates, as well as other outside forces, can affect market risk. For example, from about the United States experienced a market crash in the tech industry. Because of this, the tech industry (and not the entire market) experienced a very substantial crash, which caused many investors to lose millions of dollars. The 2008 US subprime mortgage crisis is another example of a market crash. There were many factors that contributed to this crisis, which included subprime lending practices, overbuilding, risky mortgage products, and an incredibly high level of default rates among borrowers. Liquidity Risk Liquidity risk refers to the ease with which an investment can be bought and sold and/or converted to cash. Some investments are more easily converted to cash on short notice than others. These are considered liquid. Financial assets, like stocks and bonds, are generally more liquid than real assets such as collectibles coin collections, antique cars, jewelry--or real estate. For example, let s say that you want to buy a car for work purposes and you need access to your money quickly. If you can t redeem your investment quickly without taking a huge loss in its value, your investment has a low liquidity.

122 Lesson 10 Financial Markets Inflation (or Price-Level) Risk Some people believe that the safest form of investing is to place their money into a savings account or a certificate of deposit because their money is guaranteed to be safe. However, even these forms of investing can be risky. There is a chance that your money may not be able to keep up with inflation and your dollar may actually be worth less in the future. As you have learned, when the price of goods and services goes up, the result is an increase in the cost of living, which is referred to as inflation. When this happens, your purchasing power decreases because the value of your money declines. Inflation risk refers to the uncertainty associated with the real value of the cash payments that you expect to receive from your investments. Interest Rate Risk The amount your investments earn can become uncertain because of changes in value caused by interest rate changes. Changes in interest rates can affect the price of a stock or a bond. If interest rates go up, bond prices usually go down and if interest rates go down, bond prices usually go up. In other words, bond issuers must offer higher rates on new bonds in order to entice investors when interest rates decrease. The result is that the prices of existing bonds drop because investors will choose the newer bonds that are offering the higher rate. Since stocks and bonds react differently to the changes in interest rates, investing in a variety of investment instruments can help minimize this type of risk. Business Risk Business risk refers to the risk associated with investing. The risk revolves around the soundness of the business or firm in which you are investing. Even if you do careful research on the company, you still face the risk that the company may be less profitable than you expected and may experience declining revenues or increasing costs. There is no way to predict that the company you invested in won t be affected by the arrival of a competitor, changes in labor conditions, or poor management practices. There is also the possibility that the company you invest in could fail and/or go out of business, which would mean that you could lose all of your initial investment! Global Investment Risk Global investment risk affects those investors who invest their money in stocks and bonds offered by companies in other countries. There are many risks involved with investing internationally, such as the exchange rate risk, political stability of another country, or differences in regulatory agencies and standards that other countries must abide by. Minimize Your Risk There are many different ways to invest, and every option has a different level of risk attached to it. You will learn about the variety of investment options later in this lesson, and as you ll see there will always be the potential for loss but also for high returns. The key is to have a balanced investment portfolio so gains in one type of investment in your portfolio can offset any potential losses that may occur in another part of your portfolio. Diversifying your investments (spreading your money among different investments) is a good way to reduce investment risks. Furthermore, understanding the risks posed by certain types of investments and determining the kind of investment risks worth taking at a particular point in time should be a part of everyone s investment strategy. One thing to remember: we all have a responsibility when it comes to the decisions we make. We need to educate ourselves and understand the potential risks involved and then make an informed decision about whether or not to accept the risk.

123 Lesson 10 Financial Markets Student Resource 10.2 Chart: Investment Risk Factors Student Name: Date: Directions: Use your knowledge of the different forms of risk to complete the table below. For each type of risk, describe some of the factors that cause it and one thing it most affects. Type of Risk What Causes It One Thing It Most Affects Economic Risk Market Risk Liquidity Risk Inflation Risk Interest Rate Risk

124 Lesson 10 Financial Markets Type of Risk What Causes It One Thing It Most Affects Business Risk Global Investment Risk

125 Lesson 10 Financial Markets Student Resource 10.3 Note-Taking Guide: Investment Instruments Student Name: Date: Directions: Jot down what you know about each term. Add information both during and after viewing the presentation and then write a definition of each type of investment instrument or term. 1. common stock 2. preferred stock 3. initial public offering (IPO) 4. primary market 5. corporate bonds 6. US Treasury bonds 7. municipal bonds 8. mutual funds

126 Lesson 10 Financial Markets 9. exchange-traded funds (ETFs) 10. options 11. futures 12. annuities 13. hedge funds 14. private equity

127 Lesson 10 Financial Markets Student Resource 10.4 Reading: Investment Instruments There are many different investment instruments available that can help investors meet their financial objectives, each with its own unique characteristics. Being knowledgeable about the various instruments available should be the first part of any investment strategy.

128 Lesson 10 Financial Markets Some of the main differences between common and preferred stock include the payment of the dividends, voting rights, and the risk return trade-off. Both common stocks and preferred stocks represent ownership in a company, and both stockholders share in the profit if the stock prices go up. However, preferred stockholders will be paid dividends before common stockholders, and the dividends are generally greater than for common stockholders. Common stockholders also have voting rights, while preferred stockholders do not. Preferred stocks are more stable and are considered a safer investment; however, they do lack the potential for growth that common stocks can offer. Companies may issue different classes of stock and list them differently on the stock market. Most stocks can be placed into the following categories: blue chip stocks, income stock, growth stock, defensive stock, large and small cap stock, and penny stock. The strength of the stock market is usually related to the economy and specific factors that affect it. The price of stocks move up or down depending on consumer confidence along with how much investors are willing to pay for them at any given time.

