UnitOfStudy Teacher

Teaching Financial Literacy
Unit of Study: Creating An Investment Portfolio

Unit Overview Creating an Investment Portfolio is a project-based co-operative unit where students work in small groups to build and present an investment portfolio for a fictional client. In order to achieve this goal, a series of lessons and activities have been created to support both teachers and their students through each of the stages of this learning process. Curriculum Connections This interactive unit has been designed to assist teachers in meeting the curriculum expectations that deal with money management and capital markets primarily in the senior level courses of business, economics, and mathematics. The contents of this unit also deal with the essential principles of personal money management and investing while offering insight into career opportunities in business and finance.
Creating an Investment Portfolio: A Unit of Study

Project Management Checklist
Topic Teacher Area Instructions and Notes Lesson Teach "The Value of Learning about Investing". (see Teaching Tips for more details). Introduce "Project Overview and Rubrics" Assign "Pretest Quiz". Note: Students can complete this online or use as a handout. Teaching Tips The Value of Learning About Investing Read through the list of Resources provided. These may be useful for you during the unit. Forming the Group Lesson Using the suggestions from Teaching Tips start the group building process by using some of the team building strategies with your students. Assemble students into their Project Management teams and have each group member select one of the following roles: Project Manager, Accountant, Technology and Graphics Specialist, Communication Specialist. By using an overhead, or by taking students to the computer lab, share some examples or exemplars of completed projects. Exemplars of this project are available to view in flash or to print from "Project Exemplars - Print Files" . Have students record the names of their group members using the "Introduction Worksheet" provided. Teaching Tips Group Forming and Team Building Activities Project Exemplars - Print Files Introduction - Worksheet Student Area Handouts and Worksheets
Project Introduction: Estimated Time: 60 Minutes
Project Overview Handout Portfolio Report Rubric Portfolio Presentation Rubric Pretest Quiz
Estimated Time: 60 Minutes
Team/Company Name
Lesson Once students are in their groups, tell them that they are now part of an investment company. Teach students about investment firms and the role of an investment advisor. To learn more about Financial Advisors, ask students to watch the video , How to Work With a Financial Advisor. Give each group time to select a name for their investment company and require that each group describe a rationale for their name selection. Students can record all of this information on their handout.
Team/Company Logo
Lesson Require groups to create a team logo. Extension: Encourage students to use Photoshop or Microsoft Publisher to create the final product.
Estimated Time: 30 Minutes Portfolio Estimated Time: 60 Minutes Lesson Hand out the student copy of the Five Dimensions - Student Worksheet . Formally teach the process of building an investment portfolio by using the overhead called "The Five Dimensions - Teacher Overhead". Have students fill in their worksheet as you teach. Explore the dimensions further by following the steps in Teaching Tips. Teaching Tips The Five Dimensions Student Worksheet
Recording Ideas Student Worksheet
Step 1: Investor Personality Profile Estimated Time: 60 Minutes
Lesson Use the overhead: "Step 1: Investor Personality Profile", to review the characteristics of an investor and to teach students what to consider when choosing investments for their client. Hand out a copy to students for reference. Teach students about the kinds of questions they can ask their client by having students work through the Step 1 - Exploratory Activity. Direct team members to start developing a list of ideas about their fictional client. Remind students that they must select a client who is either preparing for post secondary education or is planning to retire. Teaching Tips Teams may use web sites to identify the questions commonly asked by financial planners. If computer access is not possible, provide your own financial profile templates.
Step 1: Investor Personality Profile Handout Step 1 - Exploratory Activity
Identify Your Client.
Lesson Have students brainstorm alternatives for potential fictional clients. Use the activities in the Teaching Tip area to encourage creative choices. Ask each group to agree on their choice of client. Teaching Tips
Describe Your Client
Activities Have students create the Investor Personality Profile for their client using the "Step 1 Worksheet". Using the information contained on the worksheets, each portfolio group should prepare a one-page creative biography of their client that includes: age, marital status, monthly income, spending habits, saving patterns, expenses and other relevant information. Teaching Tips Have students in each group perform a short skit or dramatic monologue that brings their client to life. Encourage students to use costumes and props to help portray this individual to their classmates. Lesson Hand out the Student page called Step 2: Investment Goals". Using an overhead of "Step 2: Investment Goals, introduce students to the different areas that they may need to focus on when making calculations for their client's portfolio. Guide students through "Step 2: Exploratory Activity" to help them learn how funds might be allocated within a portfolio. Teach "Lessons 1, 2, and 3". Refer to Teaching Tips for detailed strategies. Using the information in "Lesson 4", teach students about the stock market. Be sure that they understand the basics. Refer to Teaching Tips for more strategies. Teaching Tips Teaching Strategies Lesson 1 Teaching Strategies Lesson 2 Teaching Strategies Lesson 3 Teaching Strategies Lesson 4 Step 1 - Worksheet
Estimated Time: 30 minutes
Step 2: Investment Goals Estimated Time: 3-4/ 60 minute periods
Step 2: Investment Goals - Handout Step 2 - Exploratory Activity Lesson 1 Lesson 2 Lesson 3 Lesson 4
Misconception/Concept Handout
Describe Your Clients Investment Goal
Lesson Now that students have learned some of the key calculations, have them focus on the financial goal of their client. Using the 'Step 2- Investment Goal Worksheet', ask students to write down their client's goal in dollars ($). Have students use the "Step 2 - Planning Tools For Education and Retirement Exploratory Activity" as their reference.
Step2 - Investment Goal Worksheet Step 2 - Planning Tools for Education and Retirement Goals Exploratory Activity
Step 3: Asset Allocation Model Estimated Time: 45 minutes
Lesson In this lesson you will be providing students with general knowledge about the different investments available to a client. Using an the overhead of "Step 3: Asset Allocation" , show students the range of investment choices for their client and identify the risks involved. See teaching tips for extensions to this lesson. Describe each of the asset classes - speculative, equities, fixed income, cash. Introduce the asset allocation model as a way that students can divide their portfolio into the different classes of investments. Teaching Tips On a large piece of paper, have students translate the asset allocation pyramid onto a horizontal line that moves from low to moderate to high risk investments. As practice, have each student choose six different investments for their client and plot them on this line. Group members can then compare their individual choices to see if they agree on the needs of their client. An alternative is to have students highlight each choice on the provided pyramid using red (high risk), yellow (moderate), and green (low) markers.
Step 3: Asset Allocation Handout
Complete for Your Portfolio
Lesson Using "Step 3 - Worksheet ", have students define and give an example of each of the following: cash and cash equivalents fixed Income equity speculative Using the information in "Lesson 5" to support your teaching, explain to students the importance of understanding how investments are influenced by the pressures exerted by market factors including inflation, deflation, money supply etc. Explore the concepts of risk and regulation. See Teaching Tips for further instruction. Teaching Tips Teaching Strategies for Lesson 5.
Step 3 - Worksheet
Estimated Time: 3x60 Minute Periods
Lesson 5
Present and Future Value
Lesson Distribute Lesson 6 . Have students: Define present value; Define future value; Write the formulas for both; Complete the examples on the handout; Design and complete a present value and a future value example for your client include in your portfolio.
Lesson 6
Step 4: Investment Decisions Estimated Time: 3x60 Minutes
Lesson Distribute "Step 4: Investment Decisions" handout to students. Teach activities in "Lesson 7" to ensure students learn how to read and evaluate annual reports so they are able to make educated investment recommendations for their client's portfolio. See Teaching Tips for more support. Ask teams to identify their investment decisions using the "'Step 4: Investment Decisions" handout. To help students select investments for their client, have students follow the directions in Step 4 - Exploratory Activity. Distribute the "Glossary". Teaching Tips Teaching Strategies Lesson 7
Step 4: Investment Decisions - Handout Lesson 7
Step 4 - Exploratory Activity Glossary - Handout
Capital Markets and Investing
Lesson Handout "Step 4 - Worksheet". On "Step 4 - Worksheet " , have students define: Capital Market, Institutional Investor, Individual Investor, Primary Distribution, Secondary Market. (Questions 1-3) Step 4 - Worksheet
Page 4
Mutual Funds
Estimated Time: 45 minutes Step 5: Portfolio Records and Monitoring Estimated Time: 60 minutes
Lesson Ask students to write the following definitions on page 2 of "Step 4-Worksheet" ,Questions 4 and 5: Mutual Funds, Units, Right of Redemption and Net Asset Value per Share (NAVPS), Volatility, Rates of Return, Management Expense Ratio. In your group, complete the chart in Question 6 from "Step 4 - Worksheet" above, for your client's investment include the chart in your portfolio. Lesson Distribute - "Step 5 - Portfolio Records and Monitoring - Handout". Review the expectations in Step 5 so that students understand the importance of recording and reporting the changes in their client's portfolio value, ie: sending out a monthly statement or portfolio tracking via internet. Have students review the suggested websites in the Step 5-Exploratory Activity. Ask students to monitor their investments using the "Step 5 - Worksheet". Suggest computer software that tracks and monitors investments. See the Resources page for more information. Teachers should set a timeline of at least six weeks for the monitoring of investments. Step 5: Portfolio Records and Monitoring Handout Step 5 - Exploratory Activity Step 5 - Worksheet
Project Completion Plan
Lesson Review the criteria for the group presentation and set dates for each presentation team using the "Project Overview" handout distributed in the introduction. Have students create a plan for the completion of the project and presentation. Ask that they include their plan in the portfolio. Use the rubrics distributed in the introduction, to evaluate team presentations. Ask business leaders to come in and evaluate student presentations. Lesson Team members work on portfolio completion, presentation and report to client.
Investment Project
Estimated Time: 2x60 minutes Team Survey Estimated Time: 40 minutes Lesson Distribute the How Well Did We Work Together? handout Have students complete the handout survey individually and then as a team. Re-establish groups to discuss the individual assessments and to reflect on the project. How Well Did We Work Together? - Handout

Teaching Tips - The Value of Learning About Investing
Before you introduce the expectations of this unit, do everything you can to make the first day exciting and memorable for your students. Here are some ideas: 1. .Dress in formal business attire and hand out a tie to every student in the class and ask them to put it on before they sit down at their desk (granted some students may already have ties on if they are wearing a uniform) 2. While students are entering, have the opening song from the television show "The Apprentice" playing loudly on a CD. 3. In advance of your lesson, photocopy some pretend money and place $500 dollars on every desk 4. Begin your class by having students brainstorm what they would do with the money on their desk if it were real. Have them record ideas on a cue card or sticky note. 5. .Allow time for students to share their personal wish list with a partner 6. In a small group, discuss the following H Where will you be in ten years? H Where will your money be? 7. Use the answers they come up with for these two questions as a jumping off point for developing a list of reasons for learning about investing and finance. 8. Introduce the project and rubrics 9. If you have time left at the end of the class have a tie tying contest with your students. 10. Homework Assignment: Ask students to explain the expectations of this project to someone else. Require a signature on the project page from the individual who listens to the student's explanation.

Student Assignment: Creating an Investment Portfolio Project Overview
Your team will play the role of a financial planner who will propose a personal portfolio for a client. Your team will present your findings in two forms:
G G
a written report for the client and a presentation of the results to the client.
Presentation: 20% of the Total Mark
The presentation to the client must include visuals (graphs) and highlight the key results of the report. It should be no longer than 10 minutes and be given to help the client understand the report and the portfolio. Criteria for the Presentation Mark Group Involvement: Visuals: Coherence: Organization: Was the presentation organized and completed within the allotted time to show that it had been practised? Did each group member participate? Were the visuals professional and easy to read and understand appropriate headings, properly labeled and related to the portfolio selection? Did the presentation explain clearly to the client the choices made and how they met the needs of the client? Did the presentation reveal the underlying organizational structure used in the analysis and investment decisions?
Report: 80% of the Total Mark The report should have a table of contents and be organized into the following sections. A. B. C. D. E. Investor Personality Profile Investment Goals Asset Allocation Model Investment Decisions Portfolio Records and Monitoring
A. Investor Personality Profile (10%) You have the freedom to create your fictitious client but you must choose either a post-secondary education (for a child) or retirement as his or her investment goals. Your client may be any age, sex or marital status you wish. You determine the persons occupation, savings, income, number of children, and RRSPs. As you do the investor profile activity, try to answer the questions as your client would. Keep track of the questions and answers as part of the profile. Most programs name the investor personality type. When you are finished you must write a profile of your client. Criteria: Has the team created a realistic profile of the client and provided answers to the kinds of questions a financial planner would ask? Is the goal clearly stated in terms of time? B. Investment Goals (20%) In this section you will state specifically how much money the client will need to meet his or her investment goal and how much the client must save weekly, monthly or yearly to meet that goal. You will use online calculators to determine these numbers. Criteria: Has the team stated the goal clearly and given the dollar amount required to meet it? Has the team offered clear and objective evidence to explain the monthly savings required to meet the goals? Has the team properly referenced all sources?
C. Asset Allocation Model (10%) In this section, you use the investor profile to develop an asset allocation model dividing the investments into cash, fixed income and equity. Explain your choice. Criteria: Has the team shown an understanding of risk, liquidity, return and time frame in selecting an asset allocation? Has the team offered clear and objective evidence to support their asset allocation? D. Investment Decisions (40%) This section recommends specific investments to be part of the asset allocation for the portfolio. These must be real investments and the costs of acquisition should be identified. There is no limit on the number of investments chosen but each should be chosen for a specific reason. Criteria: Does the team have specific investments name, institution, costs, etc.? Does the team offer reasons why one investment was chosen over another? Is there diversity within the category and a reason for that diversity? Do one or more of the choices reflect research and a desire to try something different and less traditional? E. Portfolio Records and Monitoring (20%) This section recommends a method by which the client can record and monitor his or her investments. It also includes detailed instructions and samples of how to use the program and evaluate the reports generated by the program. Criteria: Does the team offer reasons for choosing the program they did? Reasons should include: how it handles transactions, reports, returns, and calculates returns. Has the team included printouts to support these reasons?

Investment Portfolio Report Rubric
Level Investor Personality Profile (10%) 1 No evidence of realistic profile No evidence of the interview questions a financial planner would ask No description of type of investor Investment Goals (20%) Few elements were evident 2 Few aspects of profile; too brief Few questions to show a client interview took place Superficial description of the investor/ client 3 Some aspects of an investor profile because of an interview Good client profile provided Good description of investor 4 Complete client profile, age, gender, education and/or work, income, savings Interview described in detail Complete realistic investor personality type described All elements are evident: Goal stated clearly Investment plan and dollar amount required to meet goals Clear and objective evidence of calculations to meet goals Asset Allocation Model (10%) No explanation and variety of investment Description of client choices for investment not supported by information on how they met client needs Description of the choices for investment includes some information given about how they met client needs Describes and demonstrates an understanding of risk, liquidity, return and time frame in selecting the asset allocation for client needs
Some elements were evident
Most elements were evident
Investment Decisions (40%)
Random, disorganized presentation with no evidence of structure for analysis and investment decisions
Some evidence of a structure for analysis exists but some information or steps are missing
Presents a coherent structure for analysis and investment decisions but is sometimes difficult to follow
Description clearly and concisely includes: -the choices and reasons for investments -names, specific investments, institution (reflects research) -gives detailed information about how they meet client needs
Portfolio Records and Monitoring (20%)

Report Appendix All classwork activities Homework assignments included
Assignments, notes, other handouts and learning materials presented in class not included in portfolio report Few, if any, homework assignments included
Few assignments, notes and classwork included in investment portfolio
Some assignments, notes and classwork included in investment portfolio report Portfolio is organized
Classwork, assignments and notes included in investment portfolio report Portfolio is organized Portfolio report indicates how client will be assisted by your investment team

Investment Portfolio Presentation Rubric
Level Group Involvement 1 No evidence of preparation Limited group member involvement 2 May have appeared rushed or too brief Some group members involved 3 Some organization of pace and flow with a few gaps Good group member involvement 4 Well organized pace and flow of information All members participated
Visuals
Few elements were evident
Some elements were evident
Most elements were evident
All elements of visual presentation were evident: - Clear graphics - Appropriate labels - Well organized - Good use of colour, space Explain clearly and concisely the choices for investments and give detailed information about how they meet client needs Presents a systematic, coherent, organized structure for the analysis and investment decisions
Coherence
No explanation of choices
Explanation of client choices for investment not supported by information on how they met client needs Some evidence of a structure for analysis exists but some information or steps are missing
Explain the choices for investment and give some information about how they met client needs
Organization
Random, disorganized presentation with no evidence of structure for analysis and investment decisions
Presents a coherent structure for analysis and investment decisions but is sometimes difficult to follow
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Financial Terms
In the space provided, write the letter of the term the statement defines. A. A place that brings together users and providers of capital. B. A plan for spending and saving. C. A loan made to a company or government for a fixed amount of interest. D. The value today of a future payment discounted at some appropriate discount rate. E. A decrease in the cost of goods and services over a period of time resulting in an increase in the purchsing power of the dollar. F. A type of investment contract that pays you regular income, usually after retirement. G. A pool of money invested in a range of investments. H. A portion of a company's profit paid to shareholders. I. Money that has been borrowed and must be repaid, with interest, by a set date. J. An increase in the cost of goods and services over a period of time, resulting in a decrease in the purchasing power of the dollar.
1.Bond 2. Stock Market 3.Budget 4. Debt 5. Inflation 6. Deflation 7. Present Value 8. Mutual Fund 9. Annuity 10. Dividend
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Financial Terms - Answers

