Credit Cards & Debt

Topic 2 Day 1

What is a Credit Card?

Cards that entitle their holders to buy goods & services based on the cardholder’s promise to pay for these goods & services

Factors Considered when Granting Credit

Income; ability to payDebtBill Payment or Credit History

Credit Card Facts

There are more than 292 million credit cards in use in the United States

76 percent of undergraduates have credit cards, and the average undergrad has $2,200 in credit card.

Most Americans have credit card debt, and the average American owes more than $9,000 to credit card companies.

Financial JargonFinancial Jargonlet's go over some important let's go over some important terms you'll encounter in credit-terms you'll encounter in credit-card brochures or discussions card brochures or discussions with potential lenders:with potential lenders:

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•Annual feeAnnual fee - A flat, yearly charge similar to a - A flat, yearly charge similar to a membership fee. membership fee.

•Finance chargeFinance charge - The dollar amount you pay to - The dollar amount you pay to use credit. Besides interest costs, this may use credit. Besides interest costs, this may include other charges such as cash-advance fees, include other charges such as cash-advance fees, which are charged against your card when you which are charged against your card when you borrow cash from the lender. borrow cash from the lender.

•Grace periodGrace period - A time period, usually about - A time period, usually about 25 days, during which you can pay your 25 days, during which you can pay your credit-card bill without paying a finance credit-card bill without paying a finance charge. charge.

•Annual percentage rate (APR)Annual percentage rate (APR) - The yearly - The yearly percentage rate of the finance charge percentage rate of the finance charge

•Interest rates on credit-card plans change over time. Interest rates on credit-card plans change over time.

•Fixed rateFixed rate - A fixed annual percentage rate of the finance - A fixed annual percentage rate of the finance charge charge •Variable rateVariable rate - Prime rate (which varies) plus an added - Prime rate (which varies) plus an added percentage (For example, your rate may be PR + 3.9 percentage (For example, your rate may be PR + 3.9 percent.) percent.) •Introductory rateIntroductory rate - A temporary, lower APR that usually - A temporary, lower APR that usually lasts for about six months before converting to the normal lasts for about six months before converting to the normal fixed or variable rate (This is a hot topic -- more about it fixed or variable rate (This is a hot topic -- more about it laterlater.) .)

http://www.cnn.com/video/#/video/business/2009/01/06/bts.velshi.calls.cnn?iref=videosearch

http://www.cnn.com/video/#/video/politics/2007/12/04/cafferty.file.debt.cnn?iref=videosearch

http://www.cnn.com/video/#/video/bestoftv/2008/01/11/me.howard.single.mom.tips.cnn?iref=videosearch

http://www.cnn.com/video/#/video/bestoftv/2008/01/29/howard.debt.cnn?iref=videosearch

Other Types of Credit

Outside of credit card, there are many other ways to obtain credit.Both public and private lenders offer loans with varying rates of interest.

Gen Debt?Gen Debt?

Average credit card debt for people Average credit card debt for people under age 35:under age 35:

1998: $1,8791998: $1,879

2000: $2,7482000: $2,748

2006: $8,0002006: $8,000

Pay it off? It will cost you $400 per Pay it off? It will cost you $400 per month for the next 5 yearsmonth for the next 5 years..

Mortgages

When buying a house, most people choose to take out a mortgage. Length of mortgages range from 10

to 40 years. 20- and 30- year mortgages are most

popular. Mortgage interest rates are largely

dependent on the strength of the national economy.

http://www.cnn.com/video/#/video/business/2009/02/03/dcl.cr.mortgage.debt.cnn?iref=videosearchhttp://www.cnn.com/video/#/video/bestoftv/2008/10/13/soros.financial.crisis.1.cnn?iref=videosearch

Student Loans

Nearly half of all college students receive some form of federal financial aid.Over two thirds of all student loans are lent by the government.

http://www.fafsa.ed.gov/index.htm

Student LoansMost student loans are have very low interest, around five percent. Loans are determined based on need.Repayment of loans begins when the student has finished or stopped attending college.Student loans can sometimes be forgiven for people entering the military and careers in education and public service.

Gen Debt?Gen Debt?

Ave. Student Loan Debt:Ave. Student Loan Debt:

1994: 1994:

•Undergraduate: $15,700.Undergraduate: $15,700.

