Investing
About Lesson

It is extremely difficult, even for financial professionals, to predict changes in future expectations and thus to choose the stocks whose price is going to rise in the future. Most Americans can accumulate considerable financial wealth if they follow two rules: complete significant additional education and training after graduating from high school and start saving money early in life.

Self-Check Questions

  1. What is the total amount of interest collected from a $5,000 loan after three years with a simple interest rate of 6%?
  2. If your receive $500 in simple interest on a loan that you made for $10,000 for 5 years, what was the interest rate you charged?
  3. You open a 5-year CD for $1,000 that pays 2% interest, compounded annually. What is the value of that CD at the end of the 5 years?

Review Questions

  1. What are the two key choices U.S. citizens need to make that determines their relative wealth?
  2. Is investing in housing always a very safe investment?

Critical Thinking Questions

  1. Explain what happens in an economy when the financial markets limit access to capital. How does this affect economic growth and employment?
  2. You and your friend have opened an account on E-Trade and have each decided to select five similar companies in which to invest. You are diligent in monitoring your selections, tracking prices, current events, and actions taken by the company. Your friend chooses his companies randomly, pays no attention to the financial news, and spends his leisure time focused on everything besides his investments. Explain what might be the performance for each of your portfolios at the end of the year.
  3. How do bank failures cause the economy to go into recession?

Problems

  1. How much money do you have to put into a bank account that pays 10% interest compounded annually to have $10,000 in ten years?
  2. Many retirement funds charge an administrative fee each year equal to 0.25% on managed assets. Suppose that Alexx and Spenser each invest $5,000 in the same stock this year. Alexx invests directly and earns 5% a year. Spenser uses a retirement fund and earns 4.75%. After 30 years, how much more will Alexx have than Spenser?

REFERENCES

U.S. Department of Commerce: United States Census Bureau. “Income: Table H-13. Educational Attainment of Householder—Households with Householder 25 Years Old and Over by Median and Mean Income.” http://www.census.gov/hhes/www/income/data/historical/household/.

United States Department of Labor. Bureau of Labor Statistics. 2015. “Table 9. Quartiles and Selected Deciles of Usual Weekly Earnings of Full-Time Wage and Salary Workers by Selected Characteristics, 2014 Annual Averages.” Accessed April 1, 2015. http://www.bls.gov/news.release/wkyeng.t09.htm.