129 Lesson 10 Financial Markets When stocks are first purchased by investors from the investment bank or directly from the founders, it is considered a primary market. After that, any shares that are sold will be on the secondary market. On the secondary market, securities may be bought and sold to many different investors and traded on securities exchanges like the NYSE or the NASDAQ. On the primary market, prices are usually set beforehand and generally the company gets the money when its stock is first issued, sold via a firm commitment deal. The investment bank makes a profit by selling the stock at a higher price than it gave the issuer. However, if an investment bank decides to facilitate the sale of a company s IPO stock using a best-efforts basis, the investment bank reduces its risk by not committing to purchase all of the company s stock and receives a flat fee for its services. On a secondary market, factors like supply and demand, the health of the economy, and political changes can affect the price of the security.

130 Lesson 10 Financial Markets A bond is a loan that pays interest over a specified amount of time. Bonds are usually considered fixedincome securities, because the rate of interest and the amount of each payment is fixed at the time the bond is offered. In the United States, there are three main categories that bonds fall into: corporate bonds, US Treasury bonds, and municipal bonds. Within each of these categories various types of bonds are available. Corporate bonds are bonds issued by companies to help them raise money for expansion, modernization, or other business activities. The US government offers different types of bonds; the three most common types of securities include Treasury bills (T-bills), Treasury notes, and US savings bonds. Treasury bills make up most of the money market and are used by the government to provide immediate funding. T-bills are sold in $1,000 increments. T-notes help to pay interest on national debt and are also issued in $1,000 increments. Series EE savings bonds are offered by the federal government and are an alternative to regular savings accounts. They can be purchased in amounts that range from $25 to $5,000. Series EE savings bonds earn interest for up to 30 years. Municipal bonds (or munis) allow states and cities to raise money. Municipal bonds help to finance new projects and improvements for each state, city, or county.

131 Lesson 10 Financial Markets By investing in mutual funds, investors with limited capital can create a diversified portfolio. There are many different types of mutual funds; the three main groups are stock funds, bond funds, and money market funds. Within each group, many different categories exist to meet the needs and objectives of different types of investors. Most of these funds serve to diversify an investor s holdings by purchasing a variety of investments within their particular category. At the end of 2012 there were more than 7,000 mutual funds in the United States with nearly $12 trillion in them. Stock funds invest in stocks and can be classified by the types of stock they buy. Categories can range from (but are not limited to) global stock funds (international companies) to utility funds (companies that offer utility services) to value funds (companies that may be undervalued and pay high dividends) to growth funds (companies in a rapid expansion phase). Bond funds invest in bonds and can be classified by the types of bonds they buy. Bond funds provide income. Categories include junk bonds (high-risk companies), corporate bonds, and municipal bonds, to name a few. Money market funds usually maintain a $1-per-share value, so they can be thought of as equal to cash. The interest the investments earn is low when interest rates are low. Money market funds invest in shortterm interest-paying securities.

132 Lesson 10 Financial Markets ETFs are portfolios of stocks, bonds, or other investment instruments that trade on a stock exchange similar to a regular stock. This portfolio may also have a collection of stocks that are bought and sold as a package. When you invest in an ETF, you are investing in whatever the ETF owns. ETFs are categorized by their investment target. For example, some ETFs track a specific market within the stock exchange, such as the pharmaceutical industry or financial companies. Other ETFs track a market index. A market index is a method for measuring a section of the stock market and is used as a benchmark to gauge the performance of a specific investment. The Dow Jones Industrial Average and the Standard & Poor s 500 Index are the best-known US indicators. Other ETFs track a certain investment style (such as growth funds). Like stocks and traditional mutual funds, ETFs are listed on an exchange (NYSE Euronext) so they can be bought and sold at the price at which they happen to be trading. Investors like the flexibility that this provides. One of the disadvantages of ETFs is that you have to buy them through a broker. Because of this, individuals pay commission fees when they buy and sell. Once bundled and traded on the exchange, the ETFs are not actively managed by a fund manager, and therefore they have lower costs.

133 Lesson 10 Financial Markets Futures and options are both considered derivatives. Derivatives are financial instruments whose value depends on the value of something else, like an asset or an index. Options give the owner the right, but not the obligation, to buy or sell a specific item at a specific price over a specific time. If the owner chooses not to buy or sell, the option will expire and the investor s only loss is the price at the time of purchase. A future is a contract that says that the buyer will purchase a financial instrument for a specific price at a specific time in the future. Futures contracts hold considerable risk because they involve a considerable degree of speculation. Futures require that investors only put up a fraction of the contract s value. Investing in futures can be dangerous for corporations as well as for individuals. Annuities are sold by life insurance companies and provide a regular series of payments that continue for a set period of time. Investors can purchase annuities with a single payment or a series of payments. Annuities are often used to fund a person s retirement. There are fixed annuities that pay a set amount (usually monthly) and variable annuities in which the payments change based on how well the investments are doing.

134 Lesson 10 Financial Markets A hedge fund is an investment fund that is lightly regulated. With hedge funds, investors can participate in a range of investment and trading activities. Hedge funds invest in stocks, bonds, and more and use a variety of investment strategies to enhance returns. Currently hedge funds do not have to register with the SEC. Real estate investment trusts (REITs) are established to make money in real estate. REITs are also similar to mutual funds in that they use funds pooled from a group of investors to buy buildings or mortgages on buildings. Most REITs will specialize in a specific type of building such as hotels, hospitals, apartments, and/or shopping centers. REITs are similar to stock in that they trade on the major exchanges. REITs are considered a highly liquid method of investing in real estate. There are many different forms of REITs; for example, there are equity REITs, mortgage REITs, and hybrid REITs. Private equity consists of securities of companies that are not openly traded on stock exchanges. Very wealthy investors are often interested in private equity investments. Their money goes into pools and is used as a source of funding for high-risk ventures, including new start-ups that are predicted to have significant growth possibilities or firms in need of restructuring. Many well-known companies have had their beginnings with private equity funding. Federal Express and Intel are two well-known examples.