In the space provided, type the letter of the term the statement defines. A. A place that brings together users and providers of capital. B. A plan for spending and saving. C. A loan made to a company or government for a fixed amount of interest. D. The value today of a future payment discounted at some appropriate discount rate. E. A decrease in the cost of goods and services over a period of time resulting in an increase in the purchsing power of the dollar. F. A type of investment contract that pays you regular income, usually after retirement. G. A pool of money invested in a range of investments. H. A portion of a company's profit paid to shareholders. I. Money that has been borrowed and must be repaid, with interest, by a set date. J. An increase in the cost of goods and services over a period of time, resulting in a decrease in the purchasing power of the dollar.
B C A G
1.Bond 2. Stock Market 3.Budget 4. Debt 5. Inflation 6. Deflation 7. Present Value 8. Mutual Fund 9. Annuity 10. Dividend
H J D
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Mathematical Skills - 1
1. The accumulated value of $1 000 earning interest at 6% per annum compounded annually for 10 years is closest to which of these values? $1 790 a. b. $1 850 $1 920 c. $2 150 d. 2 If money earns interest at the rate of 8% per annum compounded annually, then the present value of a $15 000 payment due in 15 years is closest to: $3 680 a. $4 262 b. $4 729 c. $6 919 d. 3. What is the accumulated amount of $14 000 growing at 5% per annum compounded monthly for 10 years? a. $19 287 $21 652 b. $22 747 c. d. $23 058 4. What amount now must be invested at 9% per annum compounded monthly to accumulate to $100 000 in 30 years? $5 034.75 a. b. $6 788.60 $7 991.87 c. $8 275.60 d. 5. In how many years will an investment of $8 000 grow to $20 000 if it grows at the rate of 7% per annum? 12.0 yrs a. 12.5 yrs b. 13.0 yrs c. 13.5 yrs d. 6. It costs $4 000 to purchase a bond that, 20 years from now, pays $10 000. What is the interest rate that the bond pays if it compounds annually? 4.69% a. 4.93% b. 5.09% c. 5.62% d. 7. What is the value of the sum (1.06) + (1.06)2 + ...+ (1.06)20? 38.99 a. 39.99 b. 40.99 c. 42.39 d.
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Mathematical Skills 1 - Answers

1. The accumulated value of $1 000 earning interest at 6% per annum compounded annually for 10 years is closest to which of these values? $1 790 a. b. $1 850 $1 920 c. $2 150 d. 2 If money earns interest at the rate of 8% per annum compounded annually, then the present value of a $15 000 payment due in 15 years is closest to: $3 680 a. $4 262 b. $4 729 c. $6 919 d. 3. What is the accumulated amount of $14 000 growing at 5% per annum compounded monthly for 10 years? a. $19 287 $21 652 b. $22 747 c. d. $23 058 4. What amount now must be invested at 9% per annum compounded monthly to accumulate to $100 000 in 30 years? $5 034.75 a. b. $6 788.60 $7 991.87 c. $8 275.60 d. 5. In how many years will an investment of $8 000 grow to $20 000 if it grows at the rate of 7% per annum? 12.0 yrs a. 12.5 yrs b. 13.0 yrs c. 13.5 yrs d. 6. It costs $4 000 to purchase a bond that, 20 years from now, pays $10 000. What is the interest rate that the bond pays if it compounds annually? 4.69% a. 4.93% b. 5.09% c. 5.62% d. 7. What is the value of the sum (1.06) + (1.06)2 + ...+ (1.06)20? 38.99 a. 39.99 b. 40.99 c. 42.39 d.
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Mathematical Skills - 2
1. Which expression represents the accumulated value of $P earning interest at i% per annum, compounded annually, for n years? a. b. c. d. i n 100 ) i n P (1+ 100 ) i n P (1+ 100 ) i n P (1+ 100 ) P (1+
2. Which expression represents the amount that must be invested now at i% per year, compounded annually, to accumulate to $X in n years? a. b. c. d. X(1+ i n 100 ) i n X(1+ 100 ) n X(1+ i )
n X(1+ i )-
3. Which expression represents the accumulated amount $P growing at i% per annum, compounded monthly, for n years? a. b. c. d. i 12n 12 ) i 12n P (1+ 1 200 ) i -12n P (1+ 12 ) i -12n P (1+ 1 200 ) P (1+
4. Which expression represents the amount that must be invested now at i% per year, compounded monthly, to accumulate to $X in n years? a. b. c. d. i 12n 1 200 ) i -12n X(1+ 12 ) i 12n P (1+ 12 ) i -12n P (1+ 1 200 ) X(1+
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5. Which expression represents the number of years it would take for an investment of $P, compounding at i% per annum, to grow to $X? a. logX + logP i log ) (1100 logX + logP i P (1+ ) 100 logX - logP i P (1) 100 logX - logP i P (1) 100
b.
c.
d.
6. It costs $P to purchase a bond that , n years from now, pays $F. Which expression gives as a percentage the interest rate the bond pays if it compounds annually?
a.
b.
1 100(
c.
)+1
d.
)1
7.Which formula gives the sum of the series a + ar 2 + ... + ar n? a. a(r n+1+1) r-1 a(r n+1-1) r-1 a(r n+1+1) r+1 a(r n+1-1) r+1
b.
c.
d.
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Mathematical Skills 2 - Answers

1. Which expression represents the accumulated value of $P earning interest at i% per annum, compounded annually, for n years? a. b. c. d. i n 100 ) i n P (1+ 100 ) i n P (1+ 100 ) i n P (1+ 100 ) P (1+
2. Which expression represents the amount that must be invested now at i% per year, compounded annually, to accumulate to $X in n years? a. b. c. d. X(1+ i n 100 ) i n X(1+ 100 ) n X(1+ i )
n X(1+ i )-
3. Which expression represents the accumulated amount $P growing at i% per annum, compounded monthly, for n years? a. b. c. d. i 12n 12 ) i 12n P (1+ 1 200 ) i -12n P (1+ 12 ) i -12n P (1+ 1 200 ) P (1+
4. Which expression represents the amount that must be invested now at i% per year, compounded monthly, to accumulate to $X in n years? a. b. c. d. i 12n 1 200 ) i -12n X(1+ 12 ) i 12n P (1+ 12 ) i -12n P (1+ 1 200 ) X(1+
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5. Which expression represents the number of years it would take for an investment of $P, compounding at i% per annum, to grow to $X? a. logX + logP i log ) (1100 logX + logP i P (1+ ) 100 logX - logP i P (1) 100 logX - logP i P (1) 100
b.
c.
d.
6. It costs $P to purchase a bond that , n years from now, pays $F. Which expression gives as a percentage the interest rate the bond pays if it compounds annually?
a.
b.
1 100(
c.
)+1
d.
)1
7.Which formula gives the sum of the series a + ar 2 + ... + ar n? a. a(r n+1+1) r-1 a(r n+1-1) r-1 a(r n+1+1) r+1 a(r n+1-1) r+1
b.
c.
d.
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Teaching Tips - Group Forming and Team Building Activities
Create project management teams by randomly handing out different coins to every student in the class i.e., pennies, nickels, dimes, quarters, loonies and toonies. Have students find their group members by identifying three other individuals with the same coin.
G
Use a team-building activity such as the three-person interview or "two truths and a lie" to familiarize students with each other. In Bennett's "two truths and a lie" activity, students reveal two truths and one lie about themselves. Group members can then guess which point is the lie. When students interview each other, ask them to include the following questions about investing. Describe how you save and invest? What kind of relationship do you have with money? Allow students time to view the "Justification for Higher Education " poster at http://posters.seindal.dk/p917306_Justification_for_Higher_Education.html. Using different colored chalk on separate areas of the blackboard, have students work in their groups to explore their own personal reasons or justifications for wealth building. Call the activity, "Our Justifications for Earning and Investing Money".
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Project Exemplars
What You Might Expect to See Although this module is intended for senior students, the first draft was field tested with Grade 10 students in the fall of 2000 because the new Ontario Grade 11mathematics and business courses were not yet in place. Consequently, the level of sophistication expected of senior students was not generally evident in the students work. However, the field testing with these younger students provided some important insights into which tasks would be well within the grasp of senior students and which would require more careful instruction. Most students were able to construct investor personality profiles, estimate amounts of money needed for post-secondary education or retirement, and make asset allocations to match the personality profiles. However, as anticipated, students lacked sophistication in representing annual investments as annuities and calculating accumulated values of investments at future times. For students in senior mathematics, the calculation of the present and future values of annuities using the geometric series should be a focus. For those in senior business, these calculations might be more appropriately performed on a spreadsheet or graphing calculator. Click through to the next page to see examples of Step 1 - Inverstor Personality Profile
Step 1 Investor Personality Profile