2007: 2007:

•Undergraduate: $30,000 Undergraduate: $30,000

•Graduate/Professional Degrees: $30,000-Graduate/Professional Degrees: $30,000-$114,000$114,000

1994: 46% of graduating seniors took out 1994: 46% of graduating seniors took out college loans.college loans.

2000: 70%2000: 70%

Average Loan Debt Per Average Loan Debt Per StudentStudent

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1987 1991 1997 2002

Loan Amount

Average Annual TuitionAverage Annual Tuition

http://www.cnn.com/video/#/video/bestoftv/2009/04/28/nbnb.student.loans.cnn?iref=videosearch

Bonds & Other Financial Assets

Topic 2 Day 2

What are they?

pay investor a fixed amount of interest at regular intervals for a fixed amount of time

Three Components of Bonds

interest rate that the bond issuer will pay the bondholdertime at which payment to the bondholder is dueamount that an investor pays to purchase the bond & that will be repaid to the investor at maturity

Not all bonds are held to maturity Some may be bought or sold, & their price may changeYield is the annual rate of return on the bond if the bond were held to maturity

Advantages to the Issuer

relatively safeOnce the bond is sold, the coupon rate doesn’t changedo not own a part of the company

Disadvantages

Company must make fixed interest payments, even in bad years when it does not make moneyfirm maintains financial health, its bonds may be downgraded to a lower bond rating & thus may be harder to sell unless they are offered at a discount

Savings Bonds

Low denomination bonds issued by the U.S. governmenthelp pay for public worksno risk of default

Treasury Bonds, Bills, & Notes

U.S. Treasury Department Offer different lengths of maturitySafest investments in terms of default risk

Municipal Bonds

finance such improvements as highways, state buildings, libraries, parks, & schoolsInterest paid on these is not subject to income taxes at the federal level or issuing state

Corporate Bonds & Junk Bonds

Issued by corporations to help raise money to expand their businessesJunk Bond: high-yield securities, are lower-rated, & potentially higher paying

Financial Asset Markets

Classified according to the length of time for which bonds are lentCapital Markets Money is lent for periods longer than

a year

Money markets Money is lent for periods of less than

a year

The Stock Market

Saving & InvestingTopic 2 Day 3

Stock Shock:Stock Shock:

Understanding Understanding the Stock Marketthe Stock Market

You hear You hear about it any about it any time it time it reaches a reaches a new high or new high or a new low…a new low…

and you also hear about it and you also hear about it daily in statements like "The daily in statements like "The Dow Jones Industrial Average Dow Jones Industrial Average rose 2 percent today, with rose 2 percent today, with advances leading declines by advances leading declines by a margin of..." a margin of..."

The front of the New YorkThe front of the New YorkStock ExchangeStock Exchange

The NYSE is a supermarket for The NYSE is a supermarket for stocks. The NYSE can be thought stocks. The NYSE can be thought of as a big room where everyone of as a big room where everyone who wants to buy and sell shares who wants to buy and sell shares of stocks can go to do their of stocks can go to do their buying and selling. buying and selling.

Stocks in publicly traded Stocks in publicly traded companies are bought and sold companies are bought and sold at a stock market (also known as at a stock market (also known as a stock exchange). The New York a stock exchange). The New York Stock Exchange is an example of Stock Exchange is an example of such a market.such a market.

Return is the money an investor receives above and beyond the sum of money initially invested.

Risk and Return

Return and LiquiditySavings accounts have greater liquidity, but in general have a lower rate of return.Certificates of deposit usually have a greater return but liquidity is reduced.

Return and RiskInvesting in a friend’s Internet company could double your money, but there is the risk of the company failing. In general, the higher potential return of the investment, the greater the risk involved.

Other Types of Financial Assets

Certificates of DepositCertificates of deposit (CDs) are available through banks, which use the funds deposited in CDs for a fixed amount of time.CDs have various terms of maturity, allowing investors to plan for future financial needs.

Money Market Mutual FundsMoney market mutual funds are special types of mutual funds. Investors receive higher interest on a money market mutual fund than they would receive from a savings account or a CD. However, assets in money market mutual funds are not FDIC insured.

What is the FDIC?