135 Lesson 10 Financial Markets Student Resource 10.5 Reading: Understanding Financial Markets When you think of a market, your mind probably thinks of a specific location, such as a grocery store or a department store where products can be bought and sold. But what do you think of when you hear the term financial markets? Financial markets offer products that are a bit different from the products you would find at a grocery store or a department store. For example, financial markets won t supply you with food items or cleaning supplies; however, you could buy stocks, bonds, mutual funds, and a variety of other investment options! When most people think of financial markets, they often think of the stock market. But financial markets are actually made up of a pretty complex system (rather than a location) that brings together borrowers and savers and facilitates that trade in financial products. In other words, financial markets help to efficiently connect individuals, businesses, and governments that have funds with businesses and governments that have a need for funds. Most people don t enter financial markets directly but use intermediaries such as commercial banks, mutual funds, pension funds, credit unions, savings and loan associations, and insurance companies to help simplify the process. There are many different financial markets. Financial markets are generally characterized by types of investments, types of transactions, and types of borrowers and lenders. The most common types of markets are described below. Money Markets The money market is the financial market that provides short-term borrowing and lending. Some of the most common types of investment instruments that are used in the money market are certificates of deposits and US Treasury bills. Money markets provide short-term debt financing for borrowers who are seeking funds with maturity dates of one year or less. Money markets only include debt instruments because stocks (equity instruments) have no specific maturity date. Money markets provide individuals, businesses, and even the government with short-term funds that have varying maturity dates to match particular financial needs. Capital Markets The capital market is used primarily by governments or companies who hope to raise long-term funds by issuing stocks or bonds. Capital markets include investment instruments that typically have maturity dates of more than a year. Capital markets include stock markets, which provide financing by issuing shares of stock, and bond markets, which provide financing by issuing bonds. The capital market is regulated by the US Securities and Exchange Commission (SEC), which actually regulates and enforces the conduct of every organization participating in the US securities market. One of the most common forms of capital markets is the stock market. Stock markets operate with a few main functions, such as providing companies with the capital to grow, providing investment opportunities for investors, and providing a system for people who want to buy stocks, bonds, and other investment options. Although there are seven major security exchanges in the United States, the three most common are the New York Stock Exchange (NYSE), the NYSE Amex Equities (formerly the American Stock Exchange, or AMEX), and the NASDAQ stock exchange. Companies must meet specific requirements (which vary by stock exchange) in order to have their stocks listed and traded on these exchanges. The NYSE is one of the largest securities exchanges in the world, and it is probably the best known. It is located in Manhattan, New York. In order for a company to be listed on the NYSE, a company must have issued at least a million shares of stock worth at least $100 million and must have earned more than $10 million over the last three years.

136 Lesson 10 Financial Markets NASDAQ refers to the National Association of Securities Dealers Automated Quotations system and came into existence in NASDAQ refers to the largest electronic stock market. It is a screen-based, floorless system that uses a telecommunications network to connect brokers and dealers. It accounts for a large percentage of the equity market trading and has more trading volume per hour than any other stock exchange in the world. The NASDAQ stock exchange is home to the thousands of smaller companies, including many high tech companies. To be listed on the NASDAQ, a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years. The NYSE Amex Equities is another well-known stock exchange that is located in New York. It is known for listing smaller companies than the NYSE and the NASDAQ. Its core business has recently changed from stocks to options and ETFs (exchange-traded funds). ETFs are similar to mutual funds and are traded on the open market like stocks. Financial markets allow society to consume amounts that are in excess of their income and are relied on by the nation to help individuals, businesses, and the government raise the capital they need. For instance, financial markets give many young people the chance to go to college and give families the ability to purchase homes. Financial markets also enable businesses to raise funds to expand and grow. Financial markets, in general, facilitate the wealth and the stability of our country.

137 Lesson 10 Financial Markets Student Resource 10.6 Assignment: Investment Poster Student Names: Date: Directions: Your group must research an investment option and create a poster that highlights its specific characteristics. When designing your poster keep in mind the purpose of the assignment: to educate your fellow classmates on the most important aspects of your particular investment option. Before you begin, make sure to read through the directions, review the assessment criteria, and refer to the example provided by your teacher to help guide you. Cross off the Following Steps as Your Group Completes Them 1. We have read through the assignment directions and understand the assessment criteria. 2. We have chosen our investment instrument and written down some things that we already know about it. 3. We have completed all sections of the research guide. 4. We have highlighted the most important information on Student Resource We have used the information from our research to complete a written draft of the content that will be included on our poster. 6. We have organized the layout and content of our poster. 7. We have completed the construction and design of our poster. Before You Begin Once your group has chosen which investment instrument to research, take a few minutes and write down what you already know about your particular investment option. We know Two questions that we have

138 Lesson 10 Financial Markets Make sure your poster meets or exceeds the following assessment criteria: Accurately describes the investment option and its specific characteristics Effectively informs the audience as to whom the investment option targets (in other words, this investment option is a good choice for someone who ) Correctly highlights the risks and rewards of the specific investment instrument Accurately explains why being knowledgeable about this particular investment instrument is important Contains content that is informative, accurate, and geared toward the appropriate audience Includes a balanced combination of text and graphics that is organized in a neat and visually appealing manner Contains proper spelling and grammar Rough Draft of Poster Use your research from Student Resource 10.7 along with the required criteria above to complete a written draft of the content that will be included on your poster. Assign each group member a different area to concentrate on and then come together to share your drafts.