The first two students are saving for post-secondary education. Sarah Smith Step 1 Client Personality Profile Sarah Smith has decided to invest her money but she needs help, so she has decided to turn to the help of New Era Investors Group. With the information that Sarah has provided, the New Era Investors will help her to make the most of her money and put it in the right places. The information that Sarah Smith has provided is the following: Sarah is a fourteen-year-old female student who is single. Sarah is looking to save $24 000 to pay for her after post-secondary education. She is making a monthly income of $560 and of this she is saving about $360. On a monthly basis, Sarah is spending about $200 on items such as clothes, make-up, music, gifts and other miscellaneous items. If Sarah continues to work, she will add her $7/hr. and 20/hr/week income to the $2 000 she has already saved in the bank. Sarah would like the New Era Investors Group to invest her money in a variety of securities and provide her with great diversification within her portfolio. She feels that this is a good way to explore her options and possibilities for the future. Since Sarah Smith is so young, she wants to experiment while she can. New Era Investors Group will do the best they can with Sarah Smiths money to make the money that she wants to end up with in the end. Jane Brown Step 1 Investor Personality Profile Client: Jane Brown Age: 23 Marital Status: single female Current Monthly Income: $850; works part-time as a waitress Spending Habits: spends way too much money on clothes Saving Patterns: none Expenses: G rent (shared with friends) = $400/month, G food = $200/month, G clothes = $250/month Other:
G G G G G
amount in bank account = $500 has a Visa good credit rating attends University is a medical student; will graduate with 4 more years of education
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John Doe Step 1 Investor Personality Profile This gentleman is saving for his retirement. Client:Doe, Jon Marital Status: Single Monthly Income: $3 500 Yearly Income: $42 000 Occupation: Technical Engineer Spending Habits (monthly): G apartment rent $1 000 G food $325 G entertainment $450 G public transportation $60 G TOTAL MONTHLY $1 835 G TOTAL YEARLY $22 020 Saving Patterns: invests $700 every 6 months, $1 400 every year Christopher and Darcie Maloney Step 1 Investor Profile This couple is saving for their retirement. Name: Christopher Maloney Age: 35 Marital Status: Married with 1 child Occupation: C.E.O. of Maloney Pharmaceutical Monthly Income: After taxes: $28 333.05 Spending Habits: Putting money into diverse investments Saving Patterns: He puts 15% of his salary into savings = $24 083.10 after saving. *After giving another 5% to his wife for her savings, Mr. Maloney is left with $22 666.39 Expenses and Other Relevant Factors: G food $75/month G clothing $200/month G entertainment $100/month G child care $60/month G child necessities $100/month G water/heating/electricity $250/month G phone bill $25/month G car payments (leasing a BMW) $120/month G hygiene $150/month *This is what Mr. Maloney spends himself Grand total of monthly spending: $1 320 Name: Darcie Maloney Age: 33 Marital Status: Married with 1 child Occupation: Homemaker Monthly Income: $28 333.05 Spending Habits: Spends money mostly on necessities, but likes to occasionally go on a shopping spree. Saving Patterns: Puts 5% of her husbands monthly income in a savings account of her own. Expenses and Other Relevant Factors: G food $75/month G clothing $250/month G entertainment $100/month G child care $60/month G child necessities $100/month G water/heating/electricity $250/month G phone bill $25/month G car payments (leasing a BMW) $120/month G hygiene - $150/month * This is what Mrs. Maloney spends herself Grand total of monthly spending: $1 370 Money left for him and his wife after spending are both totalled. The Maloneys are left with: $19 976.39
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Step 2: Investment Goals
Jane Brown Step 2 Investment Goals Jane Brown, who was profiled in Step 1, is 23 years old and needs to save $80 000 for her medical education. To do this, she will work as a full-time waitress and save $1 400 per month for the next two years. Then she will attend medical school at a cost of $20 000 per year. As shown in this excerpt, the students have determined that 24 deposits of $1 400 will leave her short $20 000, so they plan to invest her savings to obtain a higher yield.
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She has just completed her general degree and is aiming towards completing the additional four years of medical school. It will cost $20 000 a year to go to medical school. Our client will get no help from family and she wants to pay for all of her schooling herself. At her current salary, she cannot afford this. Therefore, she has decided to take two years off and work as a waitress full-time. The salary works out to $2 000 per month (again, this includes tips). Our clients current monthly expenses are $600. She shares an apartment with a friend and does not own a car. If she continues to live in the same conditions while earning $2 000 per month, this will mean that she has $1 400 per month to invest. The client hopes to have summer jobs and part-time jobs during her next four years of medical school, which will earn her approximately $10 000 per year. This means that she needs $40 000 in her full-time job in the two years she will work. $1 400 per month to invest times 24 months equals $33 600. Therefore, she is a little short of her goal. Therefore, she must invest some of her money as she is earning to get it closer to $40 000.
Sarah Smith Step Two Investment Goal Sarah Smith, who was profiled in Step 1, is 14 years old and needs to save $22 000 (she had saved $2 000 already) for her postsecondary education in the next five years. As shown in this excerpt, the students have determined that she will need to invest $360 per month earning 6% per annum to achieve her goal. Actually this investment would yield a little over $25 000 and so it would be enough. It appears that the students just divided the $22 000 by 60 months. Because the time line is so short (i.e. 5 years), this method yields a sufficiently close estimate. The goal of Sarah Smith is to further her education at her university residence. Sarahs dollar value of this goal is to achieve furthering her education and her dollar value is $24 000 in five years. Sarah Smith maintains a job in which she makes $360 monthly. With this incoming money, she can have the sufficient amount of money to continue to invest wisely with New Era and have a sufficient amount for university residence. Sarahs yearly income is $4 320, so she should be able to achieve her dollar value and further her education. Her increase in investment per year is 10%. Sarahs compound interest or increase in value of equities or mutual fund per year is 6%. All these factors, including her job and how much money she makes per year, and also her investments, Sarah will definitely achieve her investment goal and further her education at her university residence of choice. Jon Doe Step 2 Investment Goals Do you remember Jon Doe, the 37-year-old bachelor profiled in step 1? Well, he wants to retire between 60 to 65 years of age with accumulated savings between $500 000 and $750 000. He plans to reach that goal by saving $700 every 6 months. Its a stretch, but he can do it if he can sustain an annual return of 15%. Good luck! Our clients goal is to be able to retire with a comfortable amount of money to live off of. After having numerous discussions with our client, we have learned that he wishes to retire at a healthy 60 to 65 years of age. He doesnt have many plans yet for a family but he is keeping it as a possibility. With the aide of our sessions, our client has decided that he would like to retire with a total savings of $500 000 to $750 000. In order to reach this goal our client is willing to invest $700 every six months.
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The Maloneys Step 2 Investment Goals The married couple, the Maloneys, have 18 years to accumulate $69 000 for their daughters education. These students have divided $69 000 by 18 to determine that the Maloneys will need to save $319.44 per month. What a surprise they will get when they find they have more than a quarter million dollars! The students have not understood how compounding affects the accumulated value of the investment. This is the main hurdle that students must scale in understanding how money grows in value when invested over a long period of time. 2 a. Our clients decided to invest in a RESP for their child, so when he is done high school, he will have money for postsecondary education. b. The amount of money that will have been invested by the time the child is ready to use it will be $69 000. c. In total over an 18-year period, our clients will have saved $69 000. That breaks down to $3 833.33 per year. Therefore, every month our clients will put away $319.44. To determine how much he will need for various universities, this student undertook some research on the Internet. d. The money increases 0.97% per month, and 11.6% per year.
University Ottawa McGill Carleton Toronto
Tuition Books Supplies Residence $4 030 $3 438 $5 171 $6 127 $1 000 $2 450 $800 $1 500 $200 $200 $200 $200 At Home $6 000 At Home $6 200
Meal Plan $2 250 Residence Covered Residence Covered Residence Covered
Entertainment $350 $350 $350 $350
Transport $400 $650 $400 $650
Other $200 $200 $200 $200
Total $8 430 $13 288 $7 121 $15 227
*The tuition fees refer to the fees paid by engineering students. **All costs are the projected annual cots. ***Both the University of Ottawa and Carleton University are located in Ottawa, so trips home and residence costs are omitted.
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Step 3: Asset Allocation Model
Jane Brown Step 3 - Asset Allocation Model You may remember that Jane Brown needed $80 000 to go to medical school and that she planned to work full time as a waitress for two years to accumulate this money. Note that the students are careful to consider the risks involved when they create the allocation model for her portfolio.
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We have already decided that our clients investments must be low-risk. She cannot afford to lose any money because if she cant go to medical school, she wont become a doctor. The best types of investments for this situation, then, are Guaranteed Investment Certificates or Canada Savings Bonds. CANADA SAVINGS BONDS GUARANTEED INVESTMENT CERTIFICATES H low risk H low risk H better return rate than bank accounts (5%) but no more H better return rate than bank accounts (5%) but no more risky risky H cashable on the first of every month H can be kept for a year, as opposed to 5 years H cashable (1 time per month) (The consequences of gaining in a high risk situation are that she will be happy but it wont make too much of a difference, and the consequences losing are that she will never be a doctor. It is certainly not worth the risk.) We have decided upon Guaranteed Investment Certificates. Our clients money may not grow to $40 000, but she cannot afford to lose in a higher risk situation. She may have to get a small student loan, however this would not be hard because she has a good credit rating and could pay the bank back when she becomes a doctor. ** (We later found out that part of our assignment is to invest $3 000 in stocks and $3 000 in mutual funds for our client, and we assume that these investments are in addition to the money she will have to invest described above.)**
Sarah Smith Step 3 Asset Allocation Model Sarah Smith needed $24 000 for her post-secondary schooling but she is only 14 years old and has more time to accumulate. The students have made an effort to balance the need for strong growth with Sarahs need for some liquidity. They have thought carefully about the risks and rewards of various investment types. Asset allocation: method used to divide a portfolio into different classes of investment. This should reflect the investor personality of the client. Sarah Smith is a very young investor who is looking to put away money long term (five years) in order to further her savings for post secondary education. Sarah Smith feels her choices are plentiful, and has decided that liberal diversification would best fit her investment goal of $24 000. Her investment total is $2 000 right now, and is dispersed throughout the asset allocation triangle, with most appropriate investments significantly chosen to suit the clients investment choices wishes. Within the speculative investments, New Era has chosen to invest only 5%, $100 of the total cash equivalent into this form of equity. We feel that Sarah Smith is a very young girl who would maybe choose to chance a little sum of money, because her income per month is steady, and the longterm investment will grow out the rocky futures this investment might have. This is the riskiest of investments, however, the rate of return is exceptionally high. New Era felt that the majority of the investment, 75% or $1 500, would be spent wisely on the Equity assets of the asset allocation categories. Stocks and mutual funds can grow in value, and have excellent long term potential. This is one of the higher forms of risks, but our client is young, and the chances of receiving high return are favourable. Fixed income is a source of regular investment income, and there is a guaranteed rate, which remains the same over time, therefore 15%, or $300 is placed in this category. Sarah Smith can know that her money is growing slowly, and will always be there in case of emergencies. To complete total diversification, there is a 5% or $100 investment within the Cash and Cash equivalents category. This offers Sarah Smith the comfort of getting to her money whenever she feels she needs access to her investment. This is the easiest form of investment to place back into liquid, and is the safest category to invest in. However, only a small amount of money is allocated here, because these assets produce the lowest returns.
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Although all of Sarah Smiths investments are sound and are chosen specifically, New Era feels this client has great outstanding potential, because she is so young, and continuously adds to her investment monthly. Great diversification is within our clients portfolio because our client requested to maintain assets within all locations. Also, this lessens her great loss significantly, because the safest way to cut losses is to spread money around and not put all her eggs in one basket. Jon Doe Step 3: Asset Allocation Model Jon Does investment advisory group, who call themselves the Start Smart Investors Group want to help Jon (who is now 37) retire somewhere between 60 to 65 years of age with accumulated savings between $500 000 and $750 000. They have chosen to invest his first years savings of $1 400 in stocks and mutual funds. Their rationale is given below. Our client has chosen to invest a total $1 400.00 in stocks and mutual funds per year. We decided from this $1 400.00, we would split the money as follows, $800.00 for stocks and $600.00 for mutual funds. Since our client is fairly young, we have decided that it would be good to invest mostly $800.00 in stocks. This is also because he has enough time to get back to his financial position, if, by chance, he does lose money from these investments, even though we have reasonably confident in our choices. Now thinking for the future, we have also invested our clients money in mutual funds ($600.00) that are RRSP eligible. This is so our client has a healthy future and reach his retirement goal of $500 000-$750 000 to retire off of. The reason he has only invested $1 400.00 per year is to keep open the option to have a family. The Maloneys Step 3: Asset Allocation Model Burgeon Financial is the financial advisory group employed by the married couple, the Maloneys, who have 18 years to accumulate $69 000 for their daughters education. Since Burgeon Financial was concerned about excessive risk, they chose to put money into fixed income instruments and mutual funds. With our clients, we came to the decision that putting their money into a fixed income would be best. We feel that this is the best asset allocation for them because it generally offers higher return than cash and saving accounts. They provide a source of regular investment income, which remains fixed over time, which is basically fixed interest. It also is an investment with less risk. So, basically, our clients wont be losing their shirts if anything were to happen to the investments. As we mentioned before, consistency of the stocks we chose is important. This is because we need stock investments that arent choppy, in other words, havent had major increases, then major decreases in earnings. This is to ensure that our clients money is not at risk.
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Step 4: Investment Decisions
Jane Brown Step 4: Investment Decisions Jane Browns financial advisors were aware that she needed $80 000 to go to medical school and that she planned to work full time as a waitress for two years to accumulate most of this money. On weighing the risks vs. rewards of equity investment, the advisors felt that it would be prudent to invest Ms. Browns earnings in GICs because they were relatively safe, offer a better investment return than a savings account, and have greater liquidity than equities. (See the student comments under the title, Asset Allocation.) Sara Smith Step 4: Our Stock Choices The New Era Investment Group (as they call themselves) set up the allocation model for Sarah Smith (See the student comments under the title, Asset Allocation.) To help Sarah accumulate $24 000 for her post-secondary education that begins five years from now, they decided to invest 80% of Sarahs assets in equities and 20% in fixed income and cash equivalents. The stocks they chose for the initial $3 000 investment are described below along with the reasons for their selection. Observe that the students researched the products and services offered by the companies, but didnt scrutinize their profits, their return on equity, or any of the indicators that help forecast the solvency, the potential earnings, or growth of the company. At New Era Financial we know that its not a good choice to invest all of our clients money into one stock. With that knowledge, we chose six different stocks, one being a penny stock, to invest our clients $3 000 into. We chose the six stocks on two criteria. First we wanted to have a range of prices. We have a vast price scale which ranges from $.90 to $63.00 per stock. The second was the high and lows. We did not want to purchase a stock which was at its all time low. Instead we looked for stocks where were on the rise, and not near there lows, but closer to their highs. Our six stocks included, Cara, DomcoTarkett, Micro Tech, Janna Systems, Ecudran Minimum, and Magnotta. Cara is a food operating business, which owns Second Cup, Kelseys, and The Spectra Group of Great Restaurants. DomcoTarkett sells floor coverings, like tile and carpet. Janna Systems is a company that provides eRelationship Management (eRM) for the financial service industry. Micro Tech provides solutions for the hearing impaired and hearing health communities. Two of our stocks did not have web sites, therefore we were unable to find any further information. They were Ecudran Minimum, and Magnotta. Jon Doe Step 4: Investment Decisions The Start Smart Investors Group have chosen to invest Jon Does first years savings of $1 400 in stocks ($800) and mutual funds ($600). Their rationale for their selections of stocks and mutual funds is given below. Observe that they did compare rates of return in their selection of mutual funds, but their analysis of stocks did not involve an analysis of the financial fundamentals of the underlying company. There were many investments to choose from, for our client. We chose investments from two types. One type was investments from the stock markets. The next type we chose from was mutual funds. These will all be explained in full detail below. First we will explain the investments from the stock markets. The stock markets we chose the investments from were the TSE (Toronto Stock Exchange). We chose 3 stocks for our client; they were Ballard Power Systems Inc. (BLD), Irwin Toy Ltd. (IWT), and Printera Corporation (PAC). Here is a brief description of the stocks above. Ballard Power Systems Inc. is responsible for researching, manufacturing and marketing new economical and environment friendly power. The most common of the new batteries is the fuel cell. As of October 23, 2000 their price for one share in the stock market is, $157.00, this has increased $6.05. Next is Irwin Toys Ltd. This company makes a wide variety of toys for little children to teenagers. This is their specialty. As of October 23, 2000 the stock quote was, $5.00, it did not decrease nor increase in value, it broke even. Or third of four stocks chosen for our client was, Printera Corporation. Printera is responsible for creating unique, eye-catching designs for various products on the shelves of stores around the world. The stock quote for Printera as of October 23, 2000 was, $0.53, the value increased by $0.03. The second type of mutual funds, also chosen from the TSE. The funds we chose were, Acuity Pooled Fixed Income (ACUIPFIF) and Optima Canadian Fixed Income Pool (OPTSTRIS). These two funds above are Canadian Bonds. The last mutual fund we chose for our client was a Canadian High Income Balanced fund. The mutual fund we chose was Investors Dividend (INVDIVFD). Here are the mutual funds current quotes. For Acuity Pooled Fixed Income, the Net Assets Value Per Share (NAVPS) is $11.48. For the Optima Canadian Fixed Income Pool the NAVPS is $9.18. As for
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Investors Dividend the NAVPS is $16.34. The reason for the stocks chosen and mutual funds chosen are explained below. We chose the Ballard stock for investing because they are coming out with new technology, for instance they are developing new environmentally friendly power sources. New technological power source is their new Mark 900 fuel cell power module for automobiles, this is low costing and very efficient. We felt that this power source discovery could put up the price of their stock. We chose Irwin Toy Ltd because we saw many commercials of new toys from babies to teenagers. These toys may get popular, so more and more consumers would buy them, potentially increasing the stock price. The reason for choosing Printera was so the client could have a small stock that he would not lose much money but continue to make some. We chose two types of mutual funds; they are Canadian Bonds and Canadian High Income Balanced fund. This is because at the moment Canadian Bonds are doing the best in returns at 3.5% in three months. The reason for the other mutual fund High Income Balanced fund is it follows close by at a return percentage of 3.4%. Now we chose Acuity Pooled Fixed Income because it had the highest rate of return in the Canadian Bonds area at 8.1% in three years, which is low risk with high return. The next fund out of the same area was Optima Canadian Fixed Income Pool; this also had a high rate of return at 7.1% in three years another low risk, high return fund. The mutual fund out of the Canadian High Income Balanced was Investors Dividend. We chose this fund because it also had a high rate of return at 7.2% in three years. This is also a back up, just in case, for our client and we also chose it to provide variety for our client. All these mutual funds are RRSP eligible. Now the way we invested the $800.00 in stocks are in this manner. Stock Ballard Power Systems Inc. Irwin Toy Ltd. Printera Corporation The way we invested the $600 in mutual funds was like this: Mutual Fund Acuity Pooled Fixed Income Optima Canadian Fixed Income Pool Investors Dividend Net Assets Value Per Share (NAVPS) $11.48 $9.18 $16.34 Shares Bought 18 20 12 Total $206.64 $183.60 $196.08 Share Price $157.00 $5.00 $0.53 Shares Bought 2 75 235 Total $314.00 $375.00 $124.55
People often think that penny stocks offer less risk because their share values are smaller. They fail to realize that its the percentage increase or decrease that determines the gain or loss. The Maloneys Step 4: Investment Recommendations Burgeon Financial suggested to the Maloneys, who have 18 years to accumulate $69 000 for their daughters education, that they put their money into fixed income instruments and mutual funds. However, they seem to have chosen stocks on the basis of growth potential, suggesting that they may not have understood what is meant by fixed income instruments. To its credit, Burgeon Financial read some analyst reports and charts of company earnings for informed stock selection. With our clients, we decided to invest in several stocks and mutual funds. The four stocks we decided to invest in are: Edispatch.com Wireless Data (we invested in 100 shares/$5.70), ACD Systems Int. (invested 75 shares/$11.10), Weatherford Oil (Invested in 19 shares/$44.50), and Viscogliosi Bros. (invested in 50 shares/$14.94). We chose these stalks because we read over analyst reports that gave us future outlooks for each company, and we also read the charts of company earnings for over certain periods of time. Each stock we chose is with in the technologies industry, we invested in this particular industry because over the next 18 years technology will continually be improving, most likely pushing the earnings upwards for the companies. We did choose an Oil Company, which has more risk, but that was basically done just to give a variation of investment, and since this is a long-term investment, our clients will have time for it to jump up and down. Since our clients are investing long-term, we looked at the 5-year charts to get a rough idea of how consistent each stock was. Consistency was one of the most important factors in choosing the stocks we chose. Aside from investing in stocks, we also decided to invest some money into mutual funds. Again, from further research we chose to invest in funds that were consistent, yet had increasing earnings. We invested 8 shares at $78.85 in Advantage Series Investors group, we invested 1 share at $194.93 in Elite Equity (Investors), we invested 150 shares at $10.86 in Canadian Equity (investors), and we also invested 25 shares at $22.32 in Fidelity Cda. (Life insurance).
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Step 5: Portfolio Records and Monitoring
Jane Brown Step 5: Portfolio Records and Monitoring The financial advisory group for Jane Brown originally selected GICs as the safe haven for Janes entire investment portfolio so that the money for medical school would be there when needed (see the note at the end of their allocation model). The advisory group subsequently relented and created the more diversified portfolio reflected in Part I of the investment report shown below. Step 5: Part 1 - Summary of Assets As At October 20, 2000 Stocks Stock RND TRZ CTR.A PWT FSH Subtotal Mutual Funds Mutual Fund Empire Fin Elite Equ Aim FundsCdn Bal Scotia Funds Cdn BI Chp Talvest Funds Bond Subtotal GICs and Cash Investment Cash GIC Subtotal Summary of Investments Form of Investment Stocks Mutual Funds GICs and Cash Total Investments Value $2 575.00 $2 989.69 $1 900.00 $7 464.69 Description Bank Account 2 -year GIC issued by BMO @ 5% Amount $500.00 $1 400.00 $1 900.00 No. of Units 4 30 32 67 NAVPS $190.97 $23.48 $22.51 $11.36 Value $763.88 $704.40 $720.32 $761.12 $2 949.72 No. of Shares 100 35 25 15 5 Price per Share $8.75 $8.40 $15.10 $34.25 $102.95 Value $875.00 $294.00 $377.50 $513.75 $514.75 $2 575.00
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Part II of the investment report of Jane Browns financial advisory group shows how they report the changes in the value of her portfolio. Stocks Stock RND TRZ CTR.A PWT FSH Subtotal Value Last Month $100.00 $301.00 $500.00 $551.25 $545.00 $2 997.25 Change in Value This Month -$225.00 -$7.00 -$122.50 -$37.50 -$30.25 -$422.25 Purchase Price $100.00 $301.00 $500.00 $551.25 $545.00 $2 997.25 Mutual Funds Mutual Fund Empire Fin Elite Equ Aim FundsCdn Bal Scotia Funds Cdn BI Chp Talvest Funds Bond Subtotal Value Last Month $779.72 $714.60 $737.60 $757.77 $2 989.69 Change in Value This Month -$15.84 -$10.20 -$17.28 +$5.35 -$39.97 GICs and Cash Investment Since Last Month Cash (Including interest and dividends received) GIC Subtotal Summary of Changes in Investments Form of Investment Stocks Mutual Funds GICs and Cash Total Investments Sarah Smith Step 5: Portfolio Records & Monitoring The New Era Investment Group who is helping Sarah Smith accumulate $24 000 for her post-secondary education to begin five years hence, has provided their client with the weekly updates of the portfolio value shown below. Over the past two weeks our stocks have risen and lowered in value. Our highest profit that we could have earned if we were to sell our stocks was on October 13, where we would have had earned $355.90 in profit. Our lowest point was on October 7. We would have lost $199.03. Our current investment value is $2 921.58. If we were to sell now, we would loose $78.42. These values are not set in stone, out stocks are constantly rising and lowering. We need to wait until we think that the stock have reached their highest potential, and then sell.
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Change in Value Since Purchased -$225.00 -$7.00 -$122.50 -$37.50 -$30.25 -$422.25
Dividend Received 0 0 0 0 0 0
Purchase Price $779.72 $714.60 $737.60 $757.77 $11.36
Change in Value Since Purchased -$15.84 -$10.20 -$17.28 +$5.35 -$39.97
Value Last Month $500.00 0
Change in Value 0 $1 400.00 +$1 400.00
Change in Value -$422.25 -$39.97 +$1 400.00 +$987.78
October 1, 2000 Name Cara AnV DomcoTarkett Micro Tech Janna Sys. Ecudran Min. Magnotta Individual Stock Value $4.30 $7.00 $1.70 $63.45 $1.15 $0.90 Total Number of Stocks Purchased October 7, 2000 Name Cara AnV DomcoTarkett Micro Tech Janna Sys. Ecudran Min. Magnotta Individual Stock Value $4.05 $5.85 $1.70 $65.00 $1.08 $0.95 Total Number of Stocks Purchased October 13, 2000 Name Cara AnV DomcoTarkett Micro Tech Janna Sys. Ecudran Min. Magnotta Individual Stock Value $4.70 $9.90 $1.70 $65.00 $1.05 $0.95 Total Number of Stocks Purchased Jon Doe Step 5: Portfolio Records & Monitoring Jon Does financial advisors, the Start Smart Investors Group, display for their client the graphs showing the daily stock values for the past six months to the present, enabling Jon Doe to track the fluctuations in the values of his stocks from day to day and to examine trends. Number of Stock Purchased 250 100 250 5 419 1 $1 025 Invest. Profit Gain of Total Individual Stock Value $1175.50 $990.00 $425.00 $325.00 $439.95 $0.95 $3355.90 $355.90 Number of Stock Purchased 250 100 250 5 419 1 $1 025 Invest. Profit Loss of Total Individual Stock Value $1 012.50 $585.00 $425.00 $325.00 $452.52 $0.95 $3000.00 $199.03 Number of Stock Purchased 250 100 250 5 419 1 $1 025 Total Invest. Total Individual Stock Value $1 075.00 $700.00 $425.00 $317.25 $481.85 $0.90 $3000.00
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Creating an Investment Portfolio
Introduction Worksheet: Investment Teams

