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Application and Enrichment

S AVING AND INVESTING

CHOOSING THE BEST INVESTMENT

Your Aunt Edith is not only a successful banker, she’s generous. For your eighteenth birthdayshe presented you with $500 with these conditions:

1) you must invest the money;

2) you must write her a letter explaining why you made those choices.

She plans to save your letter and present it to you in 10 years so that you can evaluate yourdecisions.

Directions: List the advantages and disadvantages (risks) for each choice below. Then choose the one thatyou think is best for you, or you may divide the $500 between two or more kinds of investment. Finally,write your letter to Aunt Edith, explaining your choice—or choices.

Choice:

Dear Aunt Edith,

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Name Date Class

6

Investment Advantages Disadvantages

A. PASSBOOK SAVINGS

B. CERTIFICATE OF DEPOSIT (CD)

C. COMMON STOCKS

Enrichment Activity 6

Teaching Transparency

Application and Enrichment

Review and Reinforcement

C HAPTER 6 SAVING AND INVESTINGDirections: Read each statement below, and then write the letter of the correct answer.

1. The money return a stockholder receives on his or her investment in a company is called .

a. a dividendb. interest

c. capital

2. A company obtains money for use in expanding its business by issuing to buyers, who will share thecompany’s profits.

a. salesb. bonds

c. stocks

3. Bondholders earn from the borrowing company or government.

a. tax breaksb. interest

c. pensions

4. Profits earned on the sale of stocks are known as .

a. capital gainsb. interest

c. stock income

5. A time deposit that pays higher interest rates for longer maturity is a .

a. money market deposit accountb. certificate of deposit

c. statement savings account

6. An easy way to invest in a variety of stocks and bonds is to participate in a .

a. mutual fundb. pyramid scheme

c. certificate of deposit

7. Pension plans are provided by many companies to help employees save for .

a. collegeb. investment

c. retirement

8. A person who earns less than $25,000 can contribute up to $2000 per year to and deduct themoney from taxable income.

a. an Individual Retirement Accountb. a Keogh Plan

c. an IRS

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Name Date Class

Economic VocabularyActivity 6

140A

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U SING A SPREADSHEETIndividuals, corporations, and government agencies use electronic spreadsheet programs tostore, edit, and format numerical data. Spreadsheet programs perform calculations automati-cally and allow users to turn spreadsheets of data into graphs for analysis.

The sample spreadsheet below shows various categories of government spending. Each piece of data is stored in a space called a “cell,” which has a corresponding letter and numberassigned to it. For example, “Source” is in A1. Examine the spreadsheet and answer the ques-tions that follow.

Federal Receipts, by Source, 1980–98(in millions of dollars)

A B C D E F G H

Note: Totals reflect interfund and intragovernmental transactions and/or other functions not shown separately.Source: U.S. Census Bureau [http://www.census.gov/prod/3/98pubs/98statab/sasec10.pdf]

1. Which cell in the spreadsheet is highlighted?

2. What information appears in cell D5?

3. What data appears in cell F3?

4. The formula for the total excise taxes collected in the five years represented is sum (D5:H5). Write a formula tocalculate how much money the government received in 1980, 1985, 1990, 1995, and 1998 from individualincome taxes.

Name Date Class

24

Source 1980 1985 1990 1995 1998

Individual income taxes 244,069 334,531 466,884 590,244 767,768

Corporate income taxes 64,600 61,331 93,507 157,004 190,842

Social insurance and retirement receipts 157,803 265,163 380,047 484,473 571,374

Excise taxes 24,329 35,992 35,345 57,484 55,540

Total 517,112 734,088 1,031,969 1,351,830 1,657,858

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Name Date Class

S EQUENCING EVENTS RELATED TO SAVINGS AND INVESTING

Many important developments and events have affected the ways in which people save andinvest their money.

Directions: Use your knowledge of sequencing to help you complete the following activities.

1. Look at the events in the following list. In the table below the list, arrange the events in order, beginning withthe earliest event. Then identify the date in which the event took place, and briefly explain its significance.

• Congress passes the Securities and Exchange Act.

• Congress passes the Keogh Act.

• Standard & Poor index expands to include 500 companies.

• Dow Jones Industrial Average is created.

2. When one thing happens, it may cause a series of events to happen, one after another. Explain the series ofevents that led to the creation of the Federal Deposit Insurance Corporation (FDIC).

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Date Event Explanation

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Name Date Class

S AVING AND INVESTINGYou have many options of places and ways to invest your money. This exercise will help youreview this information.

Directions: Below are descriptions of different investments. Beside each description, write the investment itdescribes. Choose from the following list:

money market fund bond tax-exempt bond

stock Keogh Plan real estate

certificate of deposit savings bond Treasury bill

mutual fund

1. A allows self-employed people to set aside a maximum of 15 percent of income up to a specified amount eachyear and deduct that amount from their yearly taxable income.

2. A is an investment company that pools the money of many individuals to buy stocks, bonds, or other invest-ments.

3. purchase entitles the buyer to a certain part of the assets and future profits of the corporation.

4. is an investment in one’s own home, condominium, or co-op and has often proven to be wise.

5. A is a certificate a company or government issues in exchange for borrowed money. It promises to pay a statedrate of interest over a stated period of time, and then to repay the borrowed amount in full at the end of thattime.

6. A states the amount of deposit, the maturity, and the rate of interest being paid. Saver must leave their moneyon deposit for a certain period.

7. A uses investors’ money to make short-term loans to businesses and banks. Investors can write checks againsttheir money.

8. A is attractive to people with limited money to invest. The investor pays half the face value. The full face value isreached within 10 years.

9. A is sold by a local or state government. The interest is not taxed by the federal government. The interest earned within the city or state issuing it is also usually exempt from city andstate taxes.

10. A is a large investment sold by the Treasury Department. It matures in between 3 months and 1 year. The mini-mum mount of investment is $10,000.

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Critical Thinking Activity 12 Reteaching Activity 6

Reinforcing Economic Skills 24

Saving/Investment Return onOption Definition Investment Safety Liquidity

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E VALUATING SAVINGS AND INVESTMENT OPTIONSPeople save and invest for very different reasons. Three criteria involved in deciding how to saveor invest money are return on investment, safety, and liquidity. These are defined as follows:

Return on investment: the increase in value of the original sum over timeSafety: the degree of risk involvedLiquidity: the ease with which an asset can be converted to cash

Directions: The following table lists various saving and investment options. Define each option in the column provided. Then rate each option for return on investment, safety, and liquidity as good (��), adequate (�), poor (�), or variable (��).

Name Date Class

12

1. Passbook savings

2. Money market account

3. Certificate of deposit (CD)

4. Stocks

5. Bonds

6. Individual retirement account (IRA)

7. Straight life insurance

8. Real estate

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S PECULATING IN STOCKSOne way people make money on a stock is by selling it for more than they paid. Some peoplebuy stock just to speculate–they hope that the price will increase so they can sell it at a profit.The following table shows the most active stocks in the New York Stock Exchange during oneday of trading. This means that stockholders bought and sold more shares of these stocks thanof any others.

1 Trading volume in numbers of shares2 Closing price for the day3 Change in price from the previous day’s close

Directions: Use the information above to complete the exercises.

1. Which company names in the table do you recognize? Name at least one service or product for which each com-pany you recognize is known.

2. Which company’s stock is second-highest in price? Did it cost more or less at the beginning of the day’s trading?

3. Based on the table, which stock had the greatest percent change in value? Is it the same as the stock with thegreatest dollar change in value?

4. If you were a speculator that could have invested $1,000 at the beginning of the day, which stock would havegiven you the greatest gains? Explain your choice.

Company Volume1 Close2 Change3

CBS 12,766,000 50 11/16 �1 3/4

CocaCl 10,465,800 54 5/8 �2 3/4

Hilton s 9,625,000 11 3/16 �5/8

AmOnline s 9,597,000 93 5/16 �3 1/2

Lucent s 8,606,000 67 1/4 �1 1/4

NewellRub 8,120,500 31 15/16 �15/16

AT&T s 8,086,300 47 5/17 �13/16

IBM s 7,552,000 132 �3 9/64

PhiMor 7,471,100 37 1/4 �2

Compaq 7,306,400 22 15/16 �5/16

Name Date Class

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Economic Concepts 10

Median Female Income as a Percentage of Median Male Income

100

90

80

70

60

50

40

30

20

10

01965 1970 1975 1980 1985 1990 1995 2000*

*estimated

Wom

en/M

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arni

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Rati

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I NCOME DISTRIBUTIONThe bar graph shows the differences in median wages for males and females in the United States. It compares thepercentage of median female income to median male income. For example, in 1990 the median income forwomen was 71.1 percent of the median income for men.

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Economic Concepts Transparency 10

Consumer ApplicationsActivity 12

Free Enterprise Activity 12

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M AKING MONEY WITH YOUR MONEY

Name Date Class

12

Where do you save money? Do you put it under a mattress for safekeeping? Or do you investit, so that it will grow over time? Putting it in a savings account or other financial instrumentallows you to earn interest, that is, to make money with your money.

There are two types of interest: simple and compound. Simple interest of 4% means that you will earn 4% foreach year that your money is invested. Annually compounded interest of 4% means that you will earn 4% the firstyear. The next year you will earn 4% on both your initial investment and on the first year’s interest. The following yearyou will earn 4% on your initial investment, and 4% on each of the previous two years’ interest, and so on.

You can compute either type of interest using a formula. You will want to use a calculator to compute compoundinterest. Use the key marked ^ or xy to compute exponents.

Simple interestFinal balance � initial deposit � (initial deposit � annual interest rate � number of years)

Compound interestFinal balance � initial deposit � (1� interest rate per period) number of periods

To find the amount that a $500 investment will grow to after 2 years at 4% simple interest, calculate:500 � (500 � 0.04 � 2) � 500 � 40 � $540

Now suppose you invested the $500 at the same rate of interest, but the interest is compounded quarterly (4 timesper year). For each of 8 quarters, you will earn 1% interest, which will be added to the principal before computingthe next quarter’s interest. So now find:

500 � (1 � 0.01)8 � 500 � (1.01) 8 � 500 � 1.0829 � $541.45

Find the final balance for each investment under simple and compound interest.

Interest InterestInitial Interest Simple Compounded Compounded

Amount Rate Time Interest Annually Quarterly

$500 6% 5 years (1)

$1,500 4% 2 years (2)

$12,000 8% 10 years (3)

EXAMINING THE CARTOON

Multiple Choice

1. Why does the man on the right have the most money?

a. because he made a sign b. because he added “.com” to his signc. because he is an investor d. because he is a venture capitalist

2. Who or what is the cartoonist poking fun at?

a. poor people who don’t work b. people who give to charityc. investors in Internet stocks d. rich business owners

3. What might another message of the cartoon be?

a. Poor people do not deserve charity. b. Poor people have good business sense.c. Poor people should work for a living. d. Poor people are excluded from the high-tech economy.

Critical Thinking

4. Analyzing the Cartoon Write a one-sentence summary of the message of the cartoon.

5. Expressing Your Opinion Do you think some people might find this cartoon offensive? Explain.

�

WO LITTLE WORDS: DOT COMThe phrase “dot com”—a typical Internet address suffix—has become a part of the Americanlexicon. It has an especially sweet sound to many investors, who view the growth of theInternet as a once-in-a-lifetime opportunity to grow their money. However, many financialanalysts think that the potential of “dot com” companies are greatly exaggerated, and thattheir stocks have been overpriced.

Directions: Study the cartoon below. Then answer the questions that follow.

Name Date Class

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T

Mike Keefe

opportunities to acquire more education and trainingthroughout one’s working life, and pension reform . . .

Virtually all analysts believe that the trend towardcontingent work is likely to accelerate far faster than theability of society to adjust by expanding the social safetynet or providing the kinds of hard-won rights that full-time workers enjoy, like unemployment insurance, healthcare and family leave. For many workers, the flexibility ofpart-time work often outweighs the disadvantages. But ifmore and more formerly full-time and/or primary wage

earners drift into the world, companies can expect to seemounting resentment against the distinctly second-classstatus of most contingent work. At that point . . . thepoliticians will respond. “When people start realizing thatthis is happening to me, or to their neighbor or theirfriend,” says Nelson, “and they start writing letters toCongress, you’ll see something happen.”

Crittenden, Ann. “Temporary Solutions.” Working Woman, February 1994.

24 Primary and Secondary Source Readings

ANALYZING THE READING

1. What are contingent workers?

2. Why would the issue of contingent workers be featured in a magazine written primarily for women?

3. Reread the second paragraph. What makes the increase in the number of contingent workers “troubling”?

4. What are the disadvantages to contingent work?

5. What do you think should be done to minimize exploitation of contingent workers? Explain your answer.

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Cooperative Learning Simulations and Problems 12

Primary and Secondary Source Reading 12

Math Practice for Economics Activity 12

Economic Cartoons Activity 12

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S AVINGS AND INVESTMENT

GROUP PROJECT

An investor can choose among a variety of investment options to make a plan that suits hisor her special needs. In the following activity, a group representing an individual investordefines its financial goals and consults a group of investment advisers. The investment advisers then recommend a detailed savings and investment plan based on the individual’sgoals and needs.

Financial Intermediaries Savings and Investment Options• Commercial Banks • Certificates of Deposit• Savings & Loan Associations • Savings Accounts• Savings Banks • Corporate Bonds• Mutual Savings Banks • Municipal Bonds• Credit Unions • Government Savings Bonds• Life Insurance Companies • International Bonds• Mutual Funds • Money Market Mutual Funds• Pension Funds • Treasury Notes and Bonds• Finance Companies • Treasury Bills

• Individual Retirement Accounts• Stocks

1. Group Work Stage 1: Students work in twogroups of five or more. Group 1 represents invest-ment advisers. Group 2 will represent an individualseeking investment advice.

2. Group 1 Work Stage 2: Assign group members to research one or more of the topics listed above.Members should analyze the information they collect that may be of interest to a potentialinvestor. Group members should share theirresearch results and analysis. Then they should prepare a chart that displays the capabilities andlimitations of each intermediary and the advantagesand disadvantages of each type of savings plan andinvestment.

3. Group 2 Work Stage 3: Group members discuss and answer the following questions: How much initial capital do we have to save and invest? Howmuch money per month can we add to the initialinvestment? When do we need the money? Do weneed access to part of the money? What do we

need the money for: major purchases, vacation,emergency fund, education, retirement? How muchrisk can we tolerate? Work together to prepare awritten summary of answers to these and any otherquestions brought up by group members. Submitthe summary to Group 1.

4. Group Work/Analysis Stage 4: Groups 1 and 2 combine. Group 1 should use Group 2’s summary to develop a suitable savings and investment plan.The plan should be delivered to Group 2 in an oral presentation, using the chart prepared earlier. Afterthe presentation, Group 2 should consult and deter-mine whether it will accept the recommended plan.