139 Lesson 10 Financial Markets Student Resource 10.7 Research Guide: Investment Poster Student Name: Date: Directions: The content of your poster will be developed around the prompts listed below. Be sure to thoroughly and accurately complete each section of the guide before you begin your poster. When you have completed your research, reread your notes and highlight the most important information as it pertains to the poster assignment. The investment instrument that we are researching is: Describe the investment option and its specific characteristics. Source: This investment option is a good choice for someone who Source: The risks associated with this investment option include Source: The benefits associated with this particular investment option include Source:

140 Lesson 10 Financial Markets This type of investment option is similar to Source: This investment option is considered a (circle one) short-term, intermediate-term, or long-term investment because Source: Things to keep in mind or questions to ask before making this type of investment include Source: Understanding this particular investment option can better prepare you for the future because Source:

141 Lesson 10 Financial Markets Student Resource 10.8 Feedback Form: Investment Posters Student Name: Date: Directions: Review your classmates investment posters. Be sure to note the particular investment option that is highlighted and list two distinguishing features about each instrument. For each poster answer the following question: when you have money to invest, what is the most important thing you would want to remember about this investment option? An example has been provided for you. Investment Option: Precious Metals Two distinguishing features: 1. Investing in precious metals can take a variety of forms: bullion, coins, certificates, mutual funds, and stock in mining companies. 2. Precious metals are exempt from capital gains taxes. When I have money to invest, the most important thing I would want to remember about this investment option would be Investing in precious metals provides the investor with a great way to diversify his or her portfolio. About 5% 10% of an individual s portfolio should be placed in precious metals. Investment Option: Two distinguishing features: When I have money to invest, the most important thing I would want to remember about this investment option would be Investment Option: Two distinguishing features: When I have money to invest, the most important thing I would want to remember about this investment option would be

142 Lesson 10 Financial Markets Investment Option: Two distinguishing features: When I have money to invest, the most important thing I would want to remember about this investment option would be Investment Option: Two distinguishing features: When I have money to invest, the most important thing I would want to remember about this investment option would be Investment Option: Two distinguishing features: When I have money to invest, the most important thing I would want to remember about this investment option would be Investment Option: Two distinguishing features: When I have money to invest, the most important thing I would want to remember about this investment option would be

143 Lesson 10 Financial Markets Investment Option: Two distinguishing features: When I have money to invest, the most important thing I would want to remember about this investment option would be Investment Option: Two distinguishing features: When I have money to invest, the most important thing I would want to remember about this investment option would be

144 Lesson 11 Forms of Business Ownership Student Resources Resource Description Student Resource 11.1 Reading: Forms of Business Ownership

145 Lesson 11 Forms of Business Ownership Student Resource 11.1 Reading: Forms of Business Ownership Have you ever dreamed of starting your own business? What type of business would you start? Would you like to have complete control or would you prefer to have a partner that shares in the decision-making process? Perhaps you ve dreamed of owning a company on a much grander scale, one that is listed on the stock market, with hundreds or even thousands of employees located all over the world? Whatever type you choose, when you start a business one of the most important decisions that you ll have to make is how you would like the business to be legally organized. The form of ownership that you choose can impact many different areas of your business, from how quickly decisions are made to the type of inventory you carry to major financial decisions including liability and tax issues. The four most common forms of business ownership are described below. Sole Proprietorship A sole proprietorship is a business owned by one person. Most sole proprietorships are small business operations owned by an entrepreneur, or an individual who assumes the risk of business ownership. The online jewelry design company, the small downtown coffee shop, and the computer service company are all probably organized as sole proprietorships. Sole proprietorships are considered the simplest form of business ownership (there is far less paperwork than a corporation) and are the easiest to start, which is one of the reasons they are so appealing. About 75% of all businesses in the United States are organized as sole proprietorships, which makes them the most common form of business ownership. There are many advantages to this type of business ownership. When you make the choice to organize your business as a sole proprietorship, you are giving yourself the power to make all of the business decisions. Unlike other forms of business ownership, owners can make decisions quickly without having to wait for approval from others. Another advantage is that sole proprietorships are subject to few government regulations, and the business is taxed like an individual, which means that any profits made by the business are taxed as the owner s income and recorded on a personal income tax return. Another great advantage of being a sole proprietor is that you do not have to split your profits with a partner you take a lot more risk, but you stand to gain more as well. Although there are advantages to sole proprietorships, there are major disadvantages as well. One of the main disadvantages is that the owner is financially responsible for all of the business s losses. When a business is owned as a sole proprietorship, owners can lose their cars, homes, and other assets. If the business defaults on a loan, an employee is hurt or causes injury to someone else while on the job, or if the business fails, the owner can be held personally responsible for the company s failures. This is referred to as unlimited liability. Another disadvantage with this type of business ownership is that funding can become an issue. A sole proprietorship can have difficulty securing large sums of capital. This limits the business s ability to expand and grow. Partnership One way to expand a business is to create a partnership. A partnership is a business owned by two or more people. Like sole proprietorships, partnerships are easily and inexpensively formed, but they are not nearly as common, making up only 9% of businesses in the United States. When individuals wish to form a partnership, they create a partnership agreement. A partnership agreement is a contract that includes the names of the partners and their contributions, and it establishes how profits and losses will be divided as well as how the duties and responsibilities for each partner will be formed. Partnership agreements should be in writing and are often drawn up by lawyers.