Names of Investment Portfolio Project Team Members and Roles : Possible roles may include: Project Manager (PM), Accountant, Technology and Graphics Specialist, Communication Specialist Beside each team member's name, record their roles with a short description of their responsibilities. Name:___________________________ Role:______________________________ Description:_____________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Name:___________________________ Role:______________________________ Description:_____________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Name:___________________________ Role:______________________________ Description:_____________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Name:___________________________ Role:______________________________ Description:_____________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Use back if more room is required.
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Worksheet 1: Investment Teams Cont'd Group Discussion and Decision Tasks: 1. Decide on an Investment Team Name: _________________________________________ 2. Design an Investment Team logo:
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Teaching Tips - Portfolio
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Using the jigsaw method, ask the portfolio team members to number themselves off 1 - 4. Assign each team member one of the four handouts from the Project Exemplars (see student area in 'Forming the Group' ) and ask them to carefully read through the contents. Each student should highlight the key ideas on their assigned handout and record relevant points on the "Recording Ideas Student Worksheet". Students can then come back together as a group and teach what they have learned to their fellow group members . Debrief to ensure students have a clear overview of all of the concepts.
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The Five Dimensions of an Investment Portfolio
Your financial future depends on the planning and research you invest in creating your personal investment portfolio. In this activity, you will play the role of a financial planner who will create a personal portfolio for a fictitious client. You will follow the five main steps involved in selecting various investments to ensure they grow in value at a maximum rate, corresponding to the risk tolerance of your client. These steps are highlighted in the graphic below and will be dealt with in more detail as you proceed through this activity.
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The Five Dimensions of an Investment Portfolio
Your financial future depends on the planning and research you invest in creating your personal investment portfolio. In this activity, you will play the role of a financial planner who will create a personal portfolio for a fictitious client. You will follow the five main steps involved in selecting various investments to ensure they grow in value at a maximum rate, corresponding to the risk tolerance of your client. These steps are highlighted in the graphic below and will be dealt with in more detail as you proceed through this activity.
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Portfolio Worksheet: Record Your Ideas

Components Key Points Questions
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Step 1: Investor Personality Profile
To understand how to invest your client's money, the first step is to gain information about your client's personality as it relates to his or her tolerance for risk, need for liquidity, and timelines for reaching goals. This process is called the Investor Personality Profile or the KYC- "Know Your Client" . It is important to balance all four of the considerations below to reduce risk, while increasing return. In addition to these, you must consider two other factors - inflation and diversification.
Risk Risk is the degree of uncertainty about the expected return from an investment, including the possibility that some or all of the investment may be lost. With some securities, e.g., Canadian government treasury bills, there is very little risk that investors will lose any of their initial investment. With some other securities, the risk of loss can be substantial. Some people can tolerate more risk than others. Return Return is the overall profit (after taxes) that you might expect to receive from your investment either as income, in the form of interest or dividends, or as capital gains (or losses) resulting from changes in the market value of the security. The higher the expected rate of return of a security, the greater the risk. Tax implications are important in planning for maximum returns. Time Frame Time frame is the number of years available to invest. For any particular goal, the shorter the time available, the more money must be invested each month. Liquidity Liquidity is the ease with which the investment can be turned into cash, at or near the current market price. Some securities, such as mutual funds, offer liquidity by allowing investors to redeem their securities on short notice. Some investors like to be able to get their cash quickly, while others will wait.
Inflation Inflation reduces the purchasing power of money. During inflationary times, the return on investments may not keep pace with the rate of inflation, so purchasing power is decreased. A suggested guideline is to choose investments that yield the inflation rate plus three percent. Promised returns above this amount may carry high risk. Most programs on the Internet will ask you to suggest an anticipated inflation rate. Diversification Diversification is the process of reducing risk by spreading money among various types of investments. Because certain investments perform better than others in certain economic conditions, you can reduce risk by selecting investments with varied risk-return characteristics. Putting money into a variety of investments lessens the risk of loss resulting from any one investments poor performance. The Internet has many programs that allow you to assess a client's personality and create an asset allocation mix that matches that personality.
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Exploratory Activity Step 1: Setting Personal Goals
A good way to begin the goal exploration activity and investor personality profile is to analyse your own personal goals and discover your own investor personality. The Canadian Bankers Association at http://www.yourmoney.cba.ca has a series of quizzes and interactive activities to get you started thinking about goals. The following sites are specific sites within the Canadian Bankers Association web site. Pop Quiz This is an interesting quiz to see what you already know about money. http://www.yourmoney.cba.ca/eng/tsamprogram/pop_quiz/pop2.htm Personal Profiler This will test your money management skills. http://www.yourmoney.cba.ca/eng/tsamprogram/know_yourself/knowthyself.cfm Setting Goals This site will help you identify your goals. http://www.yourmoney.cba.ca/eng/tsamprogram/know_yourself/setyourgoals.cfm Budget Check This site will help you find out where your money is going. http://www.yourmoney.cba.ca/eng/tsamprogram/budget/budgetrealitycheck.cfm Reality Check These are quizzes to help you determine the cost of education, the cost of becoming an entrepreneur, or leaving home and working. http://www.yourmoney.cba.ca/eng/tsamprogram/planning_future/index.htm
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Teaching Tips - Identify Your Client
If you find your students need prompting to come up with a fictional client, try the following activity.
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Bring in all sorts of different shoes and put them in a large box (be sure to have a wide variety). Have a student from each group come up and pick a shoe from the box Ask students to get in their groups and brainstorm ideas about who walked in the shoe, what do they look like, where have they been, what are their interests and what is their family background? For homework, you may want to have students write a creative biography of this individual.
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Worksheet 1: Investor Personality Profile

1. Describe your Investor: Who is your client? _________________________________________________________ A description of your client: __________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Age: _________ Gender: ______________ Educational status: ________________________________________________ Marital status: ____________________________________________________ Career:_________________________________________________________ Monthly income:__________________________________________________ Spending habits: __________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Saving patterns: ___________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Expenses: _______________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Other factors you feel are relevant: _____________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________
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Step 2: Investment Goals
CalculationTools The starting point for your portfolio is to determine how much money your client is going to need to achieve his or her goals and what products you will need to know about in order to help him/her reach that target. The Internet has many online interactive calculation tools that will help you effectively build your client's portfolio. Examine the chart below to read an overview of tools that you may need to use in your client's portfolio. To use any of these online, select a search engine and type in "Financial Tools Canada" or "Investing Tools Canada".
General Finance & Taxes Money planners, net worth, cash flow, taxes, inflation, currency conversion, financial services, etc. Financing Education How much do you need to sock away for your education, or your childs education? How does the Canada Education Savings Grant figure into the picture? Insurance Want to calculate how much life or disability insurance you need? How about how long they expect you to live? You can even check out some premiums. Investment Calculators Asset allocation, rate of return, growth, compound interest, present value, bonds, stocks, etc. Loans, Leases & Mortgages Payments, amortization, rent vs. own, lease/buy and more. Retirement Calculators For planning and enjoying retirement. (RRSP and RRIF calculators included.) More Calculators Miscellaneous calculators and links to other calculator link pages.
Example web site to visit: www.tcalc.com/calculators.htm This site asks you to input data and then does all the calculations. There are many online calculators in the above site. Online calculators require you to have numbers to input. Make sure you write down all the numbers you used or print off the input page before asking for the calculations.
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Exploratory Activity Step 2: Investor Personality Profile and Asset Allocation Model
Your team has begun to develop a profile of the client. These sites will ask you questions and suggest an allocation model that meets your clients personality. You may find questions for which you have no answer and may have to return to your team to brainstorm. Try several sites below to see if the results produced are the same. Each site will give you a name for your investor personality. All sites will suggest an allocation model for the investor profile type. Many of the sites allow you to investigate different investments more fully. Make notes. Remember, most of these sites are created by financial institutions that are in the business of selling their investment products and are therefore biased in their recommendations. Suggested Links Canada Life - Investor Type Profiler http://www.canadalife.com/canadian/en/invest/individ/tools/questionnaire.html This test will help you determine what kind of investor you are and also gives you a sample asset mix. First Canadian Funds - MatchMaker http://www.bmo.com/mutualfunds/ps/matchmaker_benefits.html This tool offers the advantage that it combines personality and allocation objectives. From the above link, click on the "BMO Investment Profiler" on the right hand side of the screen Scotiabank Investment Centre http://www.scotiabank.com/cda/eventdetail/0,1005,LIDen_SID3043,00.html Take time and explore all the different places you can invest. Make notes if you want.
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Lesson 1 - Teaching Strategies
Terms Students Will Learn in This Lesson
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Interest Rule of 72
Instructional Strategies This activity is divided into five sections: A. B. C. D. E. Compound Interest and Accumulated Value Using Diagrams to Show How Money Grows How Money Grows at Different Interest Rates Compounding Periods Less Than One Year Exploratory Activity: How Long Does It Take to Double Your Money? Instructional Steps 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Distribute copies of Lesson 1. Read the Broom Hilda cartoon with the class. Ask students to work in pairs (think-pair-share format) to discuss whether the situation is realistic. Have students share perspectives and rationale with the class. Debrief the activity. Using an overhead projector or blackboard, review the computation of the accumulated compound interest. Review the use of spreadsheets. Pair the students to complete 'Question 1 - How Money Grows at Different Interest Rates'. Select a pair of students to display on the overhead or blackboard how they created the formulas for their spreadsheet. With the class, develop the concept of compounding monthly and demonstrate the steps for calculating effective annual interest rates. (Section D) Pair the students to complete 'Question 2 - Compounding Periods Less Than One Year'. Review the solution with the class. Revisit the Broom Hilda cartoon with the class. Pair the students and ask them to explore the activity, Section E - How Long Does It Take to Double Your Money? Have students report their findings. Assign Lesson 1 - Exercises to review all the concepts of this.
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Lesson 1 A. Compound Interest and Accumulated Value
Reprinted by permission: Tribune Media Services
Broom Hilda has discovered too late the power of compound interest. One dollar invested at an annual interest rate of 3% grows according to the table shown below. That is: After one year, the dollar has accumulated $0.03 interest, so the investment has grown to a value of $1.03. In the second year, the entire $1.03 earns interest (not just the original $1.00 invested) and so the investment has grown to $1.03 plus the interest on $1.03. So the total value is $1.03 + (.03)($1.03). Applying the distributive law, we express this as $(1.03)2. Each year the investment grows to 1.03 times its value at the end of the previous year, so the value at the end of three years is $(1.03)3. In general, the value at the end of the nth year is $(1.03)n, so the value at the end of the 1 500th year is $(1.03)1 500.
1 year
1.03
2 years 3 years 1500 years
(1.03)2
(1.03)3 (1.03)1 500
The accumulated value of $10 at the end of the 1 500th year would be 10(1.03)1 500 or about $180 000 000 000 000 000 000.
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Lesson 1 B. Using Diagrams to Show How Money Grows
It is often useful to use a diagram to relate the values of an investment at different times. The diagram below shows what the value of Broom Hildas original $10 investment would have been at the end of various years if she hadnt bought cigars.
The example above shows that the accumulated value A to which an amount $P grows depends upon two factors, the annual rate of growth i and the number of years n for which it is invested. In the example above, the accumulated value was 10(1.03)1 500, the principal was $10, the annual growth rate 3% and the period 1 500 years. Usually the accumulated amount and the principal are expressed in dollars, the growth rate as a percentage and the period in years. The accumulated value A is expressed in terms of P, i, and n in the formula: A = P (1 + i )n Accumulated Value of $1 000 growing at 6% per annum To find the accumulated value of $1 000 in 20 years growing at a rate of 6% per annum, we substitute P = 1 000, n = 20, and i = 0.06 into the formula above to obtain A = 1 000(1.06)20 or 3 207.14. That is, $1 000 growing at 6% per annum becomes $3 207.14 at the end of 20 years.
Years after the original investment This line graph shows, for a growth rate of 6%, the accumulated value of $1 000 at the end of every year for 20 years.
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Lesson 1 C. How Money Grows at Different Interest Rates
People who understand money often take some limited risks to gain an extra percentage point or two in the rate of return on their investments. In the following worked example, you will see how a small increase in an interest rate or stock yield can make a significant difference over a long period of time. Question 1 - How Money Grows at Different Interest Rates A. What is the accumulated value of $1 000 at the end of each year for 30 years for each of the following annual rates of growth: 4%, 6%, 8%, 10%, and 12%? B. Display this data on a line graph for each growth rate. Does doubling the growth rate double the accumulated value? Solution 1 - How Money Grows at Different Interest Rates A. To display on a spreadsheet the accumulated value of $1 000 at the end of each year for 30 years for the given growth rates we enter the headings and formulas shown in the spreadsheet below.
We use the' Fill Down' command to extend these formulas to the 31st row of the spreadsheet, i.e., year 30. When we display the numbers (rather than the formulas), we obtain the display below.
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Lesson 1 D. Compounding Periods Less Than One Year
Broom Hildas investment, described in the cartoon, was compounded annually. However, many investments and most loans today are compounded semi-annually, monthly or even daily! When the compounding period is less than a year, the quoted annual interest rate (called the nominal rate), is less than the actual interest rate (called the effective rate). Definition: If interest is compounded m times per annum, then the effective interest rate for one compounding period is given by i /m where i is the nominal annual interest rate. The next example explores the relationship between i and the effective annual interest rate j. Question 2 - Compounding Periods Less Than One Year A. A credit card charges a (nominal) interest rate of 15% on overdue balances. If the interest is compounded monthly, what is the effective annual interest rate? B. A department store offers a computer system for $8 000 payable now or $8 800 payable six months from now. What nominal annual rate of interest compounded monthly would make the two prices equivalent (ignoring sales tax)? C. A loan has a nominal interest rate i per annum, compounded m times per year. Write an expression for the effective annual rate j in terms of i and m. Express i in terms of j and m. Solution 2 - Compounding Periods Less Than One Year A. The monthly interest rate is the nominal annual interest rate divided by 12, i.e. 0.15/12 = 0.0125. Therefore, the amount owing at the end of any month is (1.0125) times the amount owing at the beginning of that month (assuming no payments or new charges). At the end of 12 months, the amount owing is (1.0125)12 1.16075... times the amount owing at the beginning of the year. That is, the amount of accrued interest is equivalent to an annual rate of 16.075%. The effective interest rate is 16.075%. If i denotes the nominal annual interest rate (expressed as a decimal number), then the accumulated value of $8 000 at the end of 6 months is That is If this is equivalent to $8 800, then Solving for i yields
B.
This shows that $8 000 at a nominal annual rate of 19.2% compounded monthly grows to $8 800 in 6 months. C. By definition, the effective interest rate over one compounding period is i/m. Over m compounding periods (1 year), $1 will have an accumulated value of The effective (actual) interest rate per annum j is the amount of interest accumulated on $1 by year end. That is, Solving for i in terms of j and m, we obtain .
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Lesson 1 E. How Long Does It Take to Double Your Money?
Earlier in this activity, we saw how fast the value of an investment grows as the growth rate is increased. Another way to examine the effect of the growth rate on accumulated value is to compute for various growth rates the number of years it takes for an investment to double in value. Follow the procedure outlined in 'Question 1 - How Money Grows at Different Interest Rates' to create a spreadsheet for the accumulated value of $1 000 at the end of each year for 20 years, for growth rates of 4%, 6%, 8%, 10%, and 12%. Use the same formulas in the spreadsheet as shown in that exercise. The doubling time for each growth rate is the approximate number of years it takes an investment of $1 000 to have an accumulated value of $2 000. 1. Use your spreadsheet to help you complete the second row in the table below. 2. Multiply each number in the first row by the number below it in the middle row and write the product in the bottom row. What pattern do you discover in the numbers in the bottom row? 3. Use the pattern you discovered in 2 to estimate the doubling time d corresponding to a growth rate of 7%. What value would you expect the expression (1.07)d to have if d is the exact doubling time for a 7% growth? 4. Calculate the exact doubling time corresponding to a growth of 18%. Does this doubling time follow the same pattern as you discovered for the other growth rates? Explain. 5. Use the pattern you discovered in 2 to estimate the number of years it would take an investment growing at 9% to quadruple in value. 6. An investment of $18 000 grows in value to $71 400 in a period of 16 years. Use the pattern you discovered above to estimate its average annual rate of growth. Explain how you obtained your estimate. Money invested at 12% doubles every 6 years.
Growth Rate as a Percent Doubling Time in Years Growth rate X Doubling Time
4%
6%
8%
10%
12%
Internet Exploration To explore the Rule of 72 further, check out these web sites. http://www.moneychimp.com http://www.ruleof72.net
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Lesson 1 Exercises
1. Explain what is meant by the Rule of 72 and how it can be used to estimate the time it takes to double the value of an investment. 2. Calculate the accumulated value of $6 000 at the end of 15 years if invested to yield an annual growth rate of: a) 5% b) 10% c) 15% 3. Marcia had $9 600 in her RRSP invested in Ultratech stock. Eight years later that investment was worth $26 450. What was the average annual rate of growth of her investment? 4. Calculate the effective annual interest rate that is equivalent to the following rates: a. 4% per annum compounded monthly b. 8% per annum compounded quarterly c. 16% per annum compounded monthly d. 7% per annum compounded daily 5. Explain and calculate a. Explain why an investment of $1 compounded at a rate of i% per annum for n years yields $11+i1002n dollars. b. Write an expression for the value of $P after n years of compounding at a rate of i% per annum. 6. Calculate a. As of March 1, 2000, the Canada Customs and Revenue Agency charged 9% interest, compounded daily, on overdue taxes. Calculate the equivalent effective annual rate of interest. b. At the rate of interest described in part a), how long would it take for an overdue tax bill of $1 000 to grow to $2 000? 7. Using Your Spreadsheet a. Create a table of values for A(n) the accumulated value at the end of the nth year of $1 000 at 9% per annum where n runs from 1 to 30. b. Use your table to determine the accumulated value at the end of the 10th year. c. Graph A(n) for n = 1 to 30. By the end of what year has the original investment doubled in value? 8. Using your spreadsheet complete Exercise 7 with a rate of 9% per annum compounded monthly, where n (the number of years) runs from 1 to 10.
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Lesson 1 Exercise Solutions
1. The Rule of 72 states that the product of the annual interest rate and the doubling time, in years, is approximately 72. Therefore, we can estimate the doubling time by dividing 72 by the interest rate. For example, the time it takes for an investment growing at 8% per annum to double is about 72 / 8 or 9 years. 2. The accumulated value of $6 000 at growth rate i compounded annually for 15 years is $6 000(1 + i )15. a. When i = 0.05, the accumulated value is $12 473.57. b. When i = 0.10, the accumulated value is $25 063.49. c. When i = 0.15, the accumulated value is $48 822.37. 3. If i is the annual rate of growth, then: 9 600(1+ i )8 = 26 450. Solving for i yields: And so, i 2 0.135 or 13.5%. The average rate of growth was about 13.5% per year. 4. The effective annual interest rate is given by: a. (1 + 0.04/12)12 1 or about 4.07%. b. (1 + 0.08/4)4 1 or about 8.24%. c. (1 + 0.16/12)12 1 or about 17.22%. d. (1 + 0.07/365)365 1 or about 7.25%. 5. Explain and calculate a. At the end of the first year, $1 has accumulated value is accumulated value is b. dollars in interest.The accumulated at the end of the first year. That is, at the end of each year, the times as great as it was at the beginning of that year. dollars.
Therefore at the end of the nth year the accumulated value of $1 is of $P at the end of n years is P times as great as the expression in a, i.e.,
If we invest P times as much, the yield is P times as much. That is, the accumulated value dollars.
6. Calculate a. The effective annual rate is (1 + 0.09/365)365 1 or about 9.42% per annum. b. If n is the doubling time, then (1.0942)n = 2, so n = log 2 / log (1.0942) or about 7.7 years. It would take about 7.7 years for an overdue tax bill to grow from $1 000 to $2 000. Observe that the Rule of 72 yields an estimate of about 7.64 years, which is fairly close at this interest rate. 7. Using Your Spreadsheet a. The accumulated value of $1 000 at 9% per annum is $1 000(1.09) at the end of the nth year. See table below. b. The table below left, taken from a TI-83 Plus screen display with u(n) = 1 000(1.09) , shows the accumulated value at the end of each of year from the fourth to the tenth year. We observe that the accumulated value at the end of the tenth year is $2 367.40.
n n
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c. The screen display above right, shows the accumulated value of $1 000 over the first 30 years. The intersection with the line y = 1 992.56 indicates that the doubling time is about 8 years. 8. Using your spreadsheet: a. The accumulated value of $1 000 after n years, growing at 9% compounded monthly is given by: $1 000(1 + 0.09/12)12 . b. The accumulated value at the end of the tenth year is $1 000(1 + 0.09/12)120 or about $2 451.36. c. The graph is similar to that in 7 c.
n
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B. Using the Chart Menu, we obtain a graph like the one shown at right. We observe that $1 000 invested over 30 years at 6% grows to less than $6 000, while that same investment at 12% grows to about $30 000! In this case, doubling the growth rate from 6% to 12% increases the accumulated value about 5 times as much. In mathematical terms we say that accumulated value grows exponentially with the growth rate.
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Teacher Notes Some students may think the example is unrealistic because money does not normally compound for 1 500 years. Explain to students that an investment of $10 000 growing at 12.2% per annum becomes $1 000 000 in 40 years; and then in the next six years it doubles to $2 000 000. Even in a period of one generation, money can compound dramatically, but students must understand that time is critical for the full power of compounding to be realized. See Section B - Using Diagrams to Show How Money Grows. Take students through the computation of the accumulated compound interest for each year so that they understand how to relate the accumulated value at the end of any year to the accumulated value at the end of any other year. Have students formalize the relationship in the equation A = P (1 + i )n. Explain to students that i represents the interest rate expressed as a decimal. However, if i represents a whole number percentage, then we would use i/100. Both formulations will be used at different times in the activities. Review with them how to apply the Rule of 72 to estimate the doubling time for a fixed growth rate. Have students check this rule at: http://www.moneychimp.com http://www.ruleof72.net
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G G G G G
Bond Coupon Strip Bonds Capital Present Value
Instructional Strategies This activity is divided into four sections. A. B. C. D. You Can Be a Millionaire If You Start Soon Enough Strip Bonds How Much at Age 30 Becomes $1 000 000 at Age 60? Exploratory Activity Did They Really Win a Million Dollars?
Some Preliminary Points to Explain