Group Process QuestionsWere the goals of the assignment clear?

Did the group agree on the assignment of tasks?

Did each member share the information?

Did members work well together?

COOPERATIVE GROUP PROCESS:

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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

Resource ManagerCHAPTER 6

n increasing number of people, mostly women, arebecoming “contingent workers”—part-timers, tempo-raries and freelancers (a.k.a. independent contractors).Estimates of their numbers vary wildly, from 13% to morethan 30% of the work force, but what we know for sureis that the sector is growing. Since 1980, the number ofcontingent workers has grown three times faster than thelabor force as a whole. Only half of the new jobs createdin 1992 were full-time jobs. And Manpower Inc., the largest temporary agency in the U.S., is now thenation’s largest private employer, with about 60,000employees last year—almost twice as many as GeneralMotors. Most of them are women . . .

A . . . downsizing is rippling through . . . companiesacross the country. Scratch a large corporation today andit may well be in the process of reducing its full-time, orcore, employees and replacing them with lower-paid dis-posable workers, the ultimate in just-in-time inventorycontrol.

Still, as troubling as the growth of throw-away work-ers is, it would be a mistake to conclude that the trendtoward contingent work is all bad. Even those concernedabout it agree that a significant, although relatively small,number of contingent workers are highly skilled, well paidand/or happy with their arrangements. And for manycompanies, the flexibility and lower labor costs may becritical to future prosperity. The big question is: Can itwork for employers and employees alike and enhance theeconomy as a whole.

Part-time workers in 1992 were paid 62.3% of thehourly wages of those who worked full-time. Only 15% ofpart-time workers get employer-provided health care,compared with 65% of full-time employees. And a mere10% part-timers have employer-provided pensions, versus46% of full-time workers. Not all of these people needtheir own benefits, but clearly, if you’re a temp, even aprofessional one, it helps to be young and healthy or mar-ried to someone with health coverage . . .

Congresswoman Pat Schroeder (D-Colorado) has intro-duced legislation that would mandate, among other things,

prorated health and pension benefits for anyone working500 hours a year or more. Part-time health benefits are nowincluded in President Clinton’s health-care bill, but pensionbenefits don’t have a chance of passing the currentCongress. Amending the civil-rights laws to guaranteeequal pay for equal work for part-timers would eliminatemuch of the exploitation associated with contingent work,but this, too, is an idea whose time hasn’t come.

Scratch a large corporation today

and it may well be in the process of

reducing its full-time, or core,

employees and replacing them with

lower-paid disposable workers, the

ultimate in just-in-time inventory

control.

Some observers, like Virginia duRivage, a consultantfor the Economic Policy Institute, a union-supportedWashington think tank, believe that labor-law reform,which would make unionization less difficult, couldbecome “the most effective tool for curbing the worstabuses of contingent employment.” Only 8% of part-timers belong to labor unions. They are hard to organize,partly because the Taft-Hartley Act bans “secondary boy-cott”—those staged by workers leased through anothercompany.

With the global economy making everyone’s eco-nomical situation more challenging and uncertain,perhaps the ultimate answer, for employees and business-es alike, is for the federal government to create whatSenator Bill Bradley (D-N.J.) calls an “economic securityplatform” for all Americans. The social safety net wouldbe expanded to include universal medical coverage,

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Primary and Secondary Source Readings 23

Name Date Class

T EMPORARY SOLUTIONSA fundamental shift is occurring throughout the American labor force, as a writer for a maga-zine aimed at working women discusses in the article excerpted below. As you read about thischange, think about the advantages and disadvantages of working “on contingency.” Thenanswer the questions that follow.

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A

Assessment and Evaluation

Spanish Economic Concepts Transparency 10

Spanish Vocabulary Activity 6

Spanish Reteaching Activity 6

Spanish Section Quizzes for Chapter 6

Spanish Chapter 6 Audio Program, Activity, and Test

Spanish Resources

Vocabulary PuzzleMaker CD-ROM

Interactive Tutor Self-Assessment Software

ExamView® Pro Testmaker

NBR Economics & You Video Program (English/Spanish)

Presentation Plus!

Glencoe Skillbuilder Interactive Workbook CD-ROM,Level 2

TeacherWorks CD-ROM

MindJogger Videoquiz

Interactive Economics! CD-ROM

Audio Program (English or Spanish)

Technology and Multimedia

ExamView® Pro Testmaker

PROCEDURE

1. Organize the class into five groups and assign each group one of the following to research from the point ofview of savers and investors:

a. money market accounts, passbook accounts, U.S. Savings Bonds

b. collectibles such as coins, glass, antiques, books, and artc. 401Ks and IRAsd. real estate investmentse. securities such as stocks, commodities, and bonds

Each group’s research should focus on defining the investment and evaluating it for potential profits as well asthe risk involved. Each group should then present its findings to the class.

2. Reassemble the class and instruct each student to create an ad on standard-size paper encouraging Americans tosave. Ads should be original, creative, and innovative and have the student’s name on the back.

3. Have each student use the self-assessment checklist to evaluate his or her ad.

4. Display all the ads for the class, and have the students vote anonymously to select the best ad.

5. Hold a public viewing of ads inviting members of the administration, business consultants, PTSA members, etc.,to select winners (1st, 2nd, 3rd, and honorable mention).

6. As an enrichment activity, you may wish to have interested students create public service announcements (PSAs)encouraging people to use one or more of the savings techniques discovered by class group research. Investigatehow these PSAs could be disseminated to the public, such as: in the school paper; at neighborhood businesses;before Optimist, Rotary, or other public meetings; on the school’s audio or television system; on access televisionas “billboards” or “commercials;” or as “skits” done by students in a public program.

Assessment

1. Students will assess their own ads and accept feedback from their peers.

2. Have students write a paragraph explaining how their ads could boost savings rates.

▼BACKGROUND

Americans do a poor job of saving comparedto people in the rest of the developed world.Because Americans save only 5 percent, it isimportant that we learn to save more. Earlyplanning and implementation are the keys togetting rich slowly. The best way to enjoy theAmerican dream is to be debt-free.

▼MATERIALS

Standard-size white paper and colored markers or pens

▼OBJECTIVES

After completing this activity, students will beable to• Evaluate a variety of savings techniques.• Create a persuasive advertisement to

convince others of the need to save.

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S AVINGS AND INVESTMENT

Name Date Class

RUBRICSan oral presentation,group work, aposter, self-assessment, a public serviceannouncement,writing

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Performance AssessmentActivity 12

14. Money market funds

a. are insured by FDIC. b. pay lower interest than savings accounts.c. allow investors to write checks. d. are also known as stock funds.

15. Treasury bonds

a. pay dividends twice a year. b. are good short-term investments.c. are tax-exempt bonds that fund d. are certificates issued by the U.S. Treasury.

municipal projects.

CRITICAL THINKING QUESTIONS

Directions: Answer each of the following sets of questions on a separate sheet of paper.

16. Identifying Alternatives List four investment alternatives American investors face and explain the advan-tages and disadvantages of each.

17. Making Comparisons How does the FDIC increase confidence in the U.S. banking system? What happenedbefore the FDIC was created?

APPLYING SKILLS

Determining Averages: Mean and Median Study the following table and answer thequestions below.

Interest Rates on U.S. Treasury Bills, 1995–99(in percent)

18. How much interest would you have earned if you invested $20,000 in a U.S. Treasury bill in 1995 and held it forone year?

19. What was the average interest rate paid on Treasury bills between 1997 and 1999?

20. What was the median interest rate paid over the same period?

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Name Date Class

6, B

InterestYear Rate

1995 5.17

1996 4.87

1997 5.16

1998 4.48

1999 6.09

Chapter 6 Test Form B


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Name Date Class

RECALLING FACTS AND IDEAS

Multiple Choice: In the blank at the left, write the letter of the choice that best completesthe statement or answers the question.

11. The Federal Deposit Insurance Corporation (FDIC) insures

a. commercial bank accounts. b. money market accounts.c. credit union accounts. d. accounts at all financial institutions.

12. Relative to a stock, a bond provides

a. higher dividend. b. lower dividend.c. higher level of risk. d. lower level of risk.

13. Savings bonds sell for less than their face value because

a. banks compete to sell them. b. this is how they pay interest.c. they pay dividends twice a year. d. interest is tax-exempt.

SCORE

6, B

A1. tax-exempt bonds

2. over-the-counter market

3. certificate of deposit

4. broker

5. pension plan

6. diversification

7. Treasury notes

8. Keogh plan

9. maturity

10. mutual fund

USING KEY TERMS

Matching: Match each item in Column A with the items in Column B. Write the correctletters in the blanks.

Ba. certificates issued by the U.S. treasury in exchange for a mini-

mum of $1,000

b. a person who acts as a go-between for buyers and sellers ofstocks and bonds

c. company plan that provides for retirement income

d. bonds sold by local and state governments on which interestis not taxed by the federal government

e. retirement plan that allows self-employed people to save upto 15 percent of their income in a tax-deductible account

f. time deposit that states the amount of the deposit, maturity,and rate of interest being paid

g. investment company that pools the money of many individuals to buy stocks, bonds, or other investments

h. period of time after which time deposits will pay a stated rateof interest

i. spreading of investments in several different types of accountsto lower overall risk

j. electronic purchase and sale of stocks and bonds, often ofsmaller companies, which takes places outside the organizedstock exchanges

13. The largest stock exchange in the world is the

a. Midwest Stock Exchange. b. Tokyo Stock Exchange.c. New York Stock Exchange. d. London Stock Exchange.

14. Interest earned on a Roth IRA is

a. tax deferred. b. tax free.c. taxable upon retirement. d. taxable up to $2,000 a year.

15. The Dow Jones Industrial Average is

a. a mutual fund. b. another name for the S&P 500.c. traded over-the-counter. d. a stock index.

CRITICAL THINKING QUESTIONS

Directions: Answer each of the following sets of questions on a separate sheet of paper.

16. Analyzing Information If your bank paid simple interest of 4.25 percent, how much interest would youearn after three years on an initial deposit of $750?

17. Analyzing Information How would you expect the return on a stock market fund to differ from the returnon a savings account? Why do you think the two rates of return differ?

APPLYING SKILLS

Determining Averages: Mean and Median Study the following table and answer thequestions below.

Interest Rates on U.S. Treasury Bills, 1995–99(in percent)

18. What was the average interest rate paid on Treasury bills between 1995 and 1999?

19. What was the median interest rate paid over the same period?

20. How much interest would you have earned if you invested $10,000 in a U.S. Treasury bill in 1998 and held it forone year?

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Name Date Class

6, A

InterestYear Rate

1995 5.17

1996 4.87

1997 5.16

1998 4.48

1999 6.09

Chapter 6 Test Form A


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Name Date Class

RECALLING FACTS AND IDEAS

Multiple Choice: In the blank at the left, write the letter of the choice that best completesthe statement or answers the question.

11. Keogh and IRA plans allow people to do all of the following except

a. save money each year for retirement.b. withdraw money from their accounts at the end of every year without penalty.c. establish their own pension plans.d. defer taxation of the interest they earn on their accounts.

12. A person who buys a stock for $20 and sells it for $30 has earned $10 in

a. interest. b. profit per share.c. dividends. d. capital gains.

SCORE

6, A

A1. time deposit

2. savings

3. savings bond

4. maturity

5. mutual fund

6. interest

7. capital gain

8. Treasury bills

9. individual retirement account (IRA)

10. certificate of deposit

USING KEY TERMS

Matching: Match each item in Column A with the items in Column B. Write the correctletters in the blanks.

Ba. period of time after which time deposits will pay a stated rate

of interest

b. time deposit that states the amount of the deposit, the matu-rity, and the rate of interest being paid

c. investment company that pools the money of many individu-als to make short-term loans to businesses and banks

d. certificates issued by the U.S. Treasury with maturities of threemonths to one year

e. setting aside income for a period of time so that it can beused later

f. savings plan that requires savers to leave their money ondeposit for a certain period of time

g. private retirement plan that allows individuals or married cou-ples to defer taxation on the interest they earn on theirretirement savings

h. increase in value of an asset between the time it is purchasedand the time it is sold

i. payment people receive when they lend money

j. bond issued by the federal government

140B

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


You and your students can visit ett.glencoe.com—the Web site companion to Economics Today andTomorrow. This innovative integration of electronic andprint media offers your students a wealth of opportuni-ties. The student text directs students to the Web site forthe following options:

• Chapter Overviews • Student Web Activities

• Self-Check Quizzes • Textbook Updates

Answers are provided for you in the Web ActivityLesson Plan. Additional Web resources and InteractivePuzzles are also available.

Use the Glencoe Web site for additional resources. All essential content is covered in the Student Edition.

ECONOMICS

Reading for the StudentReal Life Consumer Economics, revised ed. New York:

Scholastic Books, 1990. Lessons on food, clothing, and shelter; money and credit; and taxes and economics.

Multimedia MaterialInvestments and Risk Capital. From the Running Your

Own Business Series. Videotape, 24 min. Public TelevisionLibrary, 475 L’Enfant Plaza, SW, Washington, D.C. 20024

Additional Resources

tx.ett.glencoe.com

http://tx.ett.glencoe.com

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


140C

Blackline Master

Transparency

Software

CD-ROMVideodisc

Audiocassette

Videocassette

Reading Objectives Reproducible Resources Technology/Multimedia Resources

Section 1Why Save?• When should you save?• How do passbook, statement, and

money market accounts differ?• What are the advantages of time

deposits?

Section 2Investing: Taking Risks With Your Savings• How do stocks and bonds differ?• What investment funds are available in

stock and bond markets?

Section 3Special Savings Plans and Goals• What kinds of retirement investments

are available?• How much should you save and

invest?

Reproducible Lesson Plan 6-1Daily Lecture Notes 6-1Guided Reading Activity 6-1Reading Essentials and Study Guide 6-1Daily Focus Activity 42Section Quiz 6-1*Reinforcing Economic Skills 24

Reproducible Lesson Plan 6-2Daily Lecture Notes 6-2Guided Reading Activity 6-2Reading Essentials and Study Guide 6-2Daily Focus Activity 43Section Quiz 6-2*

Reproducible Lesson Plan 6-3Daily Lecture Notes 6-3Guided Reading Activity 6-3Reading Essentials and Study Guide 6-3Daily Focus Activity 44Section Quiz 6-3*

Daily Focus Transparency 42Vocabulary PuzzleMaker CD-ROMInteractive Tutor Self-Assessment SoftwareMindJogger VideoquizPresentation Plus!ExamView® Pro Testmaker

Daily Focus Transparency 43

Economic Concepts Transparency 10Vocabulary PuzzleMaker CD-ROMInteractive Tutor Self-Assessment SoftwareMindJogger Videoquiz

NBR's Economics & You*Interactive Economics! Presentation Plus!ExamView® Pro TestmakerEconomic Survival: A Financial Simulation

Daily Focus Transparency 44Vocabulary PuzzleMaker CD-ROMInteractive Tutor Self-Assessment SoftwareMindJogger Videoquiz

NBR's Economics & You*Presentation Plus!ExamView® Pro Testmaker

*Also available in Spanish

Section Resources

Block Schedule

Easy Planning and Preparation!