Ensures customer deposits if a bank failsInsure losses up to $100,000

What is the Federal Reserve?

Influences & controls the money supply

Financial intermediaries accept funds from savers and make loans to investors.

Financial Intermediaries

Commercial banksSavings & loan associations

Savings banksMutual savings banks

Credit unions

Financial Institutions that make loans to…

Life insurance companiesMutual funds

Pension fundsFinance companies

InvestorsSavers make deposits to…

The Flow of Savings and Investments

Diversification

Spread your money around to reduce the risk of losing your entire investmentMutual Funds are the best at this, since the investment can buy shares of up to 120 different companies

Investment Considerations

1.Risk v. Return, High Risk= High Return

2.Objectives: College, Retire, age

(1) Hi-Lo. The first column is (1) Hi-Lo. The first column is the highest and lowest prices the highest and lowest prices at which the stock traded in at which the stock traded in the past year (52 weeks). In the past year (52 weeks). In our example, the highest price our example, the highest price was $47 and the lowest was was $47 and the lowest was $37$37

(2) Company Symbol. The second (2) Company Symbol. The second column is the abbreviated name of column is the abbreviated name of the firm issuing the stock. The the firm issuing the stock. The symbol of the company stands next symbol of the company stands next to the abbreviated name. In our case, to the abbreviated name. In our case, it is "Z." This symbol is sometimes it is "Z." This symbol is sometimes referred to as the company's "ticker referred to as the company's "ticker symbol."symbol."

3) Dividends. Dividends are the 3) Dividends. Dividends are the amount a company pays to its amount a company pays to its stockholders. The third column is the stockholders. The third column is the annual dividend paid per share. In our annual dividend paid per share. In our example, it is $2.30example, it is $2.30

4) Volume. The fourth column, titled "VOL," 4) Volume. The fourth column, titled "VOL," lists the volume of shares (in hundreds) that lists the volume of shares (in hundreds) that were traded that day. In our example, on August were traded that day. In our example, on August 23, 1999, 33,500 shares were traded by XYZ. 23, 1999, 33,500 shares were traded by XYZ. Volume may give you an indication on the size Volume may give you an indication on the size of the breadth of the market for a company's of the breadth of the market for a company's sharesshares

5) The YLD column approximates the dividend 5) The YLD column approximates the dividend yield. The dividend yield is the current return on yield. The dividend yield is the current return on invested capital. We can use it to compare invested capital. We can use it to compare dividend returns for firms that have different dividend returns for firms that have different stock prices. We derive the dividend yield by stock prices. We derive the dividend yield by dividing the current dividend by the closing dividing the current dividend by the closing stock price. In our case the dividend yield is stock price. In our case the dividend yield is 5%, calculated as follows:5%, calculated as follows:   

Dividend Dividend     $2.30  $2.30   = 5.43% = 5.43% Price (8th column) Price (8th column) $42.375 $42.375

The sixth column is the price to earnings (P/E) The sixth column is the price to earnings (P/E) ratio. The P/E ratio compares the price per ratio. The P/E ratio compares the price per share to the earnings per share. It shows how share to the earnings per share. It shows how much an investor is willing to pay for $1 of much an investor is willing to pay for $1 of current earnings per share (EPS). The P/E ratio current earnings per share (EPS). The P/E ratio is calculated by dividing the price by the is calculated by dividing the price by the earnings per share (EPS). Applying this formula earnings per share (EPS). Applying this formula to our example we get the following:to our example we get the following:

Price (8th column) Price (8th column)     $42.375  $42.375   = 10  = 10          (the stock is selling for 10X the earning ratio) (the stock is selling for 10X the earning ratio) EPS EPS         $4.23 $4.23 (7) The seventh column, titled Hi-(7) The seventh column, titled Hi-

The seventh column, titled Hi-Lo, represents the The seventh column, titled Hi-Lo, represents the highest and lowest prices at which trades were highest and lowest prices at which trades were completed during the trading day. In our completed during the trading day. In our example, the high was at $43 and the low was at example, the high was at $43 and the low was at $40$40--

The eighth column, titled Close, is the last price The eighth column, titled Close, is the last price at which a trade was made during the trading at which a trade was made during the trading day. In our example it is $42 3/8 ($42.375).day. In our example it is $42 3/8 ($42.375).