146 Lesson 11 Forms of Business Ownership One of the advantages of operating a business as a partnership is that multiple owners mean multiple sources of capital to draw from. Also, banks are typically more apt to lend money to multiple partners because there is less risk to banks when more people can be held financially responsible. Another advantage is that partnerships are taxed only once. Like sole proprietorships, each owner must pay personal income tax based on the profit that the company receives. Additionally, partners share not only the profits but the workload as well. One of the disadvantages that partnerships face is that many partners have a different vision or goals for the business. Decisions are shared, which can cause disagreement among owners. Also, if one of the partners wants out, exiting a partnership can be very difficult and expensive. Similar to sole proprietorships, the main disadvantage of a partnership is that it has unlimited liability. Therefore, each partner can be held personally responsible for all of the debts of the business, meaning their personal assets can be taken in the event of loss. Corporations Corporations are business organizations that operate as entities separate and independent from their owners. Corporations can vary in size from small businesses with one or two employees to huge companies that employ hundreds or thousands of people. Only about 18% of businesses in the United States are organized as corporations, but they produce the majority (85%) of the total business revenue. Starting a corporation is a very detailed process that takes time and is more costly than forming other types of companies. There are regulations to follow and documents that need to be completed. Corporate bylaws, or the rules by which the corporation will operate, must also be written. When a business operates as a corporation, company stock is issued and company ownership is divided into units called shares of stock. Unlike sole proprietorships and partnerships, the owners don t usually run the company, but a board of directors (individuals who take on a supervisory role) becomes responsible for running and overseeing the business. (Sometimes the owners are members of the board of directors and can share in this role.) Furthermore, the stockholders become the owners of the company. Some corporations decide to sell their stock publicly on the stock market, while others are considered private, with the stockholders comprising mainly family members, friends, and/or the company s employees. One of the main advantages of organizing a company as a corporation is that it is easy to raise capital. If the company needs equipment, real estate, or inventory to expand, shares of stock can be sold to raise the money. Another major advantage is that corporations have limited liability. This means that if the corporation incurs financial problems, the owners are liable only for the amount of their investment. For example, if you decided to invest $50,000 in a corporation and it went out of business, the most you could lose would be the $50,000. Although the business s debts may be worth much more than that, because liability is limited, your personal assets would be protected. One of the main disadvantages of organizing a business as a corporation involves the taxes that must be paid. The profits that corporations earn are essentially taxed twice. The corporation itself (as a legal entity) must pay taxes on its profits, and then the stockholders are also taxed on the profits that they receive (dividends) from the corporation. At the same time, it s important to note that while most corporations are officially taxed at a rate of 35%, the tax rate actually paid by corporations (after deductions, deferrals, and credits) in 2011 was 13.4% significantly lower than the rate paid by individuals. Hybrid Forms of Ownership Over the years, several forms of ownership have been developed to meet the specific needs of particular businesses that combine the characteristics of the three main types. These hybrid forms of ownership include limited partnerships, professional corporations, and Subchapter S-corporations. The most common type is the limited liability company (LLC), which has some characteristics of both a corporation and a partnership. LLCs operate and can elect to be taxed as partnerships (taxed only once)

147 Lesson 11 Forms of Business Ownership but have limited liability for the owners (similar to corporations). LLCs are becoming increasingly popular because owners get the advantage of getting taxed only once and also don t have to face the risks that are associated with unlimited liability. In a limited liability company, the liability of the owners is limited to their investments only. Whatever form of ownership business owners choose, they should carefully research and understand the advantages and disadvantages of each type. Owners should also remember that businesses grow and change; they should continually assess and evaluate their current form of ownership to ensure that it is best suited to meet the needs of the business. As the needs of the business change, owners can change how the business is organized. There have been many businesses that started out as sole proprietorships or partnerships and later evolved into multimillion-dollar corporations.

148 Lesson 12 Ethics in Finance Student Resources Resource Description Student Resource 12.1 Scenarios: Ethical Dilemmas Student Resource 12.2 Reading: Ethics in Finance Student Resource 12.3 Scenarios: Real-World Ethical Issues Student Resource 12.4 Assignment: Memo Writing

149 Lesson 12 Ethics in Finance Student Resource 12.1 Scenarios: Ethical Dilemmas Student Name: Date: Directions: The following table provides you with definitions for the terms ethics, morals, values, and lawfulness. Carefully read each term, its category, and its characteristics. Once you understand each term, read the short scenarios and decide which term(s) is most involved. Record your responses in the space provided. Term Category Characteristics Ethics is a set of moral standards that 1. is based on the conventions and rules of the society in which one lives. 2. relates to right and wrong conduct. 3. governs a person, business, and society. Morals are a system of principles or judgments that 1. guide a person s or a group s standards of behavior. 2. are defined by an individual, society, philosophy, and/or religion. 3. are concerned with the goodness or badness of human action. Values are deeply held beliefs that 1. guide people or groups to make decisions. 2. help people evaluate what is good, right, and appropriate. 3. are accepted and honored by individuals and/or groups. Lawfulness is a behavior that 1. is determined by societal institutions. 2. requires decision makers to resolve issues by applying legal rules. 3. is enforced for the general good. Scenario 1: Gerald works at ISA Insurance Company. One of ISA s long-standing clients got into a car accident. Gerald knows for certain that the damage to the customer s car wasn t even close to the $9,000 claim that was submitted. In fact, it was probably half that amount. Should he let the claim slide (no one would know the difference) or should he inform upper management of the inflated quote? Which term(s) is most involved?

150 Lesson 12 Ethics in Finance Scenario 2: Portia works as a cashier at Farrell s Department Store. She is an extremely hard worker who is often praised by management for her dedication and reliability. Last week, she witnessed one of her coworkers take some money out of one of the registers. The coworker that took the money is a single mother supporting three small children and has spoken to Portia about her financial problems. Portia is really struggling with how she should respond. Which term(s) is most involved? Scenario 3: Joan works for Iridium Computers and is one of its leading sales representatives. An international pharmaceutical company just informed Joan that they would like to place an order for 1,000 Iridium laptops. However, before they commit to the purchase they would like Joan to arrange for the purchasing manager s son to attend a New York Yankees game. They want Joan to purchase the ticket, pay for his first class flight to New York, and provide transportation from the airport to the game. Which term(s) is most involved?