Roger C. LyderPelhan High SchoolPelhan, New Hampshire

Finding a JobHave students research a particular career and create a

presentation for the class. Research the educational entryrequirements, salary ranges, growth prospects, prime loca-tions, and offshoots. Students should interview a person inthat career in order to get an insider’s view.

Then have students practice writing their resumes.These should include their school experience, skills, workexperience, and references.

ACTIVITYFrom the Classroom ofACTIVITYFrom the Classroom of

Activities that are particularly suited to use within the blockscheduling framework are identified throughout this chapterby the following designation: BLOCK SCHEDULING

Block Schedule

■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■


Teaching strategies have been coded for varying learning styles and abilities.L1 BASIC activities for all studentsL2 AVERAGE activities for average to above-average

studentsL3 CHALLENGING activities for above-average students

ENGLISH LANGUAGE LEARNER activitiesELL

Key to Ability Levels

Voluntary Standards Emphasized in Chapter 6Content Standard 12 Students will understand that inter-est rates, adjusted for inflation, rise and fall to balance theamount saved with the amount borrowed, thus affecting theallocation of scarce resources between present and future uses.

Content Standard 10 Students will understand that insti-tutions evolve in market economics to help individuals andgroups accomplish their goals. Banks, labor unions, corpora-tions, legal systems, and not-for-profit organizations are exam-ples of important institutions.

Resources Available from NCEE• Personal Finance Economics: Wallet Wisdom• Learning from the Market: Integrating the Stock Market

Game™ Across the Curriculum• Personal Decision Making: Focus on Economics

To order these materials, or to contact your StateCouncil on Economic Education about workshops andprograms, call 1-800-338-1192 or visit the NCEE Web siteat http://www.nationalcouncil.org

Timesaving Tools

• Interactive Teacher Edition Access your TeacherWraparound Edition and your classroom resourceswith a few easy clicks.

• Interactive Lesson Planner Planning has never been easier!Organize your week, month, semester, or year with all the lessonhelps you need to make teaching creative, timely, and relevant.

Use Glencoe’s Presentation Plus! multimediateacher tool to easily present dynamic lessonsthat visually excite your students. Using MicrosoftPowerPoint® you can customize the presenta-tions to create your own personalized lessons.

140D

ECON: 7A, 23A, 23C, 24C-D

http://www.nationalcouncil.org

Why It’s ImportantWhy should you save? What is the difference between saving and invest-ing? This chapter will explain reasons for saving, as well as the various institutions and invest-ments in which to put your money.

To learn moreabout investmentstrategies,viewthe Economics &

You Chapter 13 video lesson:Saving and Investing

Chapter Overview Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.com and click on Chapter 6—Chapter Overviewsto preview chapter information.

IntroducingCHAPTER6

140

Chapter OverviewMost Americans make more

income at their jobs than theyrequire for immediate necessities.At the same time, however, manylarge purchases cost more than aworker earns in a single pay period.Thus, wage earners must decidewhether to save their extra earningsfor large purchases or invest themfor future use. Chapter 6 describesvarious types of savings accountsand investment opportunities andexplains the advantages and disad-vantages of each.

CHAPTER LAUNCH ACTIVITY

IntroducingCHAPTER6

Use MindJogger Videoquiz to preview Chapter 6content.

Introduce students to chaptercontent and key terms by havingthem access Chapter 6—ChapterOverviews at ett.glencoe.com

Have students imagine they have $5,000 to save or invest as they please. Offer stu-dents the following savings and investment options: a money market account, paying4 percent interest, on which they can write four checks each month; a three-year certifi-cate of deposit (CD) that pays 6 percent interest; a stock whose value has nearly tripledin the last 18 months. Call on volunteers to identify the option they would choose andwhy. After students have offered their answers, lead the class in a discussion of twovery important factors in savings and investment decisions—risk and return.

ECONOMICS & YOU

Saving and Investing

!8BL0" Chapter 13 Disc 1, Side 1

ASK: What is the key principleof investing? risk versus return

Also available in VHS.

tx.ett.glencoe.com

ECON: 1A-B, 3A, 4B,11B, 23A, 23D, 23G

http://www.glencoe.com/sec/socialstudies/economics/econtt2003/tx/chapter6/overview.shtml


141

141Saving and Invest ing

Terms to Know• saving• interest• passbook savings account• statement savings account• money market deposit

account• time deposits• maturity• certificates of deposit

Reading Objectives1. When should you save?

2. How do passbook, state-ment, and money marketaccounts differ?

3. What are the advantagesof time deposits?

READER’S GUIDE

Economists define saving as the setting aside of income for aperiod of time so that it can be used later. You may alreadybe saving some of your income for a future use, such as buy-

ing a DVD system or continuing your education. See Figure 6.1on page 142. As you read this section, you’ll learn why saving isimportant to you and the economy as a whole.

Deciding to SaveAny saving that you do now may be only for purchases that

require more funds than you usually have at one time. When youare self-supporting and have more responsibilities, you will prob-ably save for other reasons, such as having funds in case of emer-gencies and for your retirement.

Results of Saving When an individual saves, the economy asa whole benefits. Saving provides money for others to invest orspend. Saving also allows businesses to expand, which providesincreased income for consumers and raises the standard of living.

1

saving: setting aside income fora period of time so that it can beused later

THE COLUMBUS DISPATCH, MAY 29, 1999

Money is burning a hole in consumers’ pockets. Againlast month, U.S. wage earners spent nearly as much asthey made, contributing to record low savings.

But consumers have good reason to be outthere spending. They’ve got jobs, their

incomes are rising, confidence is high,and the stock market is booming.

This trend dragged down the sav-ings rate—savings as a percentage ofafter-tax income—to a record low.

CHAPTER 6SECTION 1, Pages 141–144


Reproducible MastersReproducible Lesson Plan 6–1Reading Essentials and Study Guide 6–1Guided Reading Activity 6–1Section Quiz 6–1Daily Focus Activity 42Daily Lecture Notes 6–1

MultimediaDaily Focus Transparency 42Vocabulary PuzzleMaker CD-ROM Interactive Tutor Self-Assessment SoftwareExamView® Pro Testmaker

MindJogger VideoquizPresentation Plus!

SECTION 1 RESOURCE MANAGER

OverviewSection 1 describes the different

kinds of savings accounts availablethrough savings institutions, andexplains the advantages and disad-vantages of time deposits as com-pared with other savings accounts.

Answers to the Reading Objectivesquestions are on page 144.

Preteaching VocabularyVocabulary PuzzleMaker

READER’S GUIDE

Project Daily FocusTransparency 42 and have students answer the questions.

Available as blackline master.

Daily Focus Transparencies

S AVINGS

1. According to the diagram, how are savings “returned” to individuals?

2. What might happen if Americans decided to save less?

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3. Businesses use borrowedmoney to increase production,

and so hire more workersand pay more dividends.

2. Financial institutionsloan money to

businesses.

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Savings HelpIndividuals andthe Economy

$ $

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BELLRINGERMotivational Activity


Page 141: 1B, 3A, 4B, 8B, 11A-B,23A, 23G, 24A

Student Edition TEKS



142 CHAPTER 6

interest: payment people receivewhen they lend money or allowsomeone else to use their money

passbook savings account:account for which a depositorreceives a booklet in whichdeposits, withdrawals, and inter-est are recorded

statement savings account:account similar to a passbooksavings account except that thedepositor receives a monthlystatement showing all transactions

Where to Save Generally, when people think of sav-ing, they think of putting their funds in a savings bankor a similar financial institution where it will earn inter-est. Interest is the payment people receive when theylend money, or allow someone else to use their money.A person receives interest on his or her savings plan foras long as funds are in the account.

You actually have many options regarding places inwhich to put your savings. As you learned in Chapter 4,

the most common places are commercial banks, savings and loanassociations, savings banks, and credit unions. Investigate thefinancial institutions in your area and the services they offer.

In comparison shopping for the best savings plan, you need toconsider the trade-offs. Some savings plans allow immediateaccess to your money but pay a low rate of interest. Others payhigher interest and allow immediate use of your money, butrequire a large minimum balance.

Savings AccountsPassbook savings accounts are also called regular savings

accounts. With a passbook savings account, the depositorreceives a booklet in which deposits, withdrawals, and interestare recorded. A customer must present the passbook each timeone of these transactions, or business operations, takes place.

A statement savings account is basically the same type ofaccount. Instead of a passbook that must be presented for eachtransaction, however, the depositor receives a monthly statementshowing all transactions. The chief appeal of these accounts isthat they offer easy availability of funds. The depositor can usu-ally withdraw funds at any time without paying a penalty—forfeit-ing any money—but there is a trade-off. The interest paid onpassbook and statement accounts is low compared to the inter-est on other savings plans.

Saving Goals Your saving goals will change as you movethrough life. Today you may be saving for a stereo, whereas inthe future you may save for a college education. How doessaving affect your future spending habits?

6.16.1

142

Guided PracticeL1 Understanding Ideas Write thefollowing terms on the board, leav-ing ample space between each term:passbook savings account, statementsavings account, money marketdeposit account, certificate ofdeposit. Call on volunteers to iden-tify what they think are the advan-tages and disadvantages of each. (Asguidance, you might suggest that theadvantage of a passbook savingsaccount is easy availability of funds,while the disadvantage is a relativelylow interest rate.) Note responses onthe board. Conclude by asking stu-dents which type of account theymight use to save for the following: anew coat, a car, a retirement account.In a closing discussion, have stu-dents explain their choices.

Answer: Saving makes moreincome available for spending in thefuture.

L ECTURE LAUNCHERIn 1967, Americans saved around 8.6 percent of their disposable income. By 1996, thatamount dropped to 4.3 percent. Why do people save money? Where do they keep themoney they have saved?

I. Deciding to Save

A. People save for purchases that require more funds than available, for emergencies, andfor retirement.

B. Economies benefit from individuals who save because people have more money toinvest or spend, leading to expanding business.

C. When choosing a place to save, think about trade-offs.

• Discussion Question

Why is individual saving good for the economy? (When people save they have moremoney to invest which leads businesses to grow and provide a raise in income for employeesand a higher standard of living.)

II. Savings Accounts

A. Passbook, regular, or statement savings accounts accrue a low interest but allow

6-1

PAGES 141–142

PAGES 142–143

Daily Lecture Notes 6–1

Language Disabilities Students with language difficulties may have problems under-standing the text of Section 1. Before students read the section, ask them to study theheadings, visuals, and captions. Then ask them to tell what they think will be explained inthe section. Next, call on volunteers to read paragraphs aloud. Ask other volunteers to paraphrase the content of each paragraph.

Refer to Inclusion for the Social Studies Classroom Strategies and Activities forstudents with different learning styles.

Meeting Special Needs

ECON: 1A, 3A, 4B, 5A-B, 8A, 11B, 23A

ECON: 23A

143


A money market deposit account(MMDA) is another type of accountthat pays relatively high rates of inter-est and allows immediate access tomoney through checks. The trade-off isthat these accounts have a $1,000 to$2,500 minimum balance requirement.Customers can usually make with-drawals from a money market accountin person at any time, but they areallowed to write only a few checks amonth against the account.

Time DepositsThe term time deposits refers to a

wide variety of savings plans thatrequire a saver to deposit his or herfunds for a certain period of time. Theperiod of time is called the maturity,and may vary from seven days to eightyears or more. Time deposits are oftencalled certificates of deposit (CDs),or savings certificates. CDs state theamount of the deposit, the maturity, and the rate of interest being paid.

Time deposits offer higher interest rates than passbook orstatement savings accounts. The longer the maturity, the higherthe interest rate that is paid. For example, a CD with a short-term maturity of 90 days pays less interest than a CD with atwo-year maturity. Savers who cash a time deposit before matu-rity pay a penalty.

Insuring Deposits When the stock market collapsed in 1929,the resulting crisis wiped out people’s entire savings. Congresspassed, and President Franklin Roosevelt signed, legislation toprotect deposits. This legislation created the Federal DepositInsurance Corporation (FDIC).

Today there are several federal agencies that insure mostbanks and savings institutions. See Figure 6.2 on page 144.Each depositor’s money in a particular savings institution isinsured up to $100,000. If an insured institution fails, eachdepositor will be paid the full amount of his or her savings upto $100,000 for each legally separate account.

The percent of income that Americans save fellsteadily in the 1990s. Today, the saving rate—the per-centage of disposable personal income saved—standswell below 4 percent. How does this compare to thesaving rates of other countries? Below are some recentstatistics on saving rates for several industrializednations. ■

Comparing Saving Rates

money market deposit account:account that pays relatively highrates of interest, requires a mini-mum balance, and allows imme-diate access to money

time deposits: savings plansthat require savers to leave theirmoney on deposit for certain peri-ods of time

maturity: period of time at theend of which time deposits willpay a stated rate of interest

certificates of deposit: timedeposits that state the amount ofthe deposit, maturity, and rate ofinterest being paid

Canada

France

Germany

Great Britain

Italy

Japan

4.6%

12.5%

12.4%

11.6%

13.4%

13.2%



For use with the textbook pages 141–144

HY SAVE?

FILLING IN THE BLANKS

Directions: Use your textbook to fill in the blanks using the words in the box. Some words may be usedmore than once.

interest saving trade-offsFDIC time deposits certificates of depositretirement money market depositaccount statement savings account economypassbook savings account maturity

Introduction/Deciding to SaveEconomists define 1 __________________________ as the setting aside of income for a period of time so that it

can be used later. In addition to saving money for future purchases, one may save money for emergencies or for

2 __________________________. When individuals save money, the 3 __________________________ as a whole

benefits. People earn 4 __________________________ on their money when they save it in a financial institution. In

comparison shopping for the best saving plan, one must consider all of the 5 __________________________ involved.

Savings AccountsWith a 6 __________________________ , a depositor receives a booklet in which deposits, withdrawals, and

7 __________________________ are recorded. Depositors with a 8 __________________________ receive a monthly

Name Date Class

6-1

W

Guided Reading Activity 6–1

Have students work in small groups to create an advertisement or brochure for a localsavings institution. Suggest that they include in their advertisements or brochures thetypes of accounts their institutions offer and the benefits and possible uses of suchaccounts. Encourage groups to display their advertisements and brochures around theclass. ELL

Cooperative Learning

Meeting LessonObjectives

Assign Section 1 Assessment ashomework or an in-class activity.

Use Interactive Tutor Self-Assessment Software to review Section 1.

