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Investment Options
Investment Vehicles
A vehicle is something you use to get from where you are now to where you
want to be. For example, if you wanted to go shopping at the mall, you
might ride the bus, train, or taxi, or have a friend or relative drive you.
There are pros and cons associated with each of your transportation options
(vehicles). One vehicle might be faster than another, one vehicle
might be safer than the rest, or another vehicle might be cheaper than the
others. You need to use the vehicle that is right for your current
situation.
When we invest in the stock market, we usually do so with a financial
goal in mind. This goal, whether short-term or long-term, is where we
want to be in the future. A short-term goal might be to save enough
money for a down payment on a house; a long-term goal might be to retire
financially secure. Let's take a closer look at the most common
investment vehicles (common stocks, bonds, T-bills, mutual funds) we can use
to reach our goals.
Banks and Simple Interest
Bank accounts that pay interest are considered among the safest forms of
investments. Deposits are insured by the Federal Deposit Insurance
Corporation (FDIC), and investors have little worry that money invested in a
savings account will be lost. In this way, the interest paid by banks
forms the baseline by which other investments must be measured. Why
would an investor risk his or her money in a particular investment unless
the return on that investment is enough to walk away from the safety of a
guaranteed interest-paying bank account?
One of the first questions an investor needs to ask when considering an
investment is: Am I being adequately rewarded in return for the risk
being assumed on this investment? That's why understanding how
interest works on bank deposits is necessary before an investor can
reasonably consider the risk/reward offered by other investments.
We'll take a look at simple interest in this activity. The formula
for computing simple interest is: Interest Rate x Principal =
Interest Earned
In this formula, principal simply means the amount of money invested.
Example:
A. Lyle deposited $5,000 into a savings account. The
account pays 5% interest per year. How much money will Lyle earn from
this investment at the end of the one-year term?
$5,000 x 5% = Interest Earned
$5,000 x 0.05 = $250
Lyle's deposit will earn $250 in interest the first year. This means
that at the end of 1 year, his account would have a balance of $5,250, once
the interest has been added to his beginning balance.
B. Beverly invested $12,800 in a one-year certificate of
deposit at her bank. Interest on this certificate is 6.6%. How
much money will her investment have earned when the CD matures?
$12,800 x 6.6% = Interest Earned
$12,800 x 0.066 = $844.80
This CD will earn $844.80 at maturity.
Activity
Open the following word document. Type your answers to the
questions and your name then print it out and turn in to Mrs. Payton.
Simple Interest Handout
Group Activity
Choose one of the following topics to research and create a Power Point
presentation on. When finished, you will present to the class.
- The FDIC
http://www.fdic.gov/ or
http://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation
- Certificate of Deposit (CD)
http://en.wikipedia.org/wiki/Certificates_of_deposit or
http://www.investopedia.com/terms/c/certificateofdeposit.asp
- Bank Runs and the Creation of the FDIC
http://www.pbs.org/fmc/timeline/estockmktcrash.htm
http://www.fdic.gov/about/learn/learning/why/index.html
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