151 Lesson 12 Ethics in Finance Student Resource 12.2 Reading: Ethics in Finance On March 19, 2006, Sarah and Jose Parker were told that they could borrow up to $350,000 to purchase a home! They had no idea they could or would qualify for that amount and now so many homes homes that they thought were out of their price range were suddenly available to them. As first-time homeowners, they qualified for the interest-only, no-down payment, no-documentation loan! Their mortgage broker smiled as he told them the news. Sarah and Jose were considered subprime borrowers. Their credit score was low and they had a limited ability to cover their monthly living expenses. Although their mortgage broker knew that the couple most likely wouldn t be able to afford their adjustable rate mortgage in two years, he believed that in that time, Jose would have a better paying job or they would move out of the house anyway. Furthermore, he knew that if he didn t lend them the money, another institution would. Sarah and Jose got their loan, bought their house, and three years later found themselves in foreclosure. Meanwhile, their mortgage broker sold their loan (bundled together with thousands of other subprime loans) to various investors, who then bundled those subprime mortgages with others and passed them on. But as housing prices started to drop, many subprime borrowers could no longer afford their homes. Sarah and Jose (along with thousands and thousands of others) ultimately defaulted on their loan and lost their home, resulting in one of the largest financial meltdowns in history. The subprime mortgage crisis is just one of the many events that have shaped society s perceptions of the finance industry. In fact, it has been described as the result of one of the greediest business practices by financial organizations and their management in history. Predatory lending practices, uneducated consumers, greedy professionals, light regulations, and loose money have all contributed to this financial catastrophe. Stories such as Sarah and Jose s are common and each one seems to undermine the public s confidence in financial institutions and the professionals who are employed in the industry. Considering the level of trust that the public places in these individuals, when you place your money in the hands of a financial planner, insurance agent, mortgage broker, or banker, you have an absolute right to expect them to behave ethically. Profit Maximization, Legality, and Pressure What prompts this type of behavior? Why would professionals in charge of overseeing other people s money behave in unethical ways? To begin, we must understand the nature of any business (including businesses within the finance industry) is to make a profit. This fact can run counter to an individual s and/or a company s philosophy about behaving ethically. Some of the most common ethical challenges facing the industry are a result of the following: Profit maximization is at the heart of the financial services industry and all businesses except those classified as not for profit. If the fundamental purpose of a business is to make a profit, what happens when the goal (profit maximization) goes against an individual s sense of right and wrong? An individual s desire to do the right thing can become clouded by the desire to make a profit. This is the case with Sara and Jose s mortgage broker. His goal was to lend them the money so his company could earn a profit through their fee, but making that profit caused him to override any misgivings he felt about encouraging Sara and Jose to buy a house that was totally beyond their means. Sometimes moral and ethical behavior gets confused with lawful behavior. Even though something may not be illegal, it still may be unethical. For example, let s say that a company is offering a reward system (high commission and/or bonuses) for selling a particular financial product. What will stop the broker from pushing the product to all of his or her clients even though it may not be right for everyone? For instance, selling a high-risk security to an elderly single woman isn t against the law, but it isn t the right thing to do.

152 Lesson 12 Ethics in Finance Pressure from clients and from the company can get in the way of making ethical choices. Client pressure can affect an employee s ethical standards. If you are an accountant preparing a client s taxes and you are asked to create fictitious business expenses, you may agree to do so in fear of losing the client. Company demands and performance pressures such as increasing quarterly sales figures can also get in the way of ethical behavior by professionals. Although ethical issues are prevalent in any business and range from creative accounting practices to product testing to discrimination, unethical practices from the finance industry seem to make the headlines more frequently. From professionals that work in the industry to consumers of the products and services that it offers, almost everyone is affected in one way or another by the finance industry. Because of its size and its importance to society, sometimes the media paints a pretty grim picture of the ethical lapses that evolve from the industry. However, most finance industry professionals are honest people who are trying to help their clients reach their financial goals. Codes of Conduct and Regulations There are many different approaches for dealing with ethical problems in the finance industry. They range from individual companies establishing their own ethical codes of conduct to nationwide regulatory agencies such as the SEC (Securities and Exchange Commission), the Federal Reserve System, the FDIC (Federal Deposit Insurance Corporation), and FINRA (Financial Industry Regulatory Authority). Many professional associations have also set up their own rules of good conduct. For example, the American Institute of Certified Public Accountants and the Association for Investment Management and Research are both professional associations that have published codes of ethics. All of these entities help to ensure ethically responsible behavior within the finance industry. Whether you re the consumer of a financial product or service or someone who works within the industry, one of the best ways to protect yourself from ethical lapses is to be informed. If you re an employee, you should be familiar with your company s code of ethics and abide by it. You should also be aware of the process with which unethical or illegal actions are reported and strive to do what is best for all parties involved. As a consumer, you should always do your research. Know the product that you re buying or the service that you re requesting, ask the right questions, and above all, be informed!

153 Lesson 12 Ethics in Finance Student Resource 12.3 Scenarios: Real-World Ethical Issues Student Names: Date: Directions: Imagine that you re a management team faced with the ethical dilemma that has been assigned to you. Working with your group, carefully read the scenario and then use the following guide to organize your thoughts in response to the scenario. Do a complete and thorough job with this assignment so that you re prepared for the memo-writing activity to follow. Ethical Dilemma: Describe the ethical challenge. What were the circumstances in this situation? Who are the stakeholders? (Any person or group who was involved.)