IndependentPracticeL2 Gathering Information Havestudents work in small groups toinvestigate the interest rates paid on passbook savings accounts, state-ment savings accounts, money mar-ket deposit accounts, and certificatesof deposit at local banks today. Havegroups present their findings in abrief report. Encourage students toextend their report by calculating thereturn after a year for each accounton a deposit of $5,000.

Page 142: 1B, 3A, 4B, 5A-B, 8A-B,11A-B, 24A

Page 143: 1A-B, 3A, 4B, 5A-B,8A-B, 10B, 11A-B,15A-B, 23A, 23F-G, 24A


ECON: 3A, 4B, 8A-B, 11A-B, 23A, 23C, 24D

ECON: 8A-B, 23A, 23G, 24D



144 CHAPTER 6

Understanding Key Terms1. Define saving, interest, passbook savings

account, statement savings account, moneymarket deposit account, time deposits, maturity,certificates of deposit.

Reviewing Objectives2. What are three reasons that people save?

3. Graphic Organizer Use a chart like the onebelow to explain the differences among pass-book, statement, and money market savingsaccounts.

4. What are the advantages of time deposits?

Applying Economic Concepts5. Saving Why is it more difficult for the begin-

ning saver to open a money market depositaccount than a passbook savings account?

Critical Thinking Activity

1

Savings Institutions’Services and Insurers

Institution

Commercialbanks

Savings and loanassociations(S&Ls)/savingsbanks

Credit unions

Savings Services Offered

Passbook and statement savingsaccounts, certificates of deposit,money market accounts

Passbook and statement savingsaccounts, certificates of deposit,money market accounts

Share drafts**, share accounts,share certificates

Number ofInstitutions*

8,238

1,590

10,628

Insured by

Federal DepositInsuranceCorporation(FDIC)

S&Ls: SavingsAssociationInsurance Fund(SAIF)/FDIC

National CreditUnion ShareInsurance Fund

*Number of savings institutions changes often**Interest-earning account similar to checking account

FIGURE 6.2FIGURE 6.2

6. Synthesizing Information If your bankpays 5.5 percent interest on savingsdeposits, what is the simple interest paid inthe third year on an initial $100 deposit?What is the total amount in the account afterthree years? What is the amount after threeyears if the interest was compounded annu-ally? For help in understanding interest rates,see page xxii in the Economic Handbook.

Type of account Similarities Differences

Practice and assesskey skills with

Skillbuilder InteractiveWorkbook, Level 2.

144

ReteachAsk students to analyze the sec-

tion by writing topic sentences foreach of the major subheadings.

1. All definitions can be found in the Glossary.2. to make large purchases, for emergencies, for retirement3. Type of account Similarities Differences

Passbook savings account Relatively easy availability of funds Low minimum deposit, low interest ratesStatement savings account Relatively easy availability of funds Low minimum deposit, low interest ratesMoney market deposit account Relatively easy availability of funds Relatively high minimum deposit,

relatively high interest rates4. Time deposits offer higher interest rates than passbook or statement savings accounts.5. Money market accounts often require initial deposits of $1,000 to $2,500.6. $5.50; $116.50; $117.42

Ask students to write a slogan orsaying that answers the question“Why save?”

Name Date Class

KEY TERMS

6, 1

saving Setting aside income for a period of time so that it can be used later (page 141)

interest Payment people receive when they lend money or allow someone else to use their money (page 142)

passbook savings account Account for which a depositor receives a booklet in which deposits, with-drawals, and interest are recorded (page 142)

statement savings account Account similar to a passbook savings accounts except that instead of apassbook, the depositor receives a monthly statement showing all transactions (page 142)

money market deposit account Account that pays relatively high rates of interest, requires a minimumbalance, and allows immediate access to money (page 143)

time deposits Savings plans that require savers to leave their money on deposit for certain periods of time(page 143)

maturity Period of time at the end of which time deposits will pay a stated rate of interest (page 143)

certificates of deposit Time deposits that state the amount of the deposit, maturity, and rate of interestbeing paid (page 143)

For use with textbook pages 140–165

HY SAVE?

DRAWING FROM EXPERIENCE

Have you ever saved money to buy a specific item? Do you have a savings account? If so, do youknow the rate of interest you earn on your savings?

This section focuses on the concept of saving money. It explains the different types of savingsl bl

W

KEY TERMS

Reading Essentials and Study Guide 6–1

Name Date Class

6, 1

WHY SAVE?

Multiple Choice: In the blank at the left, write the letter of the choice that best com-pletes the statement or answers the question. (10 points each)

6. The saving of money by an individual

a. benefits the whole economy. b. deprives others of money to invest.c. lowers the standard of living. d. benefits the saver only.

7. With which kind of account does a depositor receive a booklet in which to record deposits, withdrawals,and interest?

a. statement savings account b. money market deposit accountifi f d i d b k i

SCORE

A1. saving

2. interest

3. time deposits

4. maturity

5. certificates of deposit

Ba. savings plans that require savers to leave their

money on deposit for certain periods of time

b. time deposits that state the amount of the deposit,maturity, and rate of interest being paid

c. payment people receive when they lend money orallow someone else to use their money

d. setting aside income for a period of time so that itcan be used later

e. time at which deposits will pay a stated rate ofinterest

Matching: Place a letter from Column B in the blank in Column A. (10 points each)

Section Quiz 6–1

L2 Analyzing Information Havestudents analyze the interest rates forchecking and savings accounts atbanks in your area. Then have stu-dents discuss their findings with theclass. ECON: 11A

ECON: 23A

ECON: 1B, 3A, 11B, 23A

TechnologySkills

145


People use electronic spreadsheets to manage numbers quickly and easily. Formulas may be used toadd, subtract, multiply, and divide the numbers in the spreadsheet. If you make a change to one num-ber, the totals are recalculated automatically for you.

Technology Skills

Using a Spreadsheet

• Vertical columns areassigned letters—A, B, C,AA, BB, CC, and so on.

• Horizontal rows areassigned numbers—1, 2,3, and so on.

• The point where a columnand row intersect is calleda cell—C6, for example.

• The computer highlightsthe cell you are in. Thecontents of the cell alsoappear on a status line atthe top of the screen.

• Spreadsheets use stan-dard formulas to calculatenumbers. To create a for-mula, highlight the cellyou want the results in.Type an equal sign (=)and then build the for-mula, step by step. If youtype the formula=B4+B5+B6 in cell B7,the values in these cellsare added together andthe sum shows up in cellB7.

• To use division, the for-mula would look like this:=A5/C2. This divides A5by C2. An asterisk (*) sig-nifies multiplication:=(B2*C3)+D1 means youwant to multiply B2 timesC3, then add D1.

Learning the SkillAll spreadsheets follow a basic design of rows and

columns. To understand how to use a spreadsheet, fol-low the steps on the left.

Practicing the SkillStudy the spreadsheet on this page.

1. Which cell is highlighted? What information isfound in the cell?

2. What formula would you type in which cell to calcu-late the average life expectancy of both males andfemales in Sri Lanka?

3. What formula would you type in which cell to find theGNP per capita of the South Asian countries listed?

Application ActivityUse a spreadsheet to enter your test scores and your

homework grades. At the end of the grading period,input the correct formula and the spreadsheet will cal-culate your average grade.

Using a SpreadsheetWork through the guidelines in

the Learning the Skill section. Asyou do, refer students to the samplespreadsheet on this page. Thenassist students in completing thePracticing the Skill activity.

Before assigning the ApplicationActivity, allow students computertime to review and experiment withvarious types of spreadsheets—budgets, schedules, inventories, andso on.

Answers to Practicing the Skill

1. C6; the population (in millions) of India in mid-19982. =(D9+E9)/2; F93. =B4+B5+B6+B7+B8+B9; B11

Application Activity Spreadsheets will vary according to students’ test scores andhomework grades.

Copyright ©

by The M

cGraw

-Hill C

ompanies, Inc.

24 Reinforcing Economic Skills

U SING A SPREADSHEETIndividuals, corporations, and government agencies use electronic spreadsheet programs tostore, edit, and format numerical data. Spreadsheet programs perform calculations automati-cally and allow users to turn spreadsheets of data into graphs for analysis.

The sample spreadsheet below shows various categories of government spending. Each piece of data is stored in a space called a “cell,” which has a corresponding letter and numberassigned to it. For example, “Source” is in A1. Examine the spreadsheet and answer the ques-tions that follow.

Federal Receipts, by Source, 1980–98(in millions of dollars)

A B C D E F G H

Note: Totals reflect interfund and intragovernmental transactions and/or other functions not shown separately.Source: U.S. Census Bureau [http://www.census.gov/prod/3/98pubs/98statab/sasec10.pdf]

1. Which cell in the spreadsheet is highlighted?

2. What information appears in cell D5?

3. What data appears in cell F3?

4. The formula for the total excise taxes collected in the five years represented is sum (D5:H5). Write a formula tocalculate how much money the government received in 1980, 1985, 1990, 1995, and 1998 from individualincome taxes.

Name Date Class

24

Source 1980 1985 1990 1995 1998

Individual income taxes 244,069 334,531 466,884 590,244 767,768

Corporate income taxes 64,600 61,331 93,507 157,004 190,842

Social insurance and retirement receipts 157,803 265,163 380,047 484,473 571,374

Excise taxes 24,329 35,992 35,345 57,484 55,540

Total 517,112 734,088 1,031,969 1,351,830 1,657,858

Reinforcing Economic Skills 24

Page 144: 1B, 3A, 4B, 8A-B, 11A-B,15A-B, 23A, 23F-G, 24A

Page 145: 23A, 23F-G, 24C


ECON: 23A




MultimediaDaily Focus Transparency 43Economic Concepts Transparency 10Vocabulary PuzzleMaker CD-ROMInteractive Tutor Self-Assessment SoftwareExamView® Pro Testmaker

NBR’s Economics & YouInteractive Economics!

Economic Survival: A Financial Simulation


146 CHAPTER 6

Terms to Know• stockholders• capital gain• capital loss• tax-exempt bonds• savings bonds• Treasury bills• Treasury notes• Treasury bonds• broker• over-the-counter market• mutual fund• money market fund

Reading Objectives1. How do stocks and bonds

differ?

2. What investment funds areavailable in stock and bondmarkets?

READER’S GUIDE

People have savings plans because they want a safe rate ofinterest. If people are willing to take a chance on earning ahigher rate of return, however, they can invest their savings

in others ways, such as in stocks and bonds. Stocks and bondsoffer investors greater returns, but with more risk. As you readthis section, you’ll learn what stocks and bonds are, and whythey carry a risk.

Stocks and BondsCorporations are formed by selling shares of stock

(also called securities). By issuing stock for sale, a com-pany obtains funds for use in expanding its businessand, it hopes, in making a large profit. Shares of stockentitle the buyer to a certain part of the future profits

THE ECONOMIST, JANUARY 30, 1999

“Some day we’ll all invest this way,” runs the slogan,while the screen shows a relaxed man on a yacht ticklinghis laptop computer. Hardly the traditional picture of howshares are bought and sold: on a crowded floor, full ofjostling, shouting traders in lurid polyester jackets. Butthe soaring share prices of electronic brokers suggestthat investors, at least, believe online trading is theway of the future.

2

146

OverviewSection 2 describes and explains

stocks and bonds and the differ-ences between them, and how thegovernment regulates the stock andbond markets.



READER’S GUIDE


This activity is also availableas a blackline master.


D OW-JONES INDUSTRIAL AVERAGE

1. What generalization or generalizations can you make about thecompanies listed?

2. Which of these companies have you heard of or done businesswith?

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Components of the Dow-JonesIndustrial Average

(2000)*

AlliedSignalAlcoa

American ExpressAT&T

BoeingCaterpillarCitigroupCoca-ColaDuPont

Eastman KodakExxon

General ElectricGeneral MotorsHewlett-PackardThe Home Depot

IBMIntel

International PaperJ.P. Morgan

Johnson & JohnsonMcDonald's

MerckMicrosoft

Minnesota Mining & ManufacturingPhilip Morris

Procter & GambleSBC CommunicationsUnited Technologies

Wal-MartWalt Disney

*component stocks occasionally change



147


stockholders: people who haveinvested in a corporation and ownsome of its stock

capital gain: increase in value ofan asset from the time it wasbought to the time it was sold

capital loss: decrease in valueof an asset or bond from the timeit was bought to the time it wassold

and assets of the corporation selling the stock. The person buy-ing stock, therefore, becomes a part owner of the corporation. Asproof of ownership, the corporation issues stock certificates. SeeFigure 6.3.

Stock Returns Stockholders, or owners of stock, makemoney from stock in two ways. One is through dividends, themoney return a stockholder receives on the amount he or sheoriginally invested in the company. The corporation may declarea dividend at one or more times during a year. Dividends typi-cally are paid only when the company makes a profit.

The other way people make money on stock is by selling it formore than they paid for it. Some people buy stock just to specu-late, hoping that the price will increase greatly so they can sell itat a profit. They do not buy it for the dividends.

Capital Gains and Losses Suppose a person buys stock at$20 a share and sells it for $30. The profit of $10 per share iscalled a capital gain. The person has had an increase in his orher capital, or wealth, of $10 a share. Of course, the value ofstock may also fall. If a person decides to sell stock at a lowerprice than he or she paid for it, that person suffers a capital loss.Money may be made or lost on bonds in much the same way.

Bonds Instead of buying stock, people with money to invest canbuy bonds. A bond is a certificate issued by a company or the gov-ernment in exchange for borrowed money. It promises to pay astated rate of interest over a stated period of time, and then torepay the borrowed amount in full at the end of that time. Abondholder lends money for a period of time to a company orgovernment and is paid interest on that money. At the end of theperiod, the full amount of borrowed money is repaid. The periodof time is called the bond’s maturity.

Unlike buying stock, buying a bond does not make a bond-holder part owner of the company or government that issued thebond. The bond becomes part of the debt of the corporation or

Stock Certificates Stock certificates like these areissued to people who have invested in a corporation.

6.36.3



Guided PracticeL1 Understanding Ideas Have stu-dents identify the various kinds ofinvestments sold by the government.Then call on a volunteer to come tothe board to list these investmentsby the amount of funds they require.Finally, ask students to suggest whygovernment bonds are considered arelatively safe investment.

Have students study the stockcertificates pictured in Figure 6.3.ASK: How is owning stock aform of saving? By buying stock,the investor is choosing to set aside,rather than spend, current income.

L ECTURE LAUNCHERIn 1792, a group of 24 businessmen met under a buttonwood tree in New York City. In 1817,a building was built on this spot and formally made into the New York Stock and ExchangeBoard. Since 1863 it has been known as the New York Stock Exchange. Why do companiessell stocks? Why do people purchase stocks?