G
This activity asserts that you need only about $10 000 growing at 12% per annum to reach $1 000 000 in 40 years. Students might ask where they would get $10 000 at age 25. Explain how careful saving of money from summer and part-time jobs can accumulate very quickly to such amounts. Explain to students that inflation will erode the purchasing power of $1 000 000, so that it will not buy as much in the future as it will today. However, if you do not invest your savings, its purchasing power will diminish. Instructional Steps 1 Review the exponent laws for negative exponents on an overhead projector or on the blackboard. OR Ask students whether a million dollars now is worth more than a million dollars ten years from now. Conduct a full class discussion to elicit an understanding of the idea that money grows over time and therefore it takes less than a million dollars now to grow to a million dollars in ten years. (Some students may confuse this idea with decreased purchasing power from inflation.) Use the steps as outlined in Lesson 1 to complete this section.
Teacher Notes The development of the concept of present value parallels the development of accumulated value in Lesson 1. The exploratory activity titled, Did They Really Win a Million Dollars?, should be done on a spreadsheet by all students. However, those students who can use a TI-83 or TI-83 Plus should be encouraged to use the TVM Solver to check their spreadsheet computations.
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Lesson 2 A. Present Value
You Can Be a Millionaire If You Start Soon Enough! How much do you think you would need to put into an RRSP (registered retirement savings plan) when you are 25 years old to have $1 000 000 when you reach 65 years of age? The answer is that it depends upon the rate at which your money grows. If your money or investment grows at the rate of 6% per annum, you would need to put almost $100 000 into your RRSP at age 25. However, if your investment grows at double that rate, i.e., 12%, you would need only about $10 000! What a difference! An understanding of the power of compound growth and how to maximize the rate of growth of an investment portfolio together constitute the cornerstone of wealth building. In this lesson, you will learn how to calculate the amount of money P that must be invested now, called the present value, to grow to a particular amount A at some future time. In Lesson 1, you discovered that $P invested now at an annual growth rate of i increases to $A in n years where A = P (1 + i ) . This formula allows us to calculate A for a given value of P. To find the present value P for a given future amount A, we solve the equation above for P to obtain P = A/(1 + i )n or, P = A (1+i )n To calculate the amount of money P that must be invested at 6% per annum now to grow to $1 000 000 in 40 years we substitute A =1 000 000, i = 0.06 and n = 40 into the formula above to obtain P = 1 000 000(1.06)40 or 97 222.20. That is, $97 222.20 invested now at 6% per annum will grow to one million dollars in 40 years. This is called the present value of one million dollars when invested at 6% for 40 years. Use the formula above to calculate the present value of one million dollars when invested at 12% for 40 years. These examples show why growth rate is so important in long-term investments.
n
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Lesson 2 B. Strip Bonds
When a government or a company needs to borrow money, it issues a bond. A bond is a loan that the issuer promises to repay at a future time. When you purchase a bond, you are lending money to the bond issuer.
G G G G
The amount to be repaid to you in future is called the face value. The date when repayment is due is called the maturity date. The annual rate of interest paid to you is called the bond rate. The amount you pay for the bond is called the cost price.
A Strip Bond Is Also Called a Zero Coupon Bond. Why? A typical bond such as a Government of Canada bond or a bond issued by a company has two parts:
G G
redeemable coupons that pay you, the bondholder, equal monthly or semi-annual installments of interest; the face value of the bond that is paid in cash at maturity.
Brokerage firms sometimes separate these two parts and sell the coupons to investors who want regular payments, and the bond (without its coupons) to other investors who prefer to receive the face value at a future date. The bond stripped of its coupons is a special type of bond called a strip bond. The important question for you as an investor is: How much should I pay for a strip bond that pays $10 000, say, 20 years from now if I want a yield of 6% per annum? An equivalent question is: How much money $P invested now at 6% per annum will grow to an amount A = $10 000 in 20 years? Substitution of i = 0.06 and A = 10 000 into the present value formula on the previous page yields: P = 10 000(1.06)20 or P = 3 118.05. That is, $3 118.05 should be paid now for a strip bond of face value $10 000 maturing 20 years from now to yield a 6% per annum return. Canadian financial author and former Minister of National Revenue, Garth Turner, wrote in 1997 in his 1998 RRSP Guide: How to Build Your Wealth and Retire in Comfort (page 161): In May 1994, I bought a Government of Ontario strip bond that matures on February 18, 2002. The annual yield was good at the time, 8.86%, and on maturity day that bond will be worth $194 000 inside my RRSP. But the actual cost to buy it was $100 412, which worked out to be $51.75 for every $100 worth of bond. In effect, I was arranging to double my money in less than eight years without risk.
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Lesson 2 C. How Much at Age 30 Becomes a $1 000 000 at Age 60?
How much money you need to invest at age 30 to yield $1 000 000 when you turn 60 depends on the annual growth rate of your investment. You learned in the previous activity how even a small increase in the annual growth rate over a long period of time yields substantially greater gains in the accumulated value. In this activity, you will investigate how the growth rate affects how much you need to invest to reach your goals. Question 1 - How Much at Age 30 Becomes a Million at Age 60? Use a spreadsheet to display the present value (cost) of the bond on January 2 of each year from 2000 to 2030 for each of the following annual yields: 4%, 6%, 8%, 10%, and 12%. Does doubling the yield rate reduce the cost on January 2, 2000 to half? Solution 1 - How Much at Age 30 Becomes a Million at Age 60? If the bond is to yield the investor a 4% annual return, then its value on January 2 for each year from 2000 to 2030 can be displayed on a time line as shown here. Why do we have negative exponents?
To display on a spreadsheet these values on January 2 of each year for 30 years for the given yield,s we list the years from 2000 to 2030 A.D. by entering the formulas shown in column A below. We use the Fill Down command to extend these formulas to the 32nd row of the spreadsheet, i.e., year 2030. To enter the formulas in column B for the 4% yield, we observe from the time diagram above that the value of the 4% yield strip
n n bond in year n is 1 000 000 (1.04)(2030 ) or 1 000 000(1.04)( 2030). For the entry in column B of row 2 in the spreadsheet, n
is the number in cell A2 so we write 1 000 000(1.04)( 2030) as 106*(1.04)^($A2 2030). We use the Fill Down command to extend these formulas to the 32nd row of the spreadsheet (i.e., year 2030). Similarly we enter the corresponding formulas in columns C, D, E, and F (columns E and F are not shown here).
When we display the numbers (rather than the formulas), we obtain the display below.
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On comparing columns B and D, we see that when the yield is 8%, the price of a bond in the year 2000 is less than one-third the price of a bond with a yield of 4%. Doubling the yield rate reduces the price in the year 2000 to much less than half! To be a millionaire at age 60, you must invest at age 30 either $174 110.13 in a bond with a 4% yield or only $33 377.92 in a bond with a 12% yield. You learned earlier in Lesson 2 that the yield rate of a bond has a significant effect on its price. When the yield rate is high, the bond is much cheaper. However, as the yield rate decreases, the price of the bond approaches its face value. The number of years to maturity also affects the price of a bond. The next example shows how a bond with a maturity date far in the future (called a long bond) has a significantly smaller price than a bond close to maturity. Question 2 - How Much at Age 30 Becomes a Million Using the spreadsheet for the strip bond described in Question 1, display the present value (cost) of the bond on January 2 of each year from 2000 to 2030 for each of the following annual yields: 4%, 6%, 8%, 10%, and 12%. Describe how the price of the million dollar bond changes as the maturity date approaches. Solution 2 - How Much at Age 30 Becomes a Million Using the chart menu on the spreadsheet obtained in the solution of Question 1, we obtain the graph shown below. The graph reveals that the price of the strip bond grows exponentially as the maturity date approaches. Furthermore, we observe that the graphs converge as we approach the year 2030 indicating that as the maturity date draws near, the price of the bond does not vary much for different yield rates. In fact, the differences in the bond prices for various yield rates increase as the time to maturity is increased. Can you explain why this is?
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Lesson 2 D. Did They Really Win a Million Dollars?
A recent study revealed that a large number of Canadians expect that lottery winnings will constitute their major source of income for their retirement years. But if you consider the theory of probability, youll find that this expectation is very unrealistic. In spite of the huge odds against winning the big prize, a small fraction of the worlds population does hit the jackpot. The article to the left appeared in a press release by the Texas Lottery in April 2000.
Million Dollar Winners! The Stewart Family Revocable Trust of Bedford today claimed the top prize from the Texas Lottery scratch-off game Weekly Grand of $1 000 a week for the next 20 years. The total prize payout comes to $1 040 000.00. This makes the 44th winner for the Texas Lotterys Weekly Grand scratch-off game since its inception in 1995.
(Austin TX)
Question 3 - Did They Really Win a Million Dollars? Grand Winner Claims Prize Worth $1 Million 1. Explain how the value of $1 040 000.00 was obtained.
2. Do you think that the prize was worth about the same as receiving a million dollars immediately? Explain why or why not. 3. If you won the prize now and you wanted to sell it for immediate cash, estimate roughly what you think you should receive in a lump sum payment. Show how you obtained your estimate. 4. The weekly payments of $1 000 can be shown on a time line like the one below. Fill in the present value of each payment, assuming a yield rate of 5% per annum compounded weekly. The first one is done for you.
5. Use a spreadsheet or the formula for the sum of a geometric series to add the present values of all the 1 040 payments in Exercise 4. 6. Compare your answer in Exercise 5 with your rough estimate in Exercise 3. Are you surprised? Explain why or why not. 7. Why do you think the Texas Lottery Commission advertises the prize value as the sum of all the payments instead of the present value of all the payments?
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Lesson 2 Exercises
1. Explain why a cash payment of $1 000 now is worth more than a cash payment of $1 000 five years from now. 2. Determine the present value of each future amount if money is worth 6% per annum compounded monthly. a. $1 000 a month from now b. $5 000 a year from now c. $10 000 five years from now 3. The table below shows the yields for Government of Canada strip bonds on a particular day in May 2000.
Government of Canada Bond Yields Canada 2 -year bond Canada 10-year bond Canada 30-year bond 6.25% 6.19% 5.81%
a. Calculate the cost of each of the bonds if each has a face value of $1 000. b. Which bond would you choose if you were to invest? Give reasons for your answer. 4. If money can earn 8% per annum compounded annually, what is worth more: $600 000 now or one million dollars ten years from now? Show how you obtain your answer. 5. How much money must be invested now at 6% per annum compounded monthly to grow into one million dollars: a. 15 years from now? b. 25 years from now? c. 35 years from now? 6. A 20-year strip bond with a face value of $10 000 is offered for sale when it has 15 years to maturity. a. What is the price of the bond if the yield is to be 9% per annum compounded annually? b. When the bond has only 10 years left to maturity, it is offered for sale at $3 855.43. Estimate the yield on the bond if it is then purchased and held to maturity. 7. A $100 10-year bond offers annual coupons (payments) of 5% of its face value, as shown in the time diagram below. What price should an investor pay for the bond now to obtain a yield of 6%?
8. A $1 000 20-year bond offers semi-annual coupons of 6% of its face value. What should an investor pay for the bond now to obtain a yield of 8% compounded semi-annually over the 20-year period? 9. A lottery pays $4 000 per month for life. What is the present value of this prize if money is worth 6% per annum compounded monthly and the recipient lives for another: a. 10 years? b. 20 years? c. 40 years? (Assume the first payment of $4 000 is made one month from now.) By how much is the present value of the prize increased if the recipient lives 45 instead of 40 more years?
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1. A cash payment of $1 000 now will grow in five years to $1 000(1 + i )5, where i is the annual rate of return at which it can be invested. Since $1 000(1 + i )5 is greater than $1 000, then $1 000 now is worth more than $1 000 later. 2. The present value of $P payable n months from now is given by PV = $P (1 + 0.06/12)n. a. When P = $1 000 and n = 1, PV = $ 995.02. b. When P = $5 000 and n = 12, PV = $ 4 709.53. c. When P = $10 000 and n = 60, PV = $ 7 413.72. a. The costs of the bonds are: 2-year: $1 000(1.0625)2 or $885.81 10-year: $1 000(1.0619)10 or $548.48 30-year: $1 000(1.0581)30 or $183.74 b. Answers will vary. The 2-year bond has the highest rate. It is the best investment if you expect interest rates to rise in the long run. However, if you expect interest rates to fall, then the other bonds may be preferable because they will rise in value. Note: As interest rates rise, the difference between the fixed interest rate offered by that bond and other competing investments diminishes. This reduces the demand for the bond and hence its price. During a period of increasing interest rates, a long-term bond traps the owner for a long period in an investment that gives a relatively low yield. Conversely, if interest rates fall, the long-term bond becomes the better choice. 4. The present value of $1 000 000 now is: $1 000 000(1.08)10 or $463 193.49. Therefore it is better to take $600 000 now. 5. The amount of money that must be invested now at 6% per annum compounded monthly to grow into $1 000 000 is: a. $1 000 000(1 + 0.06/12)180 or $407 482.43. b. $1 000 000(1 + 0.06/12)300 or $223 965.68. c. $1 000 000(1 + 0.06/12)420 or $123 098.87. 6. a) The price of the bond is $10 000(1.09)15 or $2 745.38. b) If i is the annual rate of growth, then: $3 855.43(1 + i )10 = $10 000. That is, (1 + i )10 = 2.5937, so i =(2.5937)1/10 1 0.1. The annual growth rate is about 0.1 or 10%. 7. The time diagram below shows the present values of all the payments including the final face value.
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The total present value of the annual payments is: 5(1.06)-1 + 5(1.06)-2 + ... + 5(1.06)-10 = 5(1.06)-10 [1.0610 1] / 0.06 = $36.80 The present value of the face value is 100(1.06)-10 $55.84. The present value of the bond is $36.80 + $55.84 = $92.64. Therefore, the investor should pay $92.64 now to yield 6%. 8. Construction of a time diagram, as in the solution to Exercise 7, yields the following expression for the sum of the present values of all the $60 coupons. 60(1.04)-1 + 60(1.04)-2 + + 60(1.04)-40 = 60(1.04)40 [1.0440 1] / 0.04 1 187.57 The total present value of the coupons is $1 187.57. The present value of the face value is $1 000(1.04)-20 or about $208.29. So the total present value of the bond is $208.29 + $1 187.57 or $1 395.86. Therefore, the investor should pay $1 395.86 now to yield 8%. 9. Construction of a time diagram as in the solution to Exercise 7 yields the following expression for the sum of the present values of all the $4 000 payments over a period of n years. 4 000(1.005)-1 + 4 000(1.005)-2 + + 4 000(1.005)-12n = 4 000(1.005)-12n [1.00512n 1] / 0.005 a. For n = 10, the total present value of the payments is $360 293.81. b. For n = 20, the total present value of the payments is $558 323.09. c. For n = 40, the total present value of the payments is $726 990.34. For n = 45, the present value is $745 872.67. That is, the present value is increased by $18 882.33 if the recipient lives for 45 more years instead of 40 years.
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G G G
Annuity Debt Taxes
Instructional Strategies This activity is divided into four sections. A. B. C. D. A Tale of Twins Buying on the Installment Plan Calculating the Outstanding Balance on a Spreadsheet Exploratory Activity: Buy or Lease a Car Which Is the Cheaper Option?
Some Preliminary Points to Explain

