Section 5 Monetary and Fiscal Policy Part A Financial Markets and Assets Q What are stocks and bonds all about Q Why will you need to own more than 1 000 000 of worth of them Q What role do bonds play in fiscal and Financial Markets and Assets What do these things have in common checking account student loan car loan mortgage bond stock All are financial assets a legal claim for future payments Are assets for one party and a liability for another security financial asset that can be sold stocks and bonds Stocks Def a share is ownership in a corporation owners can sell hopefully at higher price on the stock market owners receive profits as dividends Corporations sell stocks in themselves to raise funds uncommon Ex Twitter 11 13 and GoPro 7 14 very difficult to predict stock prices Bonds Bond Ex U S Treasury Bills T Bills sold on 3 31 15 investors sent bids to the U S Treasury to received fixed amount in 1 year 100 minimum face value for 100 in 1 year winning bidder paid 99 73 to U S Treasury A bond is a security sold by large businesses or governments They borrow from willing investors the borrower bond issuer promises fixed nominal payments to the investor lender for an agreed upon period most bonds have longer maturities and offer twice annual payments coupons Ex U S Treasury notes 2 10 years Ex U S Treasury Bonds 20 30 years Existing bonds trade in very active markets recall security Q If there was unexpected inflation bond owners would be and firms and governments that issued bonds would be A Happy Happy B Happy Upset C Upset Happy D Upset Upset Part A Financial Markets and Assets Bond Prices Q You buy a bond You are A borrowing money B lending money Most bonds have longer maturities and offer twice annual payments coupons Ex U S treasury Notes 2 10 years Ex Bond Prices Q Recall that you profit by buying a T Bill for less than its face value Say that you paid 95 PT Bill for a T Bill with a one year maturity and a face value of 100 As a fraction of your investment you earn Q In the last question your T Bill with a 100 face value had a price of 95 and an interest rate of 5 3 If someone bought it from you for 97 50 its interes rate for them would be 5 3 Iron Law of Bonds Their prices rises their interest rate falls and vice versa A 5 B 5 100 100 C D 95 E Interest rate 5 95 5 3 Interest rate face value Pt bill Pt bill 5 95 A B C interest rate 2 50 97 50 2 6 face value Pt bill Pt bill Bond Owning Why buy a T bill up to 1 year maturity interest rates similar to bank deposits Why buy a T Note or T Bond 10 30 years Higher rates than banks Ex 2 0 10 year bond vs 1 1 at PNC Most likely own in mutual bonds Why do firms and governments issue bonds Firms raise to buy capital stocks too Governments cover deficits Bonds an essential part of the economy End of Part A Financial Markets and Assets Q What are stcks and bonds all about A They re securities that are essential for a rich economy Firms use them to fund K purchases and government cover deficits They allow households to save for the future Next Why you ll need to own more than 1 000 000 of stocks and bonds Part B Why You ll Need 1 000 000 in Stocks and Bonds Your Retirement Q Why should a college student care about this The challenge if you re 20 now you can expect to live 79 76 for men 81 for women Not that much in the genes Much longer is a possibility Current average retirement age 62 Your Retirement Social Security Q What is the average monthly Social Security benefit for a retired person A 1 331 Never designed for all retirement needs supposed to keep seniors out of dire poverty Pretty much has Q What is the chance that you ll get say at least 70 of the above mentioned Social Security Benefits A 81 100 Baby Boomers won t use up as it is a largely pay as you go system Set aside funds gone by 2033 Thus benefits will almost certainly go down by 1 3 Your Retirement Defined Benefit Plans Traditional employer pension plans The employer sets funds aside for employees retirement manages them and pays from retirement to death Benefits generally determined by years of service and final salary Few for young workers Historical returns on stocks of 11 quite varied Assume 2 inflation Save 300 month which increase with inflation Funds at age 63 201 900 553 400 1 415 00 You Retirement What to do Save early and often Illustration Age savings starts 43 33 23 Estimates you need 25x final salary Spend maybe 4 of it year Aren t stocks risky 2008 38 Ex 2013 30 Certainly risky over a few years Over decades in the past they ve had a significantly positive retun GRAPH Your Retirement How to Save Most employers offer defined contribution plans 401 k 401 b 457 IRS code income tax free contributions and growth pay income taxes when funds withdrawn at retirement you select how much goes in you select the assets your contributions go into Ex mostly into stock and bond mutual funds Bank deposits pay too little Most employers offer defined contribution plans Low fees essential Diversification very important o Not your employer s stock o Stock and bonds varies by age Easiest way Select a life cycle fund Ex Vanguard Target Ret Funds Ex Fidelity Freedom Funds Your Retirement Alternative Your Retirement Why Care Q Why should a college student care about this A Must start saving early Put in 15 of your income every pay period and only take out when you retire End of Part B Why You ll Need 1 000 000 in Stocks and Bonds Q Why will you likely own more than 1 000 000 of worth of stocks and bonds A It is estimated that you ll need as much as 25X what want your annual retirement income to be Bank deposits don t pay enough You should be fine if you put 15 of each paycheck into a life cycle fund mutual fund throughout your work life Part C How the Fed Affects the Economy Q All semester long we ve mentioned that the Fed affects the economy through interest rates Federal Reserve Independence Largely independent of the government so that politics don t influence their decisions Not part of the government and does not get government funding Top officials are Presidential appointees and confirmed by the Senate Established by Congress under the Federal Reserve Act which can be and has been changed Statutory mandate of maximum employment and price stability Federal Reserve Money Q How many of the following …