I. Stocks and Bonds

A. Stocks entitle the buyer to future profits and assets of the corporation.

B. Stockholders make money through dividends, return on bought stock, or by speculat-ing—buying stock hoping it will increase in price so they can sell it at profit.

C. A capital gain is money earned by selling stock for more than you paid for it.

D. A capital loss is money lost by selling stock for less than you paid for it.

E. A bond is a certificate promising to repay a loan at a stated interest rate.

F. A bondholder is NOT part-owner of the organization.

G. Tax-Exempt bonds earn tax-free interest.

H. With savings bonds you pay half of the bond’s face value and the interest increasesyearly until the face value is reached.

I. T-Bills, T-Notes, and T-Bonds are government bonds exempt from state and local taxand mainly for larger investments.

6-2

PAGES 146–149


Hearing Disability Students with hearing difficulties may be especially interested inlearning about the hand signals and gestures that are an integral part of trading on thefloor of some stock exchanges. Encourage students to research and learn these signals,and then demonstrate them to the class.



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ECON: 11C, 23A

ECON: 23A, 24D



Differences Between Stocks and Bonds

148

government, and the bondholder becomes a creditor. Figure 6.4lists these and some other differences between stocks and bonds.

Tax-Exempt Bonds Local and state governments also sell tax-exempt bonds. The interest on these types of bonds, unlike bondsissued by companies, is not taxed by the federal government.Interest that you earn on bonds your own city or state issues isalso exempt from city and state income taxes. Tax-exempt bondsare good investments for wealthier people who would otherwisepay high taxes on interest earned from investments.

tax-exempt bonds: bonds soldby local and state governments;interest paid on the bond is nottaxed by the federal government


Stocks

1. All corporations issue or offer to sell stock.That act is what makes them corporations.

2. Stocks represent ownership.

3. Stocks do not have a fixed dividend rate(except preferred stocks).

4. Dividends on stock are paid only if thecorporation makes a profit.

5. Stocks do not have a maturity date. Thecorporation issuing the stock does notrepay the stockholder.

6. Stockholders (except those with preferredstock) can elect a board of directors whocontrol the corporation.

7. Stockholders have a claim against theproperty and income of a corporationonly after the claims of all creditors(including bondholders and holders ofpreferred stock) have been met.

Bonds

1. Corporations are not required to issuebonds.

2. Bonds represent debt.

3. Bonds pay a fixed rate of interest.

4. Interest on bonds normally must alwaysbe paid, whether or not the corporationearns a profit.

5. Bonds have a maturity date. The bond-holder is to be repaid the value of thebond, although if the corporation goes outof business, it does not normally repaythe bondholders in full.

6. Bondholders usually have no voice in orcontrol over how the corporation is run.

7. Bondholders have a claim against theproperty and income of a corporation thatmust be met before the claims of anystockholders, including those holding pre-ferred stock.

148

According to a survey conductedin 1999, 48 percent of householdsin the United States owned stocksor mutual funds. Just 16 years ear-lier, in 1983, stock ownershipamong American households stoodat just 19 percent.

Name Date Class


I NVESTING: TAKING RISKS WITH YOUR SAVINGS

RECALLING THE FACTS

Directions: Use the information in your textbook to answer the questions.

1. What are the benefits of being a stockholder in a company?

2. What are the two methods in which one makes money from stocks?

a. __________________________

b. __________________________

3. What are a capital gain and capital loss?

4. How is a bond different than a stock?

5. How is a tax-exempt bond different than a bond sold by a company?

6. What larger types of investments does the federal government offer?

7. Who is a broker?

e?

6-2


ECONOMICS & YOU



ASK: What are the trade-offsinvolved in investing in a sav-ings account, a bond, a stock,and a mutual fund? Savingsaccounts and bonds are low-riskinvestments, but the return is verylow. Stocks have greater potentialreturns but are risky. Mutual fundscan decrease in value abruptly,but the potential return is high.


Play the game “Investment—What Am I?” Select two or three students to act as quizleaders. Have them use index cards to write three clues to the identity of each financialasset—one asset per index card. Organize students into teams. Have a quiz leader readclues from an asset card to a specified team. If the team correctly identifies the asset afterthe first clue, it receives three points. If it identifies the asset after two clues, it receives twopoints, and one point if the identification is made after three clues. If the team fails to identifythe asset after three clues, then other teams may attempt to. After all asset cards have beenused, tally scores and announce the winner.


ECON: 11C

ECON: 4B, 11B-C, 23A, 24D

149

savings bonds: bonds issuedby the federal government as away of borrowing money; they arepurchased at half the face valueand increase every 6 months untilfull face value is reached

Treasury bills: certificatesissued by the U.S. Treasury in exchange for a minimumamount of $1,000 and maturing in3 months to 1 year

Treasury notes: certificatesissued by the U.S. Treasury inexchange for minimum amountsof $1,000 and maturing in 1 to 10years

Treasury bonds: certificatesissued by the U.S. Treasury inexchange for minimum amountsof $1,000 and maturing in 10 ormore years

broker: person who acts as ago-between for buyers and sellersof stocks and bonds

Savings Bonds The United States government issues savingsbonds as one of its ways of borrowing money. They range in facevalue from $50 up to $10,000. The purchase of a U.S. savingsbond is similar to buying a bank’s certificate of deposit. A verysafe form of investment, savings bonds are attractive to peoplewith limited money to invest. Another attraction is that the inter-est earned is not taxed until the bond is turned in for cash.

A person buying a savings bond pays half the bond’s facevalue. You could purchase a $50 bond, then, for only $25. Thebond increases in value every 6 months until its full face value isreached. (The Rule of 72 tells you how long it takes for the bondto mature: Divide the number 72 by the interest rate.) If youchoose to redeem a U.S. savings bond before it matures, you areguaranteed a certain rate of interest, which changes depending onrates of interest in the economy.

T-Bills, T-Notes, and T-Bonds The Treasury Department ofthe federal government also sells several types of larger invest-ments. Treasury bills mature in 3 months to 1 year. The mini-mum amount of investment for Treasury bills is $1,000. Treasurynotes have maturity dates of 1 to 10 years, and Treasury bondsmature in 10 or more years. Notes and bonds are sold in mini-mums of $1,000. The interest on all three of these governmentsecurities is exempt from state and local income taxes, but notfrom federal income tax.

Stock and Bond MarketsStocks are bought and sold through brokers or on the

Internet. A broker is a person who acts as a go-between for buy-ers and sellers. If an investor is interested in buying or tradingcorporate shares, he or she can contact a brokerage firm, whichwill perform the service for a fee.

Thousands of full-service brokerage firms throughout thecountry buy and sell stocks daily for ordinary investors. The feesthey charge to perform the trades—up to $500—depend on thedollar amounts invested or traded. Today, however, if an investorhas an account with an Internet brokerage firm, the cost for thesame trade may be as low as $7.

Savings Bond



L2 Making Comparisons Writethe terms “Stocks” and “Bonds” onthe board. Call on volunteers tocome to the board and list factsabout these two financial assetsunder the appropriate heading. Thenhave students use information onthe board to analyze the following:You have $5,000 to invest. Whatwould be the economic impact ofinvesting your funds in stock? Inbonds?

Project Economic ConceptsTransparency 10 and have studentsdiscuss the accompanying questions.

Tell students to suppose that they have set a goal to save enough money to pay fortheir college tuition. Ask them to select one of the financial assets—or combination offinancial assets—discussed in Section 2 that would best help them attain this goal. Thenhave students write a brief essay explaining why they chose a particular asset or combina-tion of assets. Encourage students to read their essays to the class.

Free Enterprise Activity

Economic Connectionto... HistoryEconomic Connectionto...

Savings Bonds During WorldWar II special savings bonds—called war bonds—were issued toraise funds for the war effort.These bonds were issued indenominations of $10, $25, $50,$75, $100, $200, $500, $1,000,$10,000, and $100,000, and couldbe purchased at 75 percent of theface amount.

8: 1B, 3A, 4B, 11B-C, 24APage 149: 1B, 4B, 11B-C, 15A,

23G, 24A, 27A

Student Edition TEKSECON: 1B, 3A, 4B,11B-C, 23A, 23D, 24D

ECON: 11B-C, 23A, 23D

ECON: 11C, 15A



over-the-counter market: elec-tronic purchase and sale of stocksand bonds, often of smaller com-panies, which takes place outsidethe organized stock exchanges

There are well over 100 online brokerage firms, with morespringing up on the Web every day. It is estimated that 10 millionAmerican investors use the Internet to make trades every year.

Stock Exchanges Brokerage houses communicate with thebusy floors of the stock exchanges. See Figure 6.5. The largeststock exchange, or stock market, is the New York Stock Exchange(NYSE) in New York City. There are also supplemental stockexchanges and regional exchanges—such as the Midwest StockExchange in Chicago—and exchanges in other countries—such asthe London and Tokyo stock exchanges.

To be listed on these exchanges, a corporation offering stockmust prove to the exchange that it is in good financial condition.Most of the companies traded on stock exchanges are among thelargest, most profitable corporations in the country.

Over-the-Counter Markets Stocks can also be sold on theover-the-counter market, an electronic marketplace for stocks notlisted on the organized exchanges. The largest volume of over-the-counter stocks are quoted on the National Association of SecuritiesDealers Automated Quotations (NASDAQ) national market system,which merged with the American Stock Exchange in 1998.

Buying Stocks or Bonds If you decide to buystocks or bonds, you may wish to contact a broker (byphone or through the Internet). You pay the broker afee to purchase the stock at one of the stockexchanges. The stock exchanges act as a marketbetween buyers and sellers of securities, or stocks.

6.56.5

BrokerClients NASDAQNYSE150

150

IndependentPracticeL3 Writing a Report Randomlyassign the following media to stu-dents: radio and television, newsmagazines, and the Internet. Havestudents research what kinds ofinvestment information and adviceare available on their assigned media.Ask students to write a detailedreport and critique of one examplethey locate. Call on volunteers topresent their reports to the class.

To help students learn to man-age their own finances, have theclass play the game EconomicSurvival: A Financial Simulation,in which each student enters theworkforce, rents an apartment, anddeals with everyday events. Thesimulation takes five days to com-plete and may be extended for anadditional two weeks.

ECONOMIC SURVIVALA Financial SimulationECONOMIC SURVIVALA Financial Simulation

After students have viewedFigure 6.5, point out that theNew York Stock Exchange wasfounded in May 1792 by a groupof 24 brokers. They met under atree on what today is Wall Street.

Minorities and the Stock Market Studies have found that the vast majority of Americanstockholders are white. African Americans and Hispanics each account for only 5 percentof investors, while only 2 percent of investors are Asian. Recently, investment companieshave made efforts to tap these underserved minority markets. One company has under-taken regular surveys of African American investors to see how it might better serve them.Other companies advertise prominently in business magazines aimed at Hispanics andAsians. Still others have translated prospectuses for their various financial assets intoSpanish and Chinese.

Relevant Issues in Economics

ECON: 4B, 23A, 23C, 24B-C, 27A

ECON: 4A-B, 16A

151


mutual fund: investment com-pany that pools the money ofmany individuals to buy stocks,bonds, or other investments

Unlike organized stock exchanges, over-the-counter stocks are not traded in any specific place.Brokerage firms hold shares of stocks that theybuy and sell for investors. For example, assumethat XYZ Corporation is a company that sellscomputers. If an investor wanted to buy stock init, he or she would check the NASDAQ listings inthe local newspaper or on the Internet. This tableof over-the-counter stocks would list XYZ Corp-oration, the number of shares of stock sold theday before, and the price at which shares werebought and sold that day. The investor wouldthen call a broker or use the Internet to buy acertain number of shares. Usually stocks are soldin amounts of 100 shares, but some brokers willhandle smaller amounts.

Bond Markets The New York ExchangeBond Market and the American Exchange BondMarket are the two largest bond exchanges.Bonds, including U.S. government bonds, aresold over-the-counter and on the Internet.

Mutual Funds Many people invest in the stock market by plac-ing some of their savings in a mutual fund, an investment com-pany that pools the money of many individuals to buy stocks,bonds, or other investments. See Figure 6.6. Most mutual fundshold a variety of stocks or bonds. Losses in one area are likely tobe made up by gains in another.

One popular mutual fund invests in stocks used in an index.An index is a measuring system that tracks stock prices over thelong run. The Dow-Jones Industrial Average (DJIA) and Standard &Poor’s (S&P) are the two most common indexes. The DJIA tracks

Job Description■ Relay investors’

stock orders tothe floor of asecuritiesexchange

■ Offer financialcounseling andadvice on thepurchase orsale of particu-lar securities

Qualifications■ College degree ■ Pass a state

licensing examand theGeneralSecuritiesRegisteredRepresentativeExam

Median Salary: $53,700

Job Outlook: above average

CAREERSStock Broker

—Occupational Outlook Handbook, 2000–01

Mutual Funds The small investor should find outhow the mutual fund he or she may choose has performedcompared to index funds over a period of several years.Why are index funds watched so closely?

6.66.6



LESSON 10: PERSONALFINANCE

Have students study the sectionof the Lesson 10 “Tutorial” thatdeals with stocks, stock markets,and mutual funds. Students willlearn how to buy and sell stocksand mutual funds. The “Tutorial”also examines the effects that sup-ply and demand have on the stockmarket.

Supplied in both CD-ROM anddisk formats.

Answer: because most mutualfunds use the S&P 500 as the yard-stick against which they comparetheir returns on stocks

International Bonds Foreign governments also issue bonds. However, for the most partthey are available only in large denominations, usually starting at $1 million. As a result,only institutional investors—pension funds and insurance companies, for example—pur-chase these international bonds. Another unique aspect of international bonds is that inter-est and principal payments often are made in the currency of the issuing country ratherthan in dollars.

Extending the Content



Use Interactive Tutor Self-Assessment Software to review Section 2.

Page 150: 4A-B, 24A, 27APage 151: 3A, 4A-B, 11B-C, 24A,

27A

Student Edition TEKSECON: 2B, 3A, 11B



152 CHAPTER 6

money market fund: type ofmutual fund that uses investors’money to make short-term loansto businesses and banks

the stocks of 30 of the largest American companies to measure thewell-being of the stock market as a whole; the S&P 500 index tracks500 companies.

Most mutual funds use the S&P 500 as the yardstick againstwhich they compare their returns on stocks. The long-run returnfrom index funds is higher than can be expected from almost anyother investment. By investing in a broad-based index fund,investors will almost surely do better over the long run than byinvesting in individual stocks or in a managed mutual fund. Amanaged mutual fund is one in which the managers adjust the mixof stocks and move often in and out of the market to try to gener-ate the highest yield.

Money Market Funds One type of mutual fund, called amoney market fund, normally uses investors’ money to buy theshort-term debt of businesses and banks. Most money marketfunds allow investors to write checks against their money in the fund. Any check, however, must be above some minimumamount, usually $500. The investor then earns money only on the amount left in the account.