G
Explain to students that an RRSP is an account into which money can be placed so that it can compound freely without tax (until withdrawn). Removing tax considerations simplifies the computation of the twins' accumulated investments. Explain to students that the example of the twins shows the importance of investing early. Variations in the interest rates can reduce the advantage of investing early, but the earlier an investment is made, the larger it will grow. Instructional Steps 1 2 3 4 5 6 Introduce 'Section A - A Tale of Twins'. Ask students to work in pairs on a transparency. Discuss with the students how they developed their solutions. As a follow-up, have students in pairs create new compounding situations for another pair of students to complete. Follow up with 'Exploratory Activity: Buy or Lease a Car Which Is the Cheaper Option?'. Review the use of spreadsheets. Assign exercises from Section E to review the concepts taught in this lesson.
Teacher Notes A Tale of Twins strongly reinforces the power of compounding when the investment is made early. If identifying and summing a geometric series is not a requisite for the course you are teaching, skip 'Question 1 - Buying on the Installment Plan' and move on to 'Question 2 - Calculating the Outstanding Balance on a Spreadsheet where students can use a spreadsheet rather than apply formal mathematical techniques.
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What You might Expect to See - Buy or Lease a Car

Example and Calculations The following pages are reproductions of a student report on Sections D - Exploratory Activity: Buy or Lease a Car Which Is the Cheaper Option? A certain car sells for $18 995.00. You have enough savings to pay a $6 000.00 down payment on this car; however, you have not made a final decision as to whether you should buy or lease this vehicle. The following calculations provide concrete information regarding the financing of each option. Purchase Price/Cap Cost: $ 18 995.00 Acquisition Fees: $ 52 896.00 Loan/lease Information: 9% compounded Residual: $ 10 000.00 monthly, term 3 years The Purchase Agreement Purchase Price Plus Tax Tax: HST (GST + PST) equals 15% of purchase price 0.15 ($18 995.00) = $2 849.25 $18 995.00 + $2 849.25 = $21 844.25 Amount to be Financed $21 844.25 $6 000.00 = $15 844.25 Monthly Payment G Calculate present value: the sum of the present values should equal the principal the total present value of all the payments is given by x (1.0075)-1 + x (1.0075)-2 + x (1.0075)-3 + +x (1.0075)-35 + x (1.0075)-36 G To calculate the interest rate: interest rate divided by the number of compound periods 0.09/(12 x 3) = 0.0075 G To calculate the sum of the geometric series use the following formula. PV present value PV = $15 844.25 $15 844.25 = $503.84 = x
G
a value of first term a = x(1.0075)-1 (1.0075)-1[(1.0075)-36
r common ratio r = $1.0075)-1
n number of periods n = 36
-1] [(1.0075)-1-1] The student has calculated the montly payment correctly using the geometric series.
Accumulated value of monthly payments assuming they could have been invested at 3% per annum compounded monthly: Total value of monthly payments: 36 ($503.84) = $18 138.24 To calculate the accumulated value of monthly payments use the following formula. A = P (1+i )n A accumulated amount P present value i interest rate/period n number of periods P = $18 138.24 A = $18 238.24(1+0.0025)36 = $19 844.17 i = 0.0025 n = 36 The student has added all the monthly payments and then calculated the accumulated amount on this sum. This is a common error. Explain to students that payments made at different times accumulate to different amounts. The correct accumulated value is the sum of the accumulated values of all the payments. See the diagram on the following page.
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The Lease Agreement: Cap Cost: $18 995.00 Adjusted Cap Cost cap cost + acquisition fees down payment = $18 995.00 + $5 286.00 - $6 000.00 = $18 281.00 Amount to be Financed adjusted cap cost residual = $18 281.00 - $10 000.00 = $8 281.00 Monthly Payment(including GST and PST): Calculate present value: the sum of the present values should equal the amount to be financed the total present value of all the payments is given by x (1.0075)-1 + x (1.0075)-2 + x (1.0075)-3 + + x (1.0075)-35 + x (1.0075)-36 To calculate the interest rate: interest rate divided by the number of compound periods 0.09/(12 x 3) = 0.0075 to calculate the sum of the geometric series use the following formula: PV present value PV = $8 281.00 $8 281.00 = $263.33 = x a value of first term a = x(1.0075)-1 r common ratio r = $1.0075)-1 n number of periods n = 36
x (1.0075)-1[(1.0075)-36 -1] [(1.0075)-1-1] The student has calculated the montly payment correctly using the geometric series.
Tax: HST (GST + PST) equals 15% of monthly installments 0.15 ($263.33) = $39.50 $263.33 + $39.50 = $302.83 Accumulated value of monthly payments assuming they could have been invested at 3% per annum compounded monthly: Total value of monthly payments: 36 ($302.83) = $10 901.19 To calculate the accumulated value of monthly payments use the following formula: A = P (1+i )n A accumulated amount P present value i interest rate/period n number of periods P = $10 901.19 A = $10 901.19(1+0.0025)36 = $11 926.46 The student has made the same error here as in the computation for the acccumulated value of the purchase agreement payments of $302.83 is: 302.83[(1.0025)36 - 1] /.0025 or $11 392.63 i = 0.0025 n = 36
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Buy or Lease a Car - Evaluation and Summary

Buying a Car What are the advantages?
G G
Leasing a Car What are the advantages?

G
G G G
pride of ownership in some cases, monthly payments will expire before useful life of the car economical for long-term use economical for high mileage possibility of lower interest rate
What are the disadvantages?

G G G G G
higher monthly payments declining value investment high rate of depreciation no added insurance against unexpected losses
lower monthly payments, due to the fact that only a portion of the car's value is being paid for - the ''used up'' portion access to new vehicles every three or four years access to more expensive/higher quality vehicles than would normally suit the lessor's financial position option to buy the car still exists at the end of the lease term provides added insurance against unexpected losses money saved on monthly payments can be put to use in other investments
What are the disadvantages?