154 Lesson 12 Ethics in Finance How should the business respond? How might the business prevent the problem in the future? Other factors to consider:

155 Lesson 12 Ethics in Finance Student Resource 12.4 Assignment: Memo Writing Student Name: Date: Jennifer Ja needs your help. Because her clothing company Natty Attire is growing so quickly, she is facing an increasing number of ethical dilemmas. She is hoping to learn from other businesses that have confronted similar ethical situations. It is your job to present her with a specific ethical dilemma, provide her with an appropriate response to the dilemma, and offer an explanation of how her business can prevent this dilemma from happening. Carefully read through the entire resource before beginning your memo. A memo contains these five elements: Date: To: From: Subject: The content Make sure your memo meets or exceeds the following assessment criteria: The memo presents a brief summary of the situation and the circumstances. The memo explains why the behavior involved is a breach of ethics. The memo provides an explanation of how the business should respond to the unethical behavior. The memo gives a detailed explanation of how the business could prevent the problem in the future. The memo is neat and legible, and uses proper spelling and grammar.

156 Lesson 12 Ethics in Finance Example Memo Date: June 3 To: Jennifer Ja From: Edward Fuentes-Torres Re: Ethical dilemmas in the workplace I have been studying ethical and moral challenges that can arise in the workplace. I have studied one situation in particular and thought that I would share some of the circumstances with you. The occurrence revolved around a young employee of a reputable brokerage house. He recently found out that one of his clients was operating a Ponzi scheme (an investment scam that uses the assets from new investors to make payments to older investors). Instead of reporting this illegal behavior to the proper authorities, his desire to make more money prevented him from doing the right thing. Because he received compensation based on the amount of trading commissions he produced, he became a part of the fraud. A business s response to an ethical problem is extremely important. Unethical behavior affects the confidence of the public, which can eventually put a company out of business. In the particular situation that I studied, the business responded to the situation by adhering to their no-tolerance policy. The company immediately fired anyone that was even minutely involved in the scheme. So, the young man was fired from his job and actually ended up serving jail time for his behavior. Even though the business responded to the fraudulent behavior quickly and efficiently, the employee s actions and the scheme made the headlines and the company s reputation was damaged. In the course of managing ethical issues in the workplace, I have learned that prevention is extremely important. In this particular case the young employee unfortunately felt that he was acting within the boundaries of the company s ethical code. If employees believe that the company s culture secretly honors greed and profit maximization over ethical and moral behavior, most companies will find themselves in similar situations. In this case, it is evident that the company s ethical and moral culture needed to be re-created. Ethical behavior needs to start at the top and companies need to work hard to create a culture of trust, honesty, and integrity. A company s code of ethics should be referred to frequently, and professional development in this area should be stressed. I hope that you find this memo helpful and that your company can learn from the mistakes of others. Sincerely, Edward Fuentes-Torres Edward Fuentes-Torres

157 Lesson 13 Today s Business Environment Student Resources Resource Description Student Resource 13.1 Assignment: Fictional Case Study Student Resource 13.2 Graphic Organizer: The Changing Business Environment Student Resource 13.3 Reading: Today s Business Environment Student Resource 13.4 Example: Fictional Case Study Student Resource 13.5 Feedback Form: Case Study Analysis

158 Lesson 13 Today s Business Environment Student Resource 13.1 Assignment: Fictional Case Study Student Name: Date: A case study is a careful examination of an individual, a group, or an organization. Case studies involve in-depth research and an analysis of some sort of problem or issue. Case studies are generally written in narrative form and usually offer solutions to the issue being described. There are many different types of case studies, and they are used throughout the professional and academic world. Directions: For this assignment you will write your own case study of a fictional company called NetBooks. Your case study must focus on one specific issue or trend in the business environment that is affecting the fictional company. It should offer a real-world account of an event and chronicle the owner s response to the event. Ultimately, it should describe the issue and the people involved, summarize the issue at hand, and provide options for responding to the situation described. Make sure to read through the entire resource before beginning your case study. Case Study Use the following steps to guide you as you create the first draft of your case study. Your case study must involve an issue that a business could realistically be confronted with. Most of the time these issues go beyond the decision-makers control. However, it is the decisionmakers response to these external factors and/or the situation that is important to describe. Remember that your case study is essentially a narrative that provides a detailed account of a real-world situation. You will be writing about a real business issue as it pertains to a fictional business, so although your case study is fictional, it should be realistic. It should creatively narrate specific events in its examination of a real and relevant issue. Possible issues or trends include flexible schedules, demographic changes in the workforce, tolerance of ethnic and religious diversity, social networking sites, environmental regulations, and outsourcing, to name a few. Your case study should provide the reader with enough information so that he or she can understand what the problem or issue is. After analyzing the circumstances, the reader should be able to come up with a reasonable solution, which may or may not reflect the solution that is presented in the case study. Remember, the reader doesn t necessarily have to agree with you. It is your duty to provide the information in an unbiased and descriptive way. Section 1 Research Once you have decided on the topic for your case study, you need to complete some research. Use the following ideas to help guide your research. Describe the effects the issue or trend has on a specific industry and/or the economy. Read specific articles about your topic and find out how other businesses are dealing with the same changes. For example, if your case study will focus on providing childcare services on the business site, you may want to research companies that have the infrastructure to provide this. Preview other published case studies that focus on similar issues. If you have access to computers, either in or outside of class, the following websites provide access to case studies: o o

159 Lesson 13 Today s Business Environment Section 2 Case Study Frame Use the following frame to help you organize and create your case study. After you have completed the frame, copy the information onto a clean sheet of paper. Libraries across the country continue to experience reductions in their funding. From reduced operating hours to outdated technological resources to cutbacks in book purchases, libraries as well as their patrons have been experiencing declining library services. Out of this frustration, Lina, a San Francisco State business student, started NetBooks. Lina founded NetBooks seven years ago; since then it has become the world s largest online book rental company. By paying a small monthly rate, NetBooks customers can have access to an unlimited number of books online. Subscribers are given their own identification number and get instant access to thousands of books and periodicals instantly. Although NetBooks has become instantly popular and has grown at a rapid rate, it has its own set of issues. Changes in the business environment have forced management to take a closer look at a variety of issues. One of the most current problems facing the business environment is This issue can affect NetBooks in many ways. One of the ways is. It can also affect the Lina is very concerned about this issue for a variety of reasons Lina is considering how to respond to the issue and must carefully choose between the following options.