Banks, savings and loan associations, and savings banks nowoffer a similar service, called money market deposit accounts(MMDA). A major advantage of MMDAs is that the federal govern-ment insures them against loss. Mutual funds and money marketfunds are not insured by the federal government.

T he Dow was created in 1896 byCharles Dow, cofounder of Dow Jones

& Co. It soon became a permanent featurein the company’s newspaper, The WallStreet Journal, which is one of the world’smost influential business publications. TheDow index grew from its original 12 stocksto 30 by 1928.

It wasn’t until 1926 that Standard &Poor’s introduced a broader stock index,which tracked the nation’s 90 biggest

companies. The now-familiar S&P 500 stockindex expanded in 1957 to include the 500biggest companies.

Although it may seem odd that the Dowuses only 30 companies to measure a mar-ket with more than 10,000 stocks, those 30companies have a combined market valueof over $2.5 trillion. The S&P’s 500 compa-nies have a combined market value of$10.5 trillion—more than three-fourths of thenation’s publicly owned stocks. ■

Economic Connection to... HistoryEconomic Connection to...

The Dow-Jones and S&PThe Dow-Jones and S&P

152

The 30 stocks listed on theDow-Jones include: Allied Signal,Aluminum Co. of America,American Express, AT&T, Boeing,Caterpillar, Citigroup, Coca-Cola,Dupont, Eastman Kodak, Exxon,General Electric, General Motors,Hewlett-Packard, The HomeDepot, Intel, InternationalBusiness Machines, InternationalPaper, J.P. Morgan, Johnson &Johnson, McDonald’s Corp.,Merck & Co., Microsoft,Minnesota Mining &Manufacturing, Philip Morris,Procter & Gamble, SBCCommunications, UnitedTechnologies, Wal-Mart Stores,and Walt Disney.


Multiple Choice: In the blank at the left, write the letter of the choice that best com-pletes the statement or answers the question. (10 points each)

6. The money return a stockholder receives on the amount invested in a company is a

a. capital loss. b. dividend.c. bond. d. risk.

7. All corporations are required to

a. pay dividends. b. pay a fixed rate of interest.c iss e stock d make a profit

SCORE

A1. stockholders

2. capital gain

3. savings bonds

4. brokers

5. mutual fund

Ba. company that pools the money of many individuals

to buy investments

b. people who have invested in a corporation and ownstock

c. people who act as go-betweens for buyers and sellers of stocks and bonds

d. bonds issued by the federal government as a way ofborrowing money

e. increase in value of an asset

Matching: Place a letter from Column B in the blank in Column A (10 points each)

Name Date Class

6, 2

Section Quiz 6–2

Synthesizing Information Have students analyze the economic impact of the followinginvestments and decide which will provide the best return at the end of one year.1. $8,000 invested in a corporate bond paying annual interest of 6 percent2. $9,000 invested in $25 stock whose value grows by 5 percent over the year3. $10,000 invested in a government bond paying annual interest of 4 percent$8,000 invested in a corporate bond—return will be $480, as compared to $450 for stockand $400 for government bond


ReteachHave students construct a chart

showing the major characteristicsof the financial assets discussed inSection 2. ECON: 11B, 23A, 23F

ECON: 1B, 4B, 11B-C, 23A, 23G

153153


Government RegulationsThe stock market is heavily regulated today, both at the state

and federal levels. The Securities and Exchange Commission(SEC), created by the Securities Exchange Act of 1934, is respon-sible for administering all federal securities laws. It has regulatoryauthority over brokerage firms, stock exchanges, and most busi-nesses that issue stock. It also investigates any dealings amongcorporations, such as mergers, that affect the value of stocks.

Congress passed the Securities Act in an attempt to avoidanother stock market crash like that of 1929. The act requiresthat all essential information concerning the issuing of stocks orbonds be made available to investors. To accomplish this, a regis-tration statement must be filed with the federal government. Abriefer description, called a prospectus, must be given to eachpotential buyer of stocks or bonds. It lists the amount offered, theprice, and the company’s projected use for the money raised bythe stocks or bonds. Mutual funds must also distribute a prospec-tus describing the fund and the way in which the money will beinvested.

States also have securities laws. These are designed mostly toprevent schemes that would take advantage of small investors.

Understanding Key Terms1. Define stockholders, capital gain, capital loss,

tax-exempt bonds, savings bonds, Treasurybills, Treasury notes, Treasury bonds, broker,over-the-counter market, mutual fund, moneymarket fund.

Reviewing Objectives2. How do stocks and bonds differ?

3. Graphic Organizer Use a diagram like theone below to list at least three investment fundsavailable in stock and bond markets.

Applying Economic Concepts4. Financial Markets List five possible invest-

ments you could make if you had $10,000 inavailable funds. Rank them from highest returnto lowest return.



2

Types ofStocks

Types ofBonds

Critical Thinking Activity5. Synthesizing Information Analyze the

stocks on the New York Stock Exchange andover-the-counter market by checking theNYSE and NASDAQ quotes listed in thenewspaper. Find a stock from each listingthat had a net change of more than 2 per-cent. What corporations were they? For helpin reading the financial page, see page xxiiiin the Economic Handbook.



1. All definitions can be found in the Glossary.2. Stocks confer ownership, may rise or fall in

value, and have no fixed dividend. Bonds aredebt, pay interest at a fixed rate, and facevalue must be repaid at maturity.

3. Stocks: mutual funds, over-the-counter stocks,Internet stocks; Bonds: tax-exempt bonds, sav-

ings bonds, T-bills, T-notes, T-bonds4. Lists will vary. Encourage students to explain

why they selected particular investments.5. Answers will vary.

Encourage students to discusstheir financial goals. Then ask themto identify the kinds of investmentsthat they believe would furtherthese goals.

Name Date Class

6, 2

stockholders People who have invested in a corporation and own some of its stock (page

147)

capital gain Increase in value of an asset from the time it was bought to the time it wassold (page 147)

capital loss Decrease in value of an asset or bond from the time it was bought to thetime it was sold (page 147)

tax-exempt bonds Bonds sold by local and state governments; interest paid on the bondis not taxed by the federal government (page 148)

savings bonds Bonds issued by the federal government as a way of borrowing money;they are purchased at half the face value and increase every 6 months until full facevalue is reached (page 149)

Treasury bills Certificates issued by the U.S. Treasury in exchange for a minimum amountof $10,000 and maturing in 3 months to 1 year (page 149)

Treasury notes Certificates issued by the U.S. Treasury in exchange for minimum amountsof $1,000 or $5,000 and maturing in 2 to 10 years (page 149)

Treasury bonds Certificates issued by the U.S. Treasury in exchange for minimumamounts of $1,000 or $5,000 and maturing in 10 or more years (page 149)

broker Person who acts as a go-between for buyers and sellers of stocks and bonds (page

149)



KEY TERMS


Economic Connectionto... MATHEconomic Connectionto...

Saving vs. Gambling What’sthe surest method of accumulat-ing $1 million—saving or gam-bling? Many Americans think thattheir best chance of amassingeven half that sum is winning thelottery. Actually, the chances ofwinning a big lottery jackpot aresomewhere between 10 millionand 20 million to one. However,an investment of $50 a week—theamount that many Americansspend on the lottery—at 9 percentinterest over 40 years would growto just a little under $1,022,000.

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ECON: 23A, 23G

ECON: 1B, 23A, 23D

■ Founder and presi-dent of Ariel CapitalManagement, Inc., a Chicago-basedmoney manage-ment firm

■ Manages over$3 billion in assets

■ His mutual fundsare ranked amongthe best invest-ments by FortuneMagazine

John W. Rogers, Jr., is one ofthe country’s best managers

of stocks of small and medium-sized companies. Beginning in1983 with money from associatesand his parents, Rogers foundedAriel Capital Management, Inc.

Rogers explains what re-searchers look for in an idealstock for the Ariel Fund, the firstof their three mutual funds:

“Our ideal stock-investmentcharacteristics are really fourthings. The most important is thatthe company is in the kind ofindustry where they have barriersto entry to stop the competitionfrom coming in, and the kind ofstrong brand-name and customerawareness that brings back cus-tomers time and time again. . . .

The second thing is the qualityof the product and the quality ofthe management. . . .

And the third thing is valuation,and how many other people under-stand the stock as well as we do. If a stock is cheap, we want to

understand why its future is goingto be better. . . .

The final thing is size. We arealways looking at smaller compa-nies with new ideas, $1.5 billion or less.”

Ariel Capital Management,Inc., fund portfolios contain awide array of companies—fromdrugstores to book publishers.Ariel has favored newspaperstocks. Rogers explains why:

“These are wonderful busi-nesses to have, because they arebasically little monopolies. . . . Youhave a lot of pricing power becauseyou’re the only game in town, bothwith how much it costs to buy thenewspaper, and also what youradvertisers have to pay to put theirads inside the newspaper.”Checking for Understanding

1. What characteristics does Rogerslook for in an ideal stock?

2. Why does Rogers favor newspaperstocks?

John W. Rogers, Jr.ENTREPRENEUR (1958–)

154

154

BackgroundPoint out that John Rogers, Jr., is

recognized as one of the leaders inthe practice of socially responsibleinvesting (SRI). This involves invest-ing in companies that operate in anethical manner. Ariel CapitalManagement’s research proceduresscreen companies for such factorsas sensitivity to environmentalissues and commitment to culturaland racial diversity. Rogers thinksthat focusing on social responsibil-ity is good business: “The thingsthat make a company sociallyresponsible will also make it a goodinvestment.”

Answers to Checking for Understanding1. the existence in the industry of barriers to entry to stop the competition from coming

in; the quality of the product and the quality of the management; the company’s valu-ation; and the company’s size

2. because newspapers are basically little monopolies and because newspapers arelikely to be around in the future

Call on volunteers to read aloudthe statements by Rogers. Then askstudents to suggest the factors thathave contributed to Rogers’s success.Students should mention Rogers’sunique investment strategy of seekingundervalued small and medium-sizedcompanies with strong potential forgrowth, and focusing on those compa-nies that dominate a particular cornerin the market. They might also notethe vast amount of research his com-pany undertakes before making aninvestment.

ECON: 2B-C, 3A, 19D,21A

ECON: 23A, 23D

155


Terms to Know• pension plans• Keogh Plan• individual retirement account

(IRA)• Roth IRA• diversification

Reading Objectives1. What kinds of retirement

investments are available?

2. How much should you saveand invest?

READER’S GUIDE

3

pension plans: company plansthat provide retirement income fortheir workers

KIPLINGER’S PERSONAL FINANCE MAGAZINE, AUGUST 2000

With two medical degrees in the family— and lots ofeducation debt—Paul and Heidi Geis know how expensivecollege can be. No wonder their 18-month-old, Aiden,

already has a college fund. But what may be surpris-ing is that his tuition kitty resides 2,000 miles

away from the Geises’ home in Pittsburgh—inUtah’s college-savings plan.…

Utah is among several states that havedramatically improved their college-savings

plans over the past year.

One of the reasons that people save is to send their chil-dren to college. Another reason is to have income tospend when they retire. In addition to their savings,

most Americans will need additional sources of income for theyears after they stop working. As you read this section, you’lllearn what those additional sources of income are, and theamount of risk involved in these investments.

Investing for RetirementMany individuals have company retirement plans called pension

plans that provide retirement income. One of the most commontypes is a 401(k) plan, in which you allow a certain portion of




MultimediaDaily Focus Transparency 44Vocabulary PuzzleMaker CD-ROMInteractive Tutor Self-Assessment SoftwareExamView® Pro Testmaker

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Presentation Plus!


OverviewSection 3 describes the types of

retirement plans available and dis-cusses investment strategies.



READER’S GUIDE


Available as blackline master.


I NDIVIDUAL RETIREMENT ACCOUNTS (IRAs)

1. What are the requirements for withdrawals for each type of IRAplan?

2. Which IRA plan lets an investor deduct contributions from his orher taxes?

Traditional IRAs

• available to anyone with an earned income under the age of 70 1/2• annual contributions are the lesser of $2000 or 100% of earned income• must withdraw the minimum distribution amount no later than April of the year after turning 70 1/2• tax deductions can occur if the person contributed to no other retirement plans, or if a person contributed to another plan

Roth IRAs

• available to anyone with earned income who, if single, has an AGI of $110,000 or who, if married, has an AGI of $160,000• annual contributions have a maximum of $2000 if single with an AGI of $95,000, $4000 if married with an AGI of $150,000• no mandatory withdrawal age, but no income tax withdrawal after age 59 1/2• no tax deductions

Both

• retirement plans• maximum annual contributions of $2000• withdrawals in a lump sum or installments• no withdrawals until age 59 1/2

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Page 154: 4A-B, 7A, 9C, 10A, 19D,23A

Page 155: 1B, 3A, 4B, 11A-C, 23A,24A




Keogh Plan: retirement plan thatallows self-employed individualsto save a maximum of 15 percentof their income up to a specifiedamount each year, and to deductthat amount from their yearly tax-able income

individual retirement account(IRA): private retirement planthat allows individuals or marriedcouples to save a certain amountof untaxed earnings per year withthe interest being tax-deferred

156 CHAPTER 6

your paycheck to be withheld, and the company matches thatamount. Also, most people are eligible for Social Security paymentswhen they reach retirement. Social Security by itself, however, will

not provide enough income to live comfort-ably. It is important, therefore, for a personto provide for his or her own retirement bysaving and investing in private retirementplans.

A major benefit of a private or personalpension plan is the tax savings. You do nothave to pay federal income tax immediatelyon the earned income that you invest in oneof these retirement plans, or on the interestthat the plan earns if it does not exceed acertain amount. Should you need to take

money out of the plan early, however, you have to pay a taxpenalty. Otherwise, you pay income tax only as you withdrawmoney from the plan at retirement. Because your yearly incomewill likely be less then, your tax rate will be lower.

Individual Pension Plans The Keogh Act of 1972 waspassed to help self-employed people set up their own pensionplans. The Keogh Plan allows those people who are self-employed to set aside a maximum of 15 percent of their incomeup to a specified amount each year, and then deduct that amountfrom their yearly taxable income.

Another form of retirement plan is the individual retirementaccount (IRA). A single person earning less than $30,000 can con-tribute up to $3,000 a year and deduct those contributions fromtaxable income. There are other income limits for married couplesand those covered by employer pension plans, however. The benefitof an IRA is that the income you contribute to the IRA is not taxedin the year it is contributed. In addition, the interest you earn onthat income is not taxed either. You pay the tax only when you takeout funds from your IRA account, usually after age 591/2.

A new form of IRA is called the Roth IRA. Again, you are allowedto put up to $3,000 a year in a Roth IRA. You do not get to deductyour contributions from your taxable income, however. The benefitis that all of the interest you earn on your contributions to a RothIRA is tax-free forever. Thus, when you take out funds from yourRoth IRA account while you are retired, you pay no additional taxes.

Real Estate as an Investment Buying real estate, such asland and buildings, is another form of investing. For the past

Student Web Activity Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.comand click on Chapter 6—Student WebActivities to learn more about Roth IRAs.

Roth IRA: private retirement planthat taxes income before it issaved, but which does not taxinterest on that income whenfunds are used upon retirement

156

Guided PracticeL1 Outlining Review the materialson retirement plans in this section.Then tell students to assume the roleof journalists working on the busi-ness section of the local newspaper.Inform them that they have beengiven the job of writing a guide toinvesting for retirement. Have themdraw up an outline for the guideusing information in Section 3. Callon volunteers to share their outlineswith the rest of the class.

L ECTURE LAUNCHERIn 1964, Warren Buffett took over Berkshire Hathaway. He believes in value investing—buyinga stock because of belief in the company’s value for the long term. In 1998, the company’sclass A stocks sold for a high of $84,000 a share. In the 1970s, those same shares were sell-ing for about $400. What other kinds of investments are available for people who want toinvest over the long term?

I. Investing for Retirement

A. Most companies have pension plans, such as 401k, that provide retirement income.

B. Some people will combine a retirement plan with their Social Security checks becauseSocial Security alone is not enough.

C. Personal or private pension plans have the benefit of tax savings.

D. The Keogh plan is an individual retirement plan for self-employed people where theycan save up to 15% of income.

E. Traditional IRA(s) allow you to contribute up to $2,000 year, which is not taxed whenput in, and any earnings and interest are not taxed until money is withdrawn.

F. Roth IRA(s) allow you to save up to $2,000 year, which is taxed when put in, interestand earnings are never taxed, and money is not taxed when withdrawn.

G. Real estate is a popular form of investing for the future.

H. Housing generally increases in value over time.

6-3

PAGES 155–157


Inefficient Readers Students who have problems decoding unfamiliar words often skipover them. In many cases, however, they are successful in comprehending the wordsbased on the context of the sentence. Ask students to scan the section for unfamiliarwords. Have them write these words in their notebooks and try to guess the meaning ofthe words based on the context.



See the Web Activity LessonPlan at ett.glencoe.com for anintroduction, lesson description,and answers to the Student WebActivity for this chapter.

tx.ett.glencoe.com

ECON: 1A-B, 3A, 4B, 11B-C, 23A, 24A, 24D

ECON: 23A, 24A

http://www.glencoe.com/sec/socialstudies/economics/econtt2003/tx/chapter6/webact.shtml

http://www.glencoe.com/sec/socialstudies/economics/econtt2003/tx/chapter6/walp.shtml

157

Real Estate as anInvestment Buying realestate—whether as developed orundeveloped land—is risky.Variations in supply and demandproduce different prices forhouses and commercial land indifferent parts of the country.

6.76.7

50 years or so, buying a home, condominium, or co-op hasproven to be a wise investment in many parts of the country.Resale values have soared at times, especially during the late1970s. In the early 1980s and again in the early 1990s, however,the growth in the price of housing slowed in some areas, particu-larly in California and parts of the Northeast. By the end of the1990s, values everywhere were once again on the upswing.

Buying raw, or undeveloped, land is a much riskier investment.No one can guarantee that there will be a demand in the future fora particular piece of land. The same is true for housing, but mostpeople do not buy housing for the purpose of reselling it.

Real estate, either as raw land or developed land, is not veryeasy to turn into cash on short notice. As shown in Figure 6.7,sometimes real property for sale stays on the market for longperiods of time. This difficulty in getting cash for your investmentis one of the trade-offs involved when investing in real estate. Youcannot get your funds as quickly as you could if you had investedin stocks, bonds, a bank CD, or some other savings plan.

How Much to Save and Invest?Saving involves a trade-off like every other activity. The more

you save today, the more you can buy and consume a year fromnow, 10 years from now, or 30 years from now. You will, however,have less to spend today. Deciding what percentage of income tosave depends on the following factors:• How much do you spend on your fixed expenses?• What are your reasons for saving?• How much interest can you earn on your savings and,

therefore, how fast will your savings grow?• How much income do you think you will be

earning in the future?If you expect to make a much higher income

tomorrow, you have less reason to save a largepercentage of today’s income. It is a good idea,however, to have some sort of savings plan.There are several questions to answer beforeyou decide on this plan:



IndependentPracticeL2 Applying Ideas Have studentsimagine they are financial consult-ants trying to persuade their clientsto diversify their holdings. Ask stu-dents to prepare a brief illustratedpresentation explaining why diversi-fication is important and describingthe various financial assets clientsmight invest in. Encourage studentsto make their presentations to theclass. BLOCK SCHEDULING

L1 Calculating Returns What if,instead of spending $5 on a fast-foodmeal, a student decided to invest themoney? How much might thatinvestment make in 25 years? Stu-dents can find out by visiting theAlliance for Investor Education Website at www.investoreducation.organd clicking on the “AIE Kid’s Sav-ings Calculator” link. The calcula-tions are based on 8 percent annualrate of return—the average stock mar-ket return in recent years.


S PECIAL SAVINGS PLANS AND GOALS

OUTLINING

Directions: Locate the heading in your textbook. Then use the information under the heading to help youwrite each answer.

I. Investing for Retirement

A. Introduction

1. What is a pension plan?

2. What is a major benefit of having a private pension plan?

B. Individual Pension Plans

1. What does the Keogh Plan allow?

2. What is the difference between a regular IRA and a Roth IRA?

C. Real Estate as an Investment

1. What happened to the resale value of real estate during the late1970s and the late 1990s?

2 Why is it difficult to get cash quickly from real estate investments?

Name Date Class

6-3


Point out to students that there is great concern about the future of the Social Securitysystem. Then organize students into groups of three or four. Inform groups that they arecongressional subcommittees charged with reporting possible ways to ensure the survivalof the system. Have groups research current ideas on this subject. Then have them selectand write a brief report on the plan that they think will ensure the future of Social Security.Call on groups to present and discuss their reports. BLOCK SCHEDULING


Page 156: 1A-B, 3A, 4B, 8A-B,11A-B, 15A-B, 17A-B,24A

Page 157: 1B, 4B, 5A-B, 7A, 11B


ECON: 15A-B, 16A, 17A-C, 21A, 23A, 23C-D, 23G, 24B-D, 25A

ECON: 11B-C, 23A, 23G

ECON: 3A, 4B, 11B, 23A, 23C-D, 24C-D

http://www.investoreducation.org



diversification: spreading ofinvestments among several differ-ent types of accounts to loweroverall risk

• What degree of risk are you willing to take?• How important is it that your savings be readily available in

case you need immediate cash?• Will your standard of living at retirement depend largely on

your accumulated savings?

Amount of Risk Such questions are difficult to answerbecause there are so many ways to save and invest. Perhaps themost important factor to consider is the amount of risk that youare willing to take with your savings.

If you put a lesser amount in the more risky types of invest-ments, you will have some security with your savings and havesome funds readily available should you need cash in a hurry.You may also have a chance of making high returns, as risk andreturn are directly related. Figure 6.8 ranks various investmentsaccording to risk.

Spreading Out Your Investments Investing your savings inseveral different types of accounts lowers the overall risk. If oneinvestment turns sour, the others may do better. Financial plan-ners call spreading out your investments diversification. SeeFigure 6.9. Mutual funds, for example, help you diversify.

Risk and Return The lower therisk, the lower the return. Perhaps themost risk-free investment is an insuredpassbook savings account. You couldalso invest your savings in the stock orbond market directly, although theseare the riskiest investments. The marketvalue of stocks can rise and fall dramat-ically and so, too, can the value of yourinvestment. Why do bond-basedmutual funds carry a risk?

Ris

k

Rate of Return

High

LowLow High

PassbookSavingsAccounts

Certificatesof Deposit

Bond-BasedMutual Funds

Stock-BasedMutual Funds

Bonds

Stocks


158 CHAPTER 6

158



Use Interactive Tutor Self-Assessment Software.

Name Date Class

6, 3


Multiple Choice: In the blank at the left, write the letter of the choice that best completes the statement or answers the question. (10 points each)

6. A major benefit of a private or personal pension plan is

a. penalty-free withdrawal of funds. b. deferred federal income tax.c. higher tax rate. d. no federal income tax.

7. The trade-off for investing in real estate is

a. never getting your money back. b. not being able to get your money back quickly.c. being able to sell the property on short notice. d. making a large profit.

8. Investing savings in several different types of accounts

a lowers the overall risk b increases the risk

SCORE

A1. pension plan

2. Keogh Plan

3. IRA

4. Roth IRA

5. diversification

Ba. private retirement plan that allows people to save a

certain amount of untaxed income with tax-deferredinterest

b. private retirement plan that taxes income before it issaved

c. company plan that provides for retirement income

d. spreading of investments to lower overall risk

e. retirement plan for self-employed individuals

Matching: Place a letter from Column B in the blank in Column A. (10 points each)

Section Quiz 6–3

Answer: The market value of thesebonds could fall. Also, some of thecompanies that issued the bondsmay go out of business and not beable to repay the bonds at maturity.

ECONOMICS & YOU



ASK: How does inflation affectlong-range savings goals? Thepotential for inflation to decreasethe value of the dollars savedmust be taken into account sothat enough dollars are availableat the time they need to be spent.

Organize students into groups to research and develop a plan for a school investmentclub. Point out that groups should consider the following questions when working on theirplans: What is the purpose of the club—in other words, what are the reasons for saving?Who should be eligible for membership—all students, or just students from certaingrades? What, if any, minimum investment should be required? What level of risk shouldbe taken? What level of return is required? Call on group representatives to present theirplans to the class. Then have the class create a final plan by drawing the best elementsfrom the presentations. BLOCK SCHEDULING

Free Enterprise Activity

ECON: 1B, 2B, 3A, 4B, 11B-C, 23A, 23C-D,24D, 25B

159159


When you have very little income and cannot afford anyinvestment losses, you should probably put your savings ininsured accounts in a local bank or savings and loan, or youshould buy U.S. government savings bonds. The greater yourincome and the more savings you have, the more you can diver-sify into stocks, corporate bonds, and so on.

Values Your values may also determine where you invest yoursavings. If you believe that your community needs more develop-ment, you might choose to put your savings in a local savings andloan that guarantees that a large percentage of its investments aremade in community loans. You may also choose to invest in stocksissued by environmentally responsible companies or companiesthat have aggressive equal opportunity programs.

Understanding Key Terms1. Define pension plans, Keogh Plan, individual

retirement account (IRA), Roth IRA, diversification.

Reviewing Objectives2. What are three ways of investing for

retirement?

3. Graphic Organizer Use a diagram like theone in the next column to explain how a personshould determine the amount to save and theamount to invest.

Applying Economic Concepts4. Risk-Return Relationship If you had money

to invest, in which type of account would youinvest? Why?

5. Drawing Conclusions Bonds yield a morecertain return than stocks. Why do individu-als, nonetheless, invest in stocks?




3

Amount of savings depends on

Lowering Risk “Don’t put all your eggsin one basket” is a phrase you have certainlyheard before. The theory behind it can beapplied to how a person chooses to invest.What is the most risk-free investment?

6.96.9CHAPTER 6

SECTION 3, Pages 155–159


ReteachHave students outline the section

using the main headings as thebasic outline.

1. All definitions can be found in the Glossary.2. Keogh Plans, IRAs, real estate investments3. present fixed expenses, reasons for saving,

savings growth rate, future income needs

4. Answers will vary. Ensure that students’answers demonstrate an understanding of therelationship between risk and return.

5. While the risk is greater, there is a chance ofobtaining higher returns.

Lead students in a discussion ofthe following: If you could give onepiece of advice on investing, whatwould it be? Why?

Name Date Class

pension plans Company plans that provide retirement income for their workers (page 155)

Keogh Plan Retirement plan that allows self-employed individuals to save a maximum of 15 percent oftheir income up to a specified amount each year, and to deduct that amount from their yearly taxableincome (page 156)

individual retirement account (IRA) Private retirement plan that allows individuals or married couples tosave a certain amount of untaxed earnings per year with the interest being tax-deferred (page 156)

Roth IRA Private retirement plan that taxes income before it is saved, but which does not tax interest onthat income when funds are used upon retirement (page 156)

diversification Spreading of investments among several different types of accounts to lower overall risk(page 158)

KEY TERMS



DRAWING FROM EXPERIENCE

Did you know that people save money for both short-term and long-term purposes? Do youknow what a pension plan is? In addition to savings, most Americans will need supplementarysources of income for their retirement years.

This section focuses on saving and investing for retirement. It also outlines the different retirementplans available.

ORGANIZING YOUR THOUGHTS

6, 3


Answer: an insured passbook sav-ings account

Page 158: 1A-B, 3A, 4B, 5A-B,11B-C, 23A, 23F-G, 24A

Page 159: 1A-B, 2C, 3A, 4B, 8A-B,11B-C, 23A, 23D,23F-G, 24A


ECON: 23A

ECON: 11B, 23A,23D

SPOTLIGHT

160 CHAPTER 6

SPOTLIGHT ON THE ECONOMY

It pays to be astute. Tuition and fees haverisen 94% since 1989, nearly triple the

32.5% increase in inflation. The sticker price—tuition, fees, and room and board—for a year

of undergraduate education rangesfrom $33,000 at IvyLeague schools downto $10,500 at stateuniversities.

The good news isthat rising financialaid, now at $60 bil-lion nationally, is soft-ening the blow. Thefirst thing to do wheninvestigating aid pack-ages is to head for theInternet. A few days of

pointing and clicking can have a lifelong pay-off. You’ll learn such tips as:• Don’t go the early-admission route if you

want aid. Your commitment means theyknow they’ve got you.

• If you have stock set aside for college, sell itbefore January 1 of your child’s junior year

in high school.After that date,any capital gainswill reduce aideligibility.

• Apply to at least sixcolleges, from dreamsto sure bets. Then,with offers in hand,negotiate.If you are set on a spe-

cific college, it helps tohave strong offers fromdirect competitors.Negotiations can be doneface-to-face, by phone, orby faxing other offers with a polite cover letter. Awell-spoken student may get better results than apushy parent.

Cash-strapped students are also saving thou-sands by enrolling at a public college and latertransferring to a private school or starting at ajunior college (average tuition of $1,500 a year)and moving on to a state university.—Reprinted from March 15, 1999 issue of Business Week by special

permission, copyright © 1999 by The McGraw-Hill Companies, Inc.

Think About It1. What three actions should you follow when applying

for college aid?

2. What is another alternative for cash-strappedstudents?

Check It Out! In this chapter you learned about savingand investing for the future, including paying for col-lege. In this article, read to learn how your savings cango even further by lowering the cost of college tuition.