160 Lesson 13 Today s Business Environment One option would be to Another would be to Lina could also After consulting with her managers and the affected employees, Lina has decided Final Draft Make sure that the final draft includes: An overview of the situation, which outlines the issue or problem and creatively captures the setting and characters involved. Relevant background information that provides insight into the situation being described. This may include supplemental information regarding the company, specific company rules, patterns of authority, financial records, and so on. A specific issue that reflects a relevant change in the business environment. An opportunity for the reader to make a decision. The case study should provide the reader with alternative solutions to the issue. Complete, well-constructed sentences and proper spelling. The case study should also be neat and legible.

161 Lesson 13 Today s Business Environment Student Resource 13.2 Graphic Organizer: The Changing Business Environment Student Name: Date: Directions: Record the ways in which each element listed below can affect a business s decision-making process. Technological Advances and Innovations Government Involvement Social and Societal Norms Globalization of Business

162 Lesson 13 Today s Business Environment Student Resource 13.3 Reading: Today s Business Environment There are many factors that business owners and managers must consider when making decisions. Some factors, such as an unproductive workforce or warehouse space that won t accommodate increased orders, are factors entirely under management control. Other factors, however, are outside the control of managers often they are changes to the business environment that affect all of the companies in the same sector or industry. When these changes occur, managers must decide how best to respond to them in order to gain or maintain an advantage over their competitors.

163 Lesson 13 Today s Business Environment Businesses don t operate in a vacuum. Effective managers constantly change strategy based on their competitors actions, and their competitors do the same. In addition to behavior by competitors, other shifts in the environment force businesses to adopt new strategies shifts that affect all of the companies operating in a specific market space. If, for example, schools decide that they won t allow soft drinks to be sold on campus, managers at Coke, Pepsi, and all other soft drink companies must determine how they can continue to sell at their current levels. One soft drink company might decide to shift its efforts to college students. Another might decide to spend money promoting its brand at stores around high school campuses. The third company the one that wasn t paying attention to factors in the environment will probably lose market share to the companies that constantly scan the environment for changes. Changes in customer preferences, economic downturns, and technological innovations that help companies operate faster or more cheaply are all examples of changes that businesses must respond to in order to be competitive.

164 Lesson 13 Today s Business Environment Technological innovations are all around us. They ve changed the way we live and the way we work. Thirty years ago there were no personal computers. Fax machines were rare, and mobile phones were science fiction. Now businesses all over the world depend on them. Thirty years ago there were also no viruses, spyware, spam, or workers who chatted on Skype all day. Technology has ushered in many improvements, but it has introduced threats to companies as well.

165 Lesson 13 Today s Business Environment The success of a company depends in large part upon the competence and dedication of its workforce. For this reason, companies try to make sure their employees are satisfied and feel that they re being treated fairly. But employee expectations evolve. Managers must stay informed, not only about how their employees feel today but also about changes in the marketplace that might affect how employees feel tomorrow because an unhappy worker goes to work for someone else. Managers must also be sensitive to demographic changes in the workforce as a whole. Women comprise almost half of the workforce. Ethnic and religious diversity has ushered in many benefits, but with diversity comes the need for a tolerant environment. Managers have to make sure that employees of all ethnicities and religions feel welcomed at work.

166 Lesson 13 Today s Business Environment The government imposes certain rules on industry. Companies have to pay taxes, for example this is expected and is considered a cost of doing business. Companies are unable to pour toxins into the water supply, or fire workers because of their religious beliefs, or sell illegal products. Companies in certain industries have additional sets of rules that govern their behavior; insurance companies, for example, are regulated by individual states requirements, and the states can change requirements as they deem appropriate. Sometimes these regulations are expensive to obey and have a negative effect on the bottom line, but not obeying them will be costlier in the long run. Decision makers must be careful not only to know and obey the rules they must also stay vigilant for future changes. If a company has advance warning about a state planning a new tax on a certain line of business, or a new FDA regulation that will impose new health regulations on a product, they can respond in a way that will be most beneficial for the organization.

167 Lesson 13 Today s Business Environment Two hundred years ago, most people lived their lives in one place. Travel was difficult, so people stayed put and communities made do with what was available to them for example, coastal dwellers ate a lot of fish, mountain people ate game, and inlanders farmed. With few exceptions, consumption was local. When travel became easier and faster, people started branching out. Farmers could then ship vegetables to other communities without fear that everything would spoil before it got where it was going. With the invention of motor engines, shipping became easier still no longer did a community have to sit close to a railroad to enjoy purchases from far-away places. Soon access to everything produced in this country was available throughout the United States. These days such a change is taking place on a larger scale. Now travel is possible to anywhere on Earth. Forward-looking managers saw the trend coming and took advantage of it in many ways by exporting their goods internationally, by creating websites where people from other countries can purchase their products, or even by moving operations to another country. With 95% of the world s population living outside the United States, multicultural knowledge and cultural awareness have become necessary in order to deal in the global economy. The companies that quickly took advantage of the trend toward globalization developed new markets and beat out their competitors.

168 Lesson 13 Today s Business Environment It s common for managers to see their job as dealing with events within the organization. Even good managers can get caught up in dealing what s happening right in front of them Jai wants a raise, or one of the trucks has broken down and these things are important. But by also turning outward and considering how changes in the business environment might affect the future of the organization, managers can make strategic decisions based on all the information that affects the company s performance, today and in the future.