Intro to HagglingIntro to Haggling

160

Inform students that many statesnow offer prepaid tuition plans.These plans differ from state tostate, but most allow participants tobuy tuition credits at current prices.These credits can then be used topay tuition fees in full at state col-leges—regardless of the actual costof tuition. Students wishing toattend college outside the state sys-tem can use the credits to pay partof out-of-state tuition fees. Ask stu-dents to discuss the advantages anddisadvantages of such programs.

Answers to Think About It

According to the United StatesDepartment of Education, thereare approximately 16.7 millionstudents enrolled in college, andmore than half of these studentsreceive some form of financial aid.

1. do not take early-admission route; sell any stock set aside for college before January1 of student’s junior year in high school; apply to at least six colleges, and then nego-tiate for financial aid

2. to enroll at a public college and later transfer to a private school, or to start at a jun-ior college and then move on to a state university

To find up-to-date news andanalysis on the economy, busi-ness, technology, markets,entrepreneurs, investments,and finance, have studentssearch feature articles and spe-cial reports on the BusinessWeek Web site.www.businessweek.com

ECON: 1B, 3A, 4B, 11B, 21A, 23A, 23D, 23G

http://www.businessweek.com

161


Why Save?

• Economists define saving as the nonuse of incomefor a period of time so that it can be used later.

• Saving done by an individual provides money forothers to invest or spend and allows businesses toexpand.

• Individuals have many places to invest their sav-ings, including savings accounts and timedeposits.

• With a passbook savings account, the depositorreceives a booklet in which deposits, withdrawals,and interest are recorded.

• A money market deposit account (MMDA) isanother type of account that pays relatively highrates of interest and allows immediate access tomoney through checks. The trade-off is that theseaccounts have a $1,000 to $2,500 minimum bal-ance requirement.

• Time deposits, such as certificates of deposit(CDs), offer higher rates of interest, but you mustleave your funds on deposit for longer periods oftime.

• The FDIC insures deposits up to $100,000 in com-mercial banks and savings banks.

Investing: Taking RisksWith Your Savings

• Shares of stock entitle the buyer to a certain part ofthe future profits and assets of the corporation sell-ing the stock.

• Stockholders make money from stock through div-idends and by selling their stock for more than theypaid for it.

• Companies and all three levels of government sellbonds to borrow money. These include tax-exemptbonds; savings bonds; and Treasury bills, notes,and bonds.

• Stocks are bought and sold through brokers or onthe Internet.

• Stocks of large corporations are usually traded onthe organized stock exchanges, whereas stocks ofsmaller, new corporations usually are sold on theover-the-counter market.

• Many people invest in the stock market by placingsome of their savings in a mutual fund, an invest-ment company that pools the money of many indi-viduals to buy stocks, bonds, or other investments.

Special Savings Plansand Goals

• When they retire, most Americans will need addi-tional sources of income besides their savings.

• Pension plans, the Keogh Plan, and individualretirement accounts (IRAs) are ways to increaseyour retirement dollars.

• Buying real estate is another form of investing foryour retirement, but it carries a much higher risk.

• When deciding how much and what to invest in,consider diversification in order to spread outyour investment risk.

C H A P T E R

SECTION 1

SECTION 2

SECTION 3

Chapter Overview Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.comand click on Chapter 6—Chapter Overviews toreview chapter information.

6

Use the Chapter 6 Summary to preview, review, condense, orreteach the chapter.

Preview/ReviewVocabulary PuzzleMaker

CD-ROM reinforces the key termsused in Chapter 6.

Interactive Tutor Self-Assess-ment Software allows students toreview Chapter 6 content.

CondenseHave students listen to the

Chapter 6 Audio Program (alsoavailable in Spanish) in the TCR.Assign the Chapter 6 Audio ProgramActivity and give students the Chap-ter 6 Audio Program Test.

ReteachHave students com-

plete Reteaching Activity 6 in theTCR (Spanish Reteaching Activitiesare also available).

C H A P T E R 6

ECONOMICS & YOU




Saving and Investing Ask students to think about and list items they wish to buy. Suggestthat they divide their “wish lists” into long-term goals (expensive items) and short-term goals(less expensive items). Then have students identify options of how they will save to makethese purchases. Finally, have students draw up a calendar showing target dates for savingsand purchases.

Economics Journal

Page 160: 1B, 11B-C, 21A, 23A,27A

Page 161: 1A-B, 3A-B, 4A-B, 5A-B,8A-B, 11B-C, 15A-B,23A, 24A, 27A


ECON: 1B, 3A, 5A-B, 11B, 23A, 23C, 25B


CHAPTER 6Assessment and Activities


Identifying Key TermsWrite the letter of the definition in Column Bthat correctly defines each term in Column A.

Column A1. mutual fund2. savings bond3. capital gain4. statement savings account5. time deposit6. diversification7. pension plan

Column Ba. an increase in wealth realized when a per-

son sells an assetb. a less risky way to invest in stocks and

bondsc. a government security attractive to small

investorsd. savings plan that issues a monthly sum-

mary of your transactionse. retirement plan organized by a companyf. savings plan that requires savers to leave

their funds in a financial institution for aspecified length of time

g. spreading of investments among severaldifferent types of accounts to lower over-all risk

Recalling Facts and IdeasSection 1

1. What is the main advantage of passbookand statement savings accounts?

2. Why is a bank certificate of depositcalled a time deposit?

3. Why are deposits of up to $100,000 inbanks and savings institutions often con-sidered very safe?

Section 24. What is the basic difference between a

stock and a bond?5. What are two advantages of United

States savings bonds?6. What terms describe the difference

between the purchase price of a stockand the sale price of a stock?

7. What kind of investment company hiresprofessionals to manage the investmentsof a pool of investors?

8. What government agency regulates stockand bond markets?

Section 39. What are three common types of pen-

sion plans for individuals?10. What are some of the ways you can

decide how much you should save?11. “Don’t put all your eggs in one basket.”

This quote is an example of what princi-ple of investing?

6

Self-Check Quiz Visit the Economics Today and Tomorrow Web site at tx.ett.glencoe.comand click on Chapter 6—Self-Check Quizzes toprepare for the Chapter Test.

162 CHAPTER 6

162

Identifying KeyTerms1. b2. c3. a4. d5. f6. g7. e

Recalling Facts and Ideas1. easy availability of funds, usu-

ally without penalty or forfeit2. because it requires the investor

to leave money on deposit for aspecified period of time

3. because they are insured by thefederal government

4. stock represents ownership in acorporation, a bond representsthe debt of the government or acorporation

5. They are an extremely safeinvestment, and the interestearned is exempt from federaltaxes.

6. capital gain or capital loss7. mutual fund8. Securities and Exchange

Commission (SEC)9. 401(k), Keogh Plan, IRA

10. review present fixed expenses, analyzereasons for saving, calculate savingsgrowth rate, and determine future incomeneeds

11. diversification

Thinking Critically1. set up three separate accounts of

$100,000 each2. When people buy U.S. savings bonds,

they are loaning money to the UnitedStates government. Therefore, thisincreases the government’s debt.

3. Charts will vary.

Have students visit theEconomics Today and TomorrowWeb site at ett.glencoe.com toreview Chapter 6 and take the Self-Check Quiz.

MindJogger Videoquiz

Use MindJogger to reviewChapter 6 content.

tx.ett.glencoe.com

http://www.glencoe.com/qe/qe59.php?qi=1548&ch=6

http://www.glencoe.com/qe/qe59.php?qi=1548&ch=6



163


Thinking Critically1. Identifying Alternatives Suppose you have

$300,000 that you want to save. TheFDIC only insures up to $100,000. Whatcan you do to make sure all your fundsare insured by the FDIC?

2. Understanding Cause and Effect How doesbuying a U.S. savings bond increase theUnited States government’s debt?

3. Categorizing Information Assume that youhave $100,000 in savings. Create a chartlike the one below to list the investmentsyou might make and what percentage ofthe $100,000 you would invest in each. Inthe last column, explain how your choiceswill achieve investment diversification.

ApplyingEconomic ConceptsScarcity and Choice List your short-termsavings goals, such as saving to buy a newportable DVD player. Explain the typical waysin which you can save for such a purchase.Then list your long-term savings goals, such assaving for a house or retirement. Explain howyou can achieve these goals. What is the majordifference between the two ways of saving?

CooperativeLearning Project

Working in groups of four, research what$100,000 placed in each one of the followinginvestments 10 years ago would be worth today.Rank and compare the rates of return. Obtainyour information in the library, on the Internet,or through a securities brokerage firm.

■ One particular stock■ A mutual stock fund■ U.S. Treasury bonds■ Residential real estate■ Commercial real estate■ Gold■ Diamonds

Reviewing SkillsUsing a Spreadsheet Contact at least fivefinancial institutions in your area. Ask themfor the interest rate they offer for a passbooksavings account, a certificate of deposit, anda money market deposit account with a min-imum balance of $1,000 and a maturity of 16months. Use the information you obtain asthe basis for a spreadsheet showing interestrates in your community. Then prepare a bargraph of the interest rates available and pre-sent your information to the class.

Technology ActivityUsing the Internet Choose two stocks on theNew York Stock Exchange, and follow theirprices for two weeks in the financial pagesof a newspaper or on the Internet. You willneed to read only the last column of figures.Note the daily closing prices for each stock,and then make a line graph showing thestocks’ performance over the two-weekperiod.

Use the Internet or business magazines toresearch what stocks are in demand in Italy,Finland, Israel, and Japan. Present the resultsof your research to the rest of the class.

Investment Type % of Funds Diversification

Reviewing SkillsSpreadsheets and bar graphs

may vary. Evaluate these materialsfor accuracy.

Technology ActivityLine graphs will differ. Have stu-

dents compare and discuss theirgraphs, noting which stock rose invalue and which fell.

Analyzing theGlobal Economy

Call on students to share theirfindings with the class. Then leadthe class in a discussion of whythese types of stock might be indemand.

ASK: Which of the followinginvestments has the greatestrisk factor? The greatest poten-tial return?a. certificate of depositb. stocksc. stock-based mutual fundThe answer to both questions isb, since risk and return aredirectly related.

Chapter BonusTest Question

Applying EconomicConcepts

Answers will vary but should reflect thatshort-term savings plans focus on flexibility,while long-term savings plans focus on earnings.

Cooperative LearningProject

Students might present their findings in atable or chart. Page 162: 1A-B, 3A-B, 4B, 8A,

11B-C, 15A-B, 17A, 23A,23D, 23G, 24A

Page 163: 1A-B, 3A-B, 4B, 5A-B,7A, 8A, 11B-C, 15B,17B, 23A-D, 23F-G,24C-D, 26D, 27A


ECON: 11B-C, 23A

Teacher’s Notes

Economics LabEconomics Lab

Making a Budget

In Unit 2 you learned how trade-offsshape consumer decisions regarding

credit, food products, clothing, automo-biles, housing, and saving. In this lab, youwill design a strategy for earning, spending,saving, and investing your resources.

✔ Copies of Tables 1 and 2

✔ Newspapers with advertisements forapartment rentals and auto sales

✔ Ads from local grocery stores

✔ Magazines with photos of apartments,automobiles, and furniture

✔ Pencil

✔ Calculator

1. You will be sharing living quarters withanother person. Annually you make$16,640, of which $1,800 goes to paytaxes. Monthly you earn $1,236.66. Yourtotal expenditures will include the itemslisted in Table 1.

2. Analyze the newspaper ads to select anapartment to rent. List the rental fee inTable 1.

3. Plan your weekly menus in Table 2, thenmultiply these by 4 to budget your foodexpenses for 1 month. Use the ads fromgrocery stores to select and price the foodproducts needed for your menus.

4. Decide on a type of car to buy. Analyzethe newspaper ads to obtain themonthly payment for an automobile.

5. From the magazines, select items of fur-niture to furnish your apartment.

6. Visit or call the following places toobtain prices or monthly fees for othernecessities: phone company, electriccompany, gas company, auto insurance,furniture store, and medical insurance.Optional costs include IRA deductionsand purchases of stocks and bonds.

7. Fill in your costs in Table 1.

164

From the classroom of Joanna Ackley, John F. Kennedy High School, Taylor, Michigan

164

The purpose of this lab is toapply consumer decisions in a real-life situation. Students are given theopportunity to review their needsand wants, consider available trade-offs, and then balance needs andwants with their availableresources.

Economics LabEconomics Lab

Begin the lab by reviewing thesummaries of the four chapters inUnit 2. Next, allow students time togather the materials needed for thelab. Then have students workthrough the procedures listed inStep B. Since the lab is based onshared living quarters between twopeople, it might be useful to havestudents work in pairs. The lab willtake several days to complete. Allowtime to make regular checks of stu-dents’ progress. Finally, offer stu-dents advice and guidance whenneeded.

ECON: 1B, 5A-B

ECON: 23A

Answers to Lab Report AnalysisThe largest monthly expense is rent. The rest of the students’ budgets will vary, however. Ina review session of this Economics Lab, have students compare and discuss their budgets.

165

Use the results of your cost analyses inTable 1 to draw a bar graph visually showinghow your income compares to your expendi-tures. Draw your graph on poster board touse in a presentation to the rest of the class.In your presentation you should also includevisuals of the type of apartment you chose torent, the furniture you selected, the type ofautomobile you bought, evidence of car andmedical insurance costs, and your calcula-tions for credit card interest fees.

1. What was your largest monthly expense?2. How much money did you have left overat the end of the month?3. What expense(s) surprised you themost? Why?4. What expenditures did you have toreduce in order to meet your othermonthly expenses?

Table 2MENUS PRICES OF ITEMS

Monday

Tuesday

Wednesday

Thursday

Friday

Saturday

SundayTOTAL

Table 1CATEGORIES OF EXPENDITURES MONTHLY COST

RentRental insuranceTelephoneElectricityGas heatCar paymentCar insuranceCar expenses (gas and repairs)Furniture expensesClothing expensesFood (Eating in)Eating outMedical insuranceMedical expensesCredit card billSavings accountChecking accountStocks and bondsIRA or Roth IRAEntertainmentLaundry and ToiletriesOtherTOTAL OF EXPENSES

Have students answer the LabReport Analysis questions.

Discuss with students the trade-offs they made to minimize costsand meet their wants. Ask them ifthey would like to change thesetrade-offs and, if so, why.

Vacations are one expense not included in the EconomicsLab budget. In 1999, the averageAmerican spent a little under$1,000 on a summer vacation.

Page 164: 1A-B, 3A, 4A-B, 5A-B,7A, 10A, 11A-C, 17A,23A, 23C, 23G, 25B

Page 165: 1A-B, 3A, 4A-B, 5A-B,7A, 10A, 11A-C, 23A,23C, 23F-G, 24C-D,25A-B


ECON: 1B, 5A-B

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