G
G G
less economical for high mileage use (>15 000 milers/year) less economical for long term use (>5 years) less likely to negotiate a more favourable interest rate possibility of incurring added registration costs
Overall: Buying Versus Leasing As a short term investor with limited amounts of cash to make monthly payments, leasing appears to be the better option. Since, however, the useful life of a car can easily extend beyond the 3 to 4 years leasing term, buying a car spreads the cost over a longer term, creating a substantially cheaper option than leasing two or three cars in the same time interval. Other items to consider regarding these two financing options take into consideration added benefits and insurance of a lease versus pride and ease of ownership of a purchase. Regardless of which option is chosen, it is more important to consider the quality of the product, than the method of financing it. A more affordable price may correspond to added maintenance, high depreciation, low return on the value in the case of a trade-in, and potentially pose a safety risk. The question over whether to buy or lease a car can only be answered based on personal preference and circumstances. To compare the costs of purchasing and leasing, students should observe that at the end of 3 years:
G
The accumulated value of all the payments made by the purchaser is about $18 955 and the purchase has a car with a residual value of $10 000; The accumulated value of all the payments made by the lessor is about $11 393.
The lessor has paid about $ 7 562 less than the purchaser but has no car. If the lessor wished to purchase the car, she would have to pay $10 000 plus tax. In this example, on a purely financial basis, leasing would be better only if a much larger return than 3% could be obtained on the money saved on the smaller payments and reinvested.
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Lesson 3 A. Annuities & Installment Payments
A Tale of Twins Amy and Amanda are identical twins at least in their external appearance. They have very different investment plans to provide for their retirement. Study both plans and then decide who you think will have more money in her RRSP when they both reach 65 years of age if their investments yield 9% per annum compounded annually. RRSP = Registered Retirement Savings Plan This is an account into which money can be placed so that it can compound freely without tax until withdrawn during retirement.
"I plan to put $1 000 each year into an RRSP account beginning on my birthday when I turn 20 years of age. When I turn 29, I will make my final contribution of $1 000. Then I will leave the money invested in my RRSP and let it grow, but I will make no further contributions." Q How much will Amy contribute to her RRSP between ages 20 and 30?
I want to have some spending money while Im young, so I will not open an RRSP until I reach 30 years of age. However, when I turn 30 years of age, I will put $1 000 into an RRSP account each and every year until I turn 64. Then I will make my final contribution of $1 000." Q How much will Amanda contribute to her RRSP between ages 30 and 65?
Both Amy and Amanda plan to make deposits of $1 000 into their RRSP accounts every year. Any such series of equal payments made at regular intervals of time is called an annuity. Annuities can be used to build assets or to pay off debt as in installment buying or the discharge of a mortgage. To calculate the value of Amys RRSP at age 65, we cannot simply add her $1 000 contributions together, because the contributions are made at different times and therefore have grown into different amounts. To determine the value of Amys RRSP at age 65, we must compute the accumulated value of each contribution on Amys 65th birthday and then add them together, as shown in the time diagram.
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Amys Plan
To find the accumulated value of Amys RRSP when she reaches age 65, we sum the accumulated values of all the contributions shown in the column under Age 65, using the fact that it is a geometric series of 10 terms with first term 1 000(1.09)36 and common ratio (1.09). Accumulated value ($) = 1 000(1.09)36 + 1 000(1.09)37 + 1 000(1.09)38 + + 1 000(1.09)45 = 1 000[(1.09)46 - (1.09)36 ] / 0.09 = 338 061.23 That is, Amys RRSP will have an accumulated value of $338 061.23 on her 65th birthday. Amandas Plan
To find the accumulated value of Amandas RRSP when she reaches age 65, we sum the accumulated values of all the contributions, using the fact that it is a geometric series of 35 terms with first term 1 000(1.09) and common ratio (1.09). Accumulated value ($) = 1 000(1.09) + 1 000(1.09)2 + 1 000(1.09)3 + + 1 000(1.09)35 = 1 000[(1.09)36 - (1.09)] / 0.09 = 235 124.72 That is, Amandas RRSP will have an accumulated value of $235 124.72 on her 65th birthday. Compare the contributions made by Amy and Amanda and the values of their RRSPs at age 65. Are you surprised? Explain why or why not.
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Lesson 3 B. Buying on the Installment Plan
Question 1 - Buying on the Installment Plan Most people purchase cars on the installment plan. The lending institution advances a loan of $P called the principal. The borrower repays the loan in equal installments over a given number of years, n (called the term of the loan). Both parties agree to a particular interest rate i and compounding period (usually a month), and the lending institution informs the borrower what equal installment payments x are required to repay the principal. This example shows how to calculate the value of x. A car loan of $20 000 is offered at 12% per annum compounded monthly1. What equal monthly payments are required to repay the loan over a term of 5 years? Solution 1 - Buying on the Installment Plan To determine the amount of the monthly payments, we compute the present value of all the 60 payments made over the 5-year term. The sum of these present values should equal the amount of the loan, i.e., $20 000. Observe that when we calculate future value of money, we multiply by the growth factor, but when we calculate present value of future payments, we divide by the growth factor. The total present value of all the payments is given by: x (1.01) x (1.01)2 x (1.01)59 x (1.01)60 x (1.01) and common ratio (1.01)-1.
++
This is a geometric series with first term
The sum of this series is 100x [1 (1.01)-60 ]. Since the total present value of all the payments should be equal to the principal, i.e., $20 000, we write 100x [1 (1.01)-60 ] = 20 000. Solving this equation for x yields x = 444.89. That is, 60 monthly payments of $444.89 will repay the loan in 5 years.
1 Note:
12% per annum compounded monthly means the interest is 1% per month and is calculated at the end of each month.
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Lesson 3 C. Calculating the Outstanding Balance on a Spreadsheet
In Question 1, we showed how to calculate the payment amounts in an annuity. However, when we have an installment loan, we already know the payment amount, but often wish to determine the balance owing at a particular time. The following example shows how we can use a spreadsheet to display the balance after each payment. Question 2 - Calculating the Outstanding Balance on a Spreadsheet For the $20 000 car loan in Question 1: a. What is the balance of the loan after the 9th payment? b. How much of the 9th payment is allocated to interest, and how much to the principal? Solution 2 - Calculating the Outstanding Balance on a Spreadsheet To display on a spreadsheet the monthly balances of the $20 000 car loan described on the previous page, we enter the headings and formulas shown in the spreadsheet below.
We use the Fill Down command to extend these formulas to the 11th row of the spreadsheet (i.e., payment #9). When we display the numbers (rather than the formulas), we obtain the display below.
The 11th row reveals that the balance before the 9th payment is $17 970.92, but after the 9th payment the (final) outstanding balance is $17 705.74. The difference, $17 970.92 $17 705.74 or $265.18, is the amount that has been allocated to the principal. Since the total payment is $444.89, then the interest included in that payment is $444.89 $265.18 or $179.71. To verify that we have entered appropriate formulas into the spreadsheet, we can use the Fill Down command to extend the formulas to the 62nd row (60th payment). We then display the numbers and check that the balance after the 60th payment is zero (or very close to it).
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Lesson 3 D. Exercise: Buy or Lease a Car Which Is the Cheaper Option?
Many people debate whether its cheaper to buy or to lease a car. When you buy a car, you negotiate with the dealer on a purchase price. Then you pay either the purchase price (plus tax, money levied by the government on income and sales) or a portion of the purchase price, called the down payment, and finance the rest. The part that you finance is the principal of an installment loan that is paid off in equal payments over the term of the loan (usually 3 to 5 years). When you lease a car, the dealer purchases the car on your behalf. The purchase price that you negotiate with the dealer is called the cap cost (short for capitalized cost). The lease agreement entitles you to the use of the car for a fixed term (usually for 2 or 3 years) and the option to buy the car at the end of the term at a pre-set price called the residual (value). In return for the use of the car during the term of the lease, you make monthly payments that are substantially less than if you were buying the car, but then you do not own the car at the end of the lease unless you exercise your option to buy. The mathematics of each financial arrangement are shown below. The Finances of Buying a Car 1. 2. 3. 4. 5. Reach agreement with the dealer on the purchase price of the car including optional extras. Add the appropriate GST and PST to the purchase price. Subtract the down payment from 2. Agree upon an interest rate and term for an installment loan with principal obtained in 3. Calculate the monthly payments required to pay off the principal of the loan in 4.
The Finances of Leasing a Car 1. 2. 3. 4. 5. 6. Reach agreement with the dealer on the purchase price of the car including optional extras. This is the cap cost. Add to the cap cost the acquisition fees that the dealer charges for administering the lease. Subtract the down payment from 2 to obtain the adjusted cap cost. Subtract the residual from the adjusted cap cost to obtain the amount to be financed. Agree to the terms of the payment schedule based on the amount obtained in 4. Calculate the monthly payments required to pay off the principal of the loan in 5, and add the GST and applicable PST to each payment.
Suppose you are interested in a car that sells for $18 995.00. You have saved a down payment of $6 000 that you want to put into a lease or purchase. A car dealer provides you with the purchase agreement and the lease agreement shown in the table on the following page. Read the terms of each offer and fill in the missing data.
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The Purchase Agreement Purchase Price: $18 995.00 Loan information:

G G G
The Lease Agreement Cap Cost: $18 995.00 Acquisition Fees: $5 286 Residual: $10 000.00 Lease Information:
G G
9% annually compounded monthly term of 3 years
1. The purchase price plus tax is:$_________ 2. The amount to be financed is: $_________ 3. The monthly payment is:$_________ The accumulated value of all the monthly payments at the end of 3 years, assuming 4. that they could have been invested at 3% per annum compounded monthly, is:$ _______
5. The cap cost is: $__________________ 6. The adjusted cap cost is: $___________ 7. The amount to be financed is: $________ 8. The monthly payment (including GST and PST) is: $ _______________ 9, The accumulated value of all the monthly payments at the end of 3 years, assuming that they could have been invested at 3% per annum compounded monthly, is:$ __________
10. Write a brief report comparing the costs of purchasing and leasing for the example given here. Discuss the advantages of each form of financing a car and describe the kinds of car use that would favour each method. In this activity, we have focused on price only. Some people argue that leasing has the advantage that it doesn't tie up capital that could be invested elsewhere at higher rates of return. Tax considerations might also affect your decision whether to lease or buy.
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. Solutions
Suppose you are interested in a car that sells for $18 995.00. You have saved a down payment of $6 000 that you want to put into a lease or purchase. A car dealer provides you with the purchase agreement and the lease agreement shown below. Read the terms of each offer and fill in the missing data.
The Purchase Agreement Purchase Price: $18 995.00 Loan information:

G G G
The Lease Agreement Cap Cost: $18 995.00 Acquisition Fees: $5 286 Residual: $10 000.00 Lease Information:
G G
9% annually compounded monthly term of 3 years The purchase price plus tax is:$21 844.25 The amount to be financed is: $15 844.25 The monthly payment is:$503.84 The accumulated value of all the monthly payments at the end of 3 years, assuming that they could have been invested at 3% per annum compounded monthly, is: $18 954.85
1. 2. 3. 4.
5. 6. 7. 8.
The cap cost is: $18 995.00 The adjusted cap cost is: $18 281.00 The amount to be financed is: $8 281.00 The monthly payment (including GST and PST) is: $302.83 9. The accumulated value of all the monthly payments at the end of 3 years, assuming that they could have been invested at 3% per annum compounded monthly, is: $11 392.63
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Lesson 3 Exercises
1. Write a sentence to explain what is meant by each of the following terms in an auto lease: a) cap cost b) adjusted cap cost c) acquisition fees d) term e) residual value
2. List all the parameters (i.e., variables) that are necessary to define an annuity. 3. Is smoking really expensive? The average smoker spends about $1 700 per year on cigarettes. If this amount were deposited at the end of each year in an account earning 6% compounded annually, how much would be accumulated at the end of 20 years? 4. What monthly payments earning interest at 6.75% per annum compounded monthly will accumulate to $500 000 at the end of 25 years? 5. Calculate the monthly payments required for a $60 000 mortgage to be paid off over 30 years at 9.0% per annum compounded monthly. 6. How long would it take to accumulate: a. $1 000 000 with deposits of $2 000 per year earning 8% per annum compounded annually? b. $2 000 000 with deposits of $5 000 per year earning 6% per annum compounded annually? c. $2 000 000 with deposits of $5 000 per year earning 12% per annum compounded annually? 7. A financial institution offers consumers a choice of two different 10-year savings plans. On a fixed amount of money deposited at the beginning of every year for 10 years, Plan A pays 5% per annum interest (compounded annually) in each of the first five years and 4% per annum interest in each of the remaining five years. Plan B offers 4% in the first five years and 5% in the remaining five years. Which plan, if any, offers the higher return? 8. Calculate a. Calculate the monthly payment on a mortgage of $180 000 @ 7% interest per annum compounded monthly and amortized over 30 years. b. Determine the outstanding balance after the 24th payment. How much of this payment was allocated to principal and how much to interest? c. Answer part b) for the 36th and 60th payments. d. What is the total of all the payments made over the 30 year period? How much was interest and how much was principal? 9. A car dealer presents two choices to a person seeking a particular car. H Option A Purchase by making monthly payments of $687.92 for 3 years, beginning a month from now. H Option B Lease for 3 years by making monthly payments of $499.50 (beginning a month from now) with an option to purchase at a price of $11 000 at the end of the lease. Assuming that money yields 4% per annum compounded monthly after tax and inflation, calculate the cost of the car for each option. Which option is cheaper? Explain. Internet Exploration Check your answer to Exercise 6 using the Future Worth Calculator on http://www.webfin.com. This site offers a calculator to determine how much you must save to be a millionaire: http://www.tcalc.com Try a few calculations and check that it gives the correct answers.
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1. a) The cap cost is the purchase price of the car. b) The adjusted cap cost is the purchase price plus the dealers acquisition fees less the down payment. c) The acquisition fees are the fees that the dealer charges for administering the lease. d) The term is the length of time for which the car is leased usually 2 to 3 years. e) The residual value is the amount for which you may purchase the car at the end of the term of the lease. 2. The parameters associated with an annuity are: N the number of payments in the annuity, I the nominal annual interest rate, PV the present value of the annuity, PMT the amount of the equal annuity payments, FV the future value of the annuity after the last payment, P/Y the number of annuity payments per year, and C/Y the number of compoundings per year. Given any six of these seven parameters, we can calculate the remaining parameter. 3. The accumulated values of all the $1 700 annual expenditures are shown on the time diagram below.
The sum of these accumulated amounts is: 1 700[1 + (1.06) + (1.06)2 + + (1.06)19 ] = 1 700[1.0620 1] / 0.06 or 62 535.51 That is, $62 535.51 would be accumulated in 20 years! 4. The accumulated values of all the annual payments of $x are shown on the time diagram below.
The sum of these accumulated values is: x (1.05625) + x (1.05625)2 + + x (1.05625)25 = x (1.05625)[1 + (1.05625) + (1.05625)2 + + (1.05625)24 ] = x (1.05625)[(1.05625)300 - 1] / 0.05625 Equating this accumulated sum to $500 000 and solving for x yields: x = $638.47.
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5. The sum of the present values of all the payments of $x must total $60 000 in each case.
a) The present values of the payments of $x are shown in the time diagram. The sum of the present values is: x(1.0075)360 [1.0075360 1] / 0.0075 Equating this to $60 000 and solving for x yields: x = $482.77. This is the monthly payment. 6. a. The time diagram shows that if we make the first payment of $2 000 now and then make payments until the end of the nth year, we make n + 1 payments in all.
The accumulated value of all those payments at the end of the nth year is $2 000[1 + 1.08 + 1.082 + + 1.08n ] or $2 000[1.08n+1 - 1] / 0.08. Equating to $1 000 000 and solving for n yields: n = log 41/log 1.08 - 1. That is, n < 47.25, so it takes about 48 years. b. Proceeding as above, we obtain n < 54.2 years, so it takes about 55 years to accumulate to $2 000 000. c. Proceeding as above, we obtain n < 33.3 years, so it takes about 34 years to accumulate to $2 000 000. 7. If equal deposits of $x are made, Plan A yields about $12.7x, but Plan B offers about $13x, so Plan B offers the higher return. 8. a) monthly payment $1 197.54 b) bal(24) c) bal(36) bal(60) = $176 210.91; = $174 108.53; = $169 436.86; prin: prin: prin: $168.66; $180.86; $207.95; int: int: int: $1 028.88 $1 016.69 $989.59
d) Total payment is 360($1 197.54) = $431 114.40 The total principal repaid was $180 000 so the interest paid was the difference, $251 114.40. 9. Option A We assume in purchase option A that the car is worth $11 000 at the end of 3 years. The accumulated value of 36 payments of $687.92 at the end of 3 years is $26 265.86. Net cost $15 265.86. Option B The accumulated value of 36 payments of $499.50 at the end of 3 years is $19 071.69.
Option A is cheaper. Notes:

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What other resources might I use to teach this activity? How will I link this activity to the investment portfolio task? What follow-up homework assignments would reinforce this concept? What skills from this activity need further reinforcement?
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Ask Bear Market Bid Board Lot
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Bull Market Capital Gain Capital Loss Capital Markets
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Commission Dividend Equities IPO
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Market Index Stocks Debt Taxes
Instructional Strategies This lesson is divided into eight sections. A. B. C. D. E. F. G. H. I. How a Stock Market Works Initial Public Offering (IPO) The Secondary Market The Trading Process Making the Trade How to Read Trading Information Exploratory Activity: Using Stock Indexes to Read Market Trends Exploratory Activity: Using Data to Analyse Stocks Exercises Instructional Steps 1 2 3 4 5 6 In home groups, distribute, "The Misconception/Concept" handout, to each group member. See below. Have students read-A. How A Stock Market Works, B. Initial Public Offering, C. The Secondary Market, D. The Trading Process, E. Making the Trade. Ask each group to use the reading to identify the concept and the misconception. Have students record evidence to support their choice. Ask each group to explain the concept using evidence from the reading. Debrief to ensure that students understand the key concepts. Find the "How To Read Trade Information" and "Market by Order Display " topics within lesson four. Photocopy these pages, along with their examples, onto an overhead transparency. Take students through the examples in both topics, including the Market by Order" chart. Within the groups pair students to complete Question 2 from Section F. Explain that fictitious stocks are used. In home groups, distribute a current stock page to each group. Ask students to find 4 pieces of information that they find interesting and present their findings to the class on flipchart paper or on a transparency. In pairs, ask the students to read G. Using Stock Indexes to Read Market Trends
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10 In home groups, have students complete tasks 1-5 on the "Using Stock Indexes to Read Market Trends" page. 11 Post the findings in clusters, e.g., Task 1 Findings. Use a gallery walk to allow students to view the findings of other teams. Ask students to note similarities and differences. 12 Debrief the activity, noting the use of Internet data. 13 Use Question 3 in section G. Data to Analyze a Particular Stock Page.
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14 In home groups assign roles, e.g., data manager, timekeeper, recorder, Internet person. Ask groups to: select a company to investigate. record information on the companys stock performance from the newspaper. use research to determine if their company is a good investment. support their opinion with data. Have students report their results to the class. 15 Ask groups to do the Internet investigation in Section H. 16 Have groups share their findings. Debrief the activity, noting the information found. Identify a list of criteria for comparing companies. 17 Have groups prepare a similarities and differences report about the companies researched using the criteria determined through the class discussion. 18 Assign section I. Exercises to review the concepts of this lesson. Additional Notes There are two exploratory activities: Using Stock Indexes to Read Market Trends and Using Data to Analyse a Particular Stock. These exploratory activities extend and consolidate the concepts by directing students to the Internet to find stock information. If your students have access to the Internet, revise the five tasks to read Internet and have students gather their information online. If the Internet is not available to your students, use current newspapers. The similarities and differences report generated in H.Using Data to Analyse a Particular Stock can be used for a summative assessment of what the student has learned about gathering information on stocks. The exercises in this activity give students an opportunity to apply their skills in reading trading information. If students require further practice, then use this exercise as a model. Have students select five real companies from the stock pages of a newspaper and find the information on these companies. Teacher Notes Five main concepts underlie the material found in lesson 4. Sometimes people have misconceptions about the stock market and its processes. This activity is designed to help clarify. After you have learned the material in lesson four, see if you can identify the concept vs the misconception by writing "Mis" or "Con" on the lines below. _____ You can visit TSX and see trading taking place on the floor of the Exchange. _____ There is no trading floor at the TSX. Trading occurs in cyberspace. _____ Stockbrokers handle all aspects of stock trading. _____ Stock exchanges manage trading, while stockbrokers carry out the trade. _____ Stock prices are determined by the law of supply and demand. _____ Stock prices are set by companies and regulated by the government. _____ Most trading occurs among investors in secondary markets. _____ Most trading occurs among corporations and investors in primary markets. _____ Insider trading is illegal. _____ Insider trading is legal in some circumstances, but it must be reported.
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Lesson 4 A. How a Stock Market Works
Bringing Buyers & Sellers Together A market is defined as a place where buyers and sellers, who are largely unknown to each other, come together for the purpose of exchange. Our economy is a series of such markets, from the corner variety store, to a shopping centre, to a new ecommerce business. This activity will focus on a particular market the stock market. A stock market is the part of the capital market that brings together buyers and sellers. Location Stock markets have always had a physical location known as a trading floor. The media often use images of that trading floor when reporting on developments in the stock market. But technology and the Internet eliminated the need for a physical location of a market. On April 23, 1997, the Toronto Stock Exchange became the largest exchange in North America to choose a floorless, electronic environment when its trading floor closed. All trading takes place on linked computers. The New York Stock Exchange, by contrast, still maintains a trading floor. What Is Being Exchanged? Business requires financing to buy assets that are needed for its operation. When world trade opened up in the 1600s, companies or joint partnerships were created to raise large sums of money to finance the building of ships and new trading ventures. Few individuals had enough money to finance the building of a ship, or were willing to assume the entire risk, so ownership was divided into shares (stocks). A specific number of shares were sold at a fixed price to raise the amount of money needed to build a ship. Any profits earned by the ship were distributed in dividends back to the shareholder. The first sale of shares by a company to the public is called a Primary Distribution or an Initial Public Offering (IPO). One of the funny things about the stock market is that every time one man buys, another sells, and both think they are astute.
William Feather
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Lesson 4 B. Initial Public Offering (IPO)
Primary Distribution IPO Suppose a company wishes to raise $900 in cash. In an IPO, the company offers nine shares for sale at $100 per share. The company has sold 9 shares @ $100 per share, so it has raised $900 in cash. This is called its market capitalization. After this capitalization, the companys balance sheet looks like this: Capitalization Assets $900 = Liabilities $0 Dept + Owners Equity $900(9 shares issued) Equity
This type of transaction between a shareholder and the company occurs only once and takes place in the primary market. There are no further exchanges of stock and cash between the company and the shareholder, unless the company decides to issue more shares at a later date.
The man above has purchased 6 of the 9 shares. Because he owns more than half of the shares, he is a majority shareholder.
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Lesson 4 C. The Secondary Market
If shareholders wish to sell their shares and the company is listed on an exchange, they go to the stock market to find a new buyer for their shares. The buyer may pay more or less than the purchase price ($100 per share in the above example) depending on supply and demand. This buying and selling of shares takes place in the Secondary Market. Almost all activity in a stock market is in the Secondary Market. Trading in the secondary market does not affect the original company or the owners equity. Price is an agreed-upon value for the transaction. The bid is the highest price a buyer is willing to pay for a stock. In economics this is called demand. The ask is the lowest price a seller is willing to accept for his or her stock. In economics this is called supply. A stock price, therefore, is a manifestation of the law of supply and demand. When the demand for a stock exceeds the number of shares available at a particular price, the price of the stock increases. Conversely, when there is no demand for a stock at a particular price, the price falls. Buyers and sellers have different expectations about the value of a stock. An exchange occurs when buyers and sellers agree on a price. This is called a trade. As illustrated in these charts, the only individuals who could agree on a trade would be C and E. A and Bs bid prices are too low and F and Gs ask prices are too high. The market would therefore match C and E and an exchange would occur at $102. Bid and ask prices change from minute to minute as people react to news about the company, the industry, or the economy. Because stock values can change so quickly, investment in stocks involves an element of risk. Bid Buyer A B C Price $99 $100 $102 Ask Seller E F G Price $102 $103 $104 = Trade
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Lesson 4 D. The Trading Process
The stock exchange manages the trading process. It determines who may trade and which companys shares may trade. To help in compliance with trading and settlement rules, intermediaries or brokers are given access to the stock exchange so that they can represent buyers and sellers and execute the trades. The exchange also has rules about which firms may trade. Only brokers who work for qualified firms, called Participating Organizations, may access the exchange. Step 1 Order is placed with a broker at a TSX participating organization by phone, Internet, or in person. Step 2 Orders are matched electronically by the Exchange computer system. Step 3 When a match is found, the broker informs the client of the trade price plus the commission. Buyer's Broker Seller's Broker BUY Sell Bid Ask $102 $102 $100 $103 $99 $104 Every trade is monitored by trained Market Regulation Services staff to ensure the market is fair for all investors. The trade is recorded seconds after the brokers orders are transmitted.
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Lesson 4 E. Making the Trade
Once you have opened an account with a brokerage firm, you are able to place your order. Investors who are fairly knowledgeable and comfortable with making their own decisions on the stock market may choose discount brokers. A discount broker charges less commission (usually a flat rate) but does not offer investment advice. The full-service broker charges more commission, but provides investment advice, analyst reports, and research on companies. Commission varies depending on the broker and value of the trade, but is normally charged as a percentage of the trade. Placing an Order When you are ready to place an order, i.e., to purchase shares, the broker will ask a variety of questions such as: What stock do you want to purchase? How many shares? What price are you willing to pay? What type of order do you want to place?
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A day order expires at the end of the day. An at-the-market order specifies the number of shares to be bought or sold at the best price then available. A limit order specifies a maximum price for buying or a minimum price for selling.
The Settlement Process Once you have purchased shares of a stock, your broker will tell you how much you must pay for those shares, including the commission the firm charges for its service. You (the buyer) usually have three business days to make the payment. (Money markets generally allow only one day.) How is this done? The buyer ensures that his or her account has sufficient funds to cover the transaction. The buyers broker then forwards payment (less commission) to the brokerage firm of the seller, who forwards payment (less commission) to the seller. When payment is made, ownership of the stock is transferred from the seller to you, the buyer. The actual transfer of securities takes place through a central clearinghouse. In Canada, the Canadian Depository for Securities (CDS) performs the clearing and settlement function. Before computer-based trading, a share certificate was issued to the buyer, but now stocks are electronically added or deleted from a shareholders account. Role of the Transfer Agent The company whose stock you purchased appoints a trust company (transfer agent) to keep track of its shareholders who they are and where they live. This is important for sending out dividend payments and informing eligible shareholders of annual meetings and their right to vote.
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Lesson 4 F. How to Read Trading Information
A ticker tape is a record of current trading that occurs on a stock exchange. Once printed on paper, trades are now displayed on an electronic board. The information displayed includes the stock symbol, the number of shares traded, and the price for each share. Market information is also available (usually with a 15-minute delay) on most cable TV channels and web sites. The following questions show how to read trading information presented in various formats. Question 1 - How to Read Trading Information A trade is shown on the ticker as follows: XYZ10.18.25 a. b. c. d. What stock was traded? How many shares were traded? What was the price per share? What was the total value of the trade?
Solution 1 - How to Read Trading Information a. XYZ is the symbol associated with a particular company. b. The first number following the symbol denotes the number of shares that are traded. Shares over $1.00 in value trade in board lots of 100. The 10 following the symbol XYZ indicates that 10 board lots of 100, i.e., 1 000 shares were traded. (If the share price were less than $1.00, the board lots might be 500 or 1 000 shares) When the actual number of shares is given, the letter s is used to indicate this, e.g., 1 000s denotes 1 000 shares. c. The numbers following the number of shares traded is the price per share. The 18.25 that follows the 10 indicates that the price was $18.25 per share for the 1 000 shares. (Note that share prices of stocks on the TSX that are less than $0.50 trade in increments of half pennies, those $0.50 and up trade in increments of pennies.) d. The value of the 1 000 shares traded was 1 000 X $18.25 or $18 250. Stock Symbol Share price of the trade, $18.25
XYZ 10.18.25 Number of board lots traded Market by Order (MBO) Display Company whose shares are being traded XYZ 007 003 007 007 007 Firm Bidding Firm 700 6 000 4 500 5 000 6 500 Volume Number of Shares 10.75 10.70 10.55 10.50 10.35 Price Bid Price per Share 11.05 11.40 11.40 11.50 11.55 Price Ask Price per Share 4 500 7 700 4 700 1 200 400 Volume Number of Shares 077 099 077 003 099 Firm Asking Firm
A more convenient display for brokers is the Market-by-Order Display located on their trading terminal. The MBO screen lists 85
the best buy and sell orders for a particular stock. The diagram shows the five best (highest) bids and the five best (lowest) asks for company with stock symbol XYZ. This display is useful for both brokers and traders who are interested in knowing exactly how much of a specific stock is available and at what price. The best bid and ask prices shown in the MBO display may be shown on the ticker: XYZ 10.75 B 11.05 indicating that the highest bid on XYZ stock is $10.75 and the lowest ask is $11.05. Question 2 - Market by Order (MBO) Display Stocks are listed every day in the newspaper but many people find it hard to read a stock page. In the following worked example, we look at the trading activity for the Bank of Calgary stock. A newspaper displays the following trading information for May 26, 2000 on the Bank of Calgary. 1 Year High 60.60 2 Year Low 42.00 3 Stock B of C 4 Sym BC 5 High 59.95 6 Low 58.60 7 Close 59.80 8 Chg +.40 9 Vol 9560 10 Div 2.00 11 Yield 3.34 12 EPS 5.69 13 P/E 10.5
Explain the meaning of the number or symbol in each column as you move from left to right. Solution 2 - Market by Order (MBO) Display Columns 1 and 2 Year High, Year Low These are running numbers that show the highest ($60.60) and lowest ($42.00) price that the Bank of Calgary has traded at in the last 52 weeks. This gives an indication of the price ranges at which the stock has traded. Column 3 and 4 Stock, Symbol These columns give, respectively, the name of the stock and its symbol. Sometimes it is an abbreviation and you might have to look further to find the name. The stock symbol is uniform for Canadian markets and is used on tickers and other sources of market information. Columns 5, 6, and 7 High, Low, Close On this day the Bank of Calgary traded as high as $59.95 and as low as $58.60. The last trade of the day took place at $59.80 and is called the closing price. Column 8 and 9 Change, Volume Change is the difference between the close today May 26 and yesterdays close on May 25. +.40 means an increase of $0.40. ( -.40 would mean a decrease of $0.40.) Yesterdays close was $59.80 $0.40 = $59.40. The number of shares traded (volume) is expressed in 100s. This means that 956 000 shares of the Bank of Calgary were traded. Column 10 Dividend A dividend is the amount of profits that a Board of Directors has declared be paid per year on each share. Not all companies pay dividends. If a company pays a dividend it will be reported in this column. If it is blank then no dividend has been paid. The Bank of Calgary is paying each shareholder $2.00 per share. Column 11 Yield The yield is the dividend divided by the closing price of the stock $2.00/$59.80 = 3.34%. This is the measure of the return on an investment and is shown as a percentage. Column 12 Earnings Per Share (EPS) This is net profit divided by the number of shares. The Bank of Calgary earned $5.69 per share. Note shareholders receive $2 (the dividend) and the company retains $3.69. Column 13 Price Earnings Ratio (P/E) It is obtained by dividing the closing price of the stock by the earnings per share (59.80 / 5.69). This ratio measures the relationship between the earnings of the company and stock prices. The Bank of Calgary is selling at $10.50 per $1 of earnings per share. A P/E ratio of 170 would mean a stock is selling at $170 per $1 of earnings.
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Lesson 4 G. Using Stock Indexes to Read Market Trends
What Is a Market Index? When newscasters say, the Index closed up 20 points today at 8 702, what do they mean? Although the numbers in an index report sound complex, the idea behind the index is very simple. An index is a way of measuring how a market is doing and where it is going. For example, the S&P/TSX Composite Index1 includes companies that have broad economic sector coverage. So if you hear the index went up on a particular day, you know that most of those stocks rose in price that day, or a few heavily weighted stocks rose significantly. Why Watch the Index? Indexes are useful in many ways. You can look at how an index did over the past year in order to determine historical patterns. A long period in which the index increases is called a bull market, while a falling index indicates a bear market. An index can help you see how well a stock is doing compared to other similar stocks. For example, if XYZ Inc. on the TSX dropped by $20 during a period when the S&P/TSX Composite moved higher, it may be worth investigating the reason for the stock price movements. Variations of prices are statistically measured over a period of time, commonly referred to as volatility. Other TSX Indexes The S&P/TSX 60 Index was launched on December 31, 1998. It is a large capitalization index for Canadian equity markets. S&P/TSX 60 constituents are selected for inclusion using Standard & Poors guidelines for evaluating company capitalization, liquidity and fundamentals. Companies themselves play no role in the selection process and are not consulted regarding their inclusion in the index. Index Based Products Indexes have become so important that there are now investment products based on them; for example, i60 units2 (symbol XIU). i60 units allow you to buy a piece of 60 stocks in the S&P/TSX 60 in one trade. This helps investors diversify their stock portfolio easily and inexpensively. Because they are based on an index, i60 units allow you to participate in the performance of the various segments of the Toronto Stock Exchange. BULL MARKETS - are associated with rising stock prices and higher stock indexes. BEAR MARKETS - are associated with falling stock prices and lower stock indexes. Exercise - Using Stock Indexes to Read Market Trends Index S&P/TSX Composite Close 8 473.51 Net Chg 491.90 % Chg 5.49 52wk high 10 176.60 52wk low 6 717.51 Volume 205 000 000
1. Turn to the financial section of yesterdays issue of a local newspaper. Look for the TSX listings to see the list of stocks and the quotes. Find the following information: H the S&P/TSX Composite at the close of the previous day. H the change in the index over the day before yesterday. H the % change in the index. H the high and low values of the S&P/TSX Composite over the past 52 weeks. H the spread in the S&P/TSX Composite in the past 52 weeks. 2. Use the information you recorded in Exercise 1 to determine whether the S&P/TSX Composite is now closer to its high point or low point for the past year. Do you think the S&P/TSX Composite will rise over the next few months? Give reasons for your answer.
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3. Look for a table in your newspaper that lists the most active stocks. What do you think is meant by most active? Write the name of the most active stock on the TSX yesterday. How many shares of that stock were traded? Do you know why that stock was so heavily traded? If so, explain. 4. Since the price of a stock can fluctuate, changes in the value of the investment are called capital gains or capital losses, depending on whether the value has increased or decreased. Look for a table in your newspaper listing the biggest % gainers and losers on the TSX. Record the name of the company that was the biggest % gainer. If you owned $100 000 of that stock at the market opening yesterday, what would be the value of your $100 000 investment at the end of the day? How much of a capital gain would you have made? 5. Look for a table in your newspaper that lists the biggest net gainers and losers on the TSX. Record the name of the company that was the biggest net loser. If you owned 10 000 shares of that stock at the market opening yesterday, how much of a capital loss would you have sustained on that stock by the end of the day? Internet Exploration
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Access the TSX home page at http://www.tsx.ca Select site map from the menu along the top of the home page. Then select closing summary. Locate the tables showing the most active stocks, the top advances and declines and the biggest % gainers and losers. Does the data match what you found in the newspaper? Explain why or why not.
1 S&P is a trademark of The McGraw Hill Companies, Inc. 2 i60 units are created by Barclays Global Investors Canada Limited.
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Lesson 4 H. Using Data to Analyse a Particular Stock
There are two factors to be determined in the calculation of the potential yield of an investment. The first is the amount of any payment that comes from owning the investment. This would include interest payments, dividends, royalties, and profit-sharing arrangements. The second is whether or not the value of the principal has changed. The original amount you put into an investment is called the principal. If the amount of the principal is guaranteed and will not decrease or increase, you have a safe investment. A bank account is an example of a safe investment, as the amount of the principal will neither increase nor decrease over time. If the amount of the principal can increase or decrease then that investment has greater risk. The following worked example shows how we calculate the yield on a stock. Question 3 - Using Data to Analyse a Particular Stock On May 1, 2000, Sarah paid $10 per share for a board lot of Bank of Calgary. She used a discount broker who charged her a $25 commission. She held the stocks until November 30, 2000 when she sold all her shares for $11.20 per share. This time she used a full service broker who charged her $83.43 for her trade. She received one dividend payment of $0.58 per share in July. How much money did she make on the stock? What was her percentage return on her investment? Solution 3 - Using Data to Analyse a Particular Stock Sarah Paid on May 1: 100 shares @ $10/share = $ 1 000.00 Commission on purchase = $ 25.00 Total Paid = $ 1 025.00 Sarah Received on Nov 30: 100 shares @ $11.20/share = $ 1 120.00 58.00 Dividend on 100 shares @ $0.58 = $ $ 1 178.00 Total received 83.43 Less commission on the sale $ $ 1 094.57 Net received Amount Sarah made: Net received = $ 1 094.57 Minus amount paid $ 1 025.00 69.57 Total made = $ Sarahs yield as a percent of her investment is: $69.57 / $1 025.00 X 100% = 6.78%. That is, Sarah made a 6.78% return in a period of 7 months from May 1 to November 30. On an annual basis, this is equivalent to 6.78% X 12/7 or about 11.6% per annum. Internet Activity Use the worksheet below to complete this Activity. 1. Choose a Company to Investigate. Use the stock page in a newspaper to identify at least two or three companies to investigate that are listed on the TSX. Investigate one company only; the others are alternatives in case there is not enough information for the original choice. Remember to look in the most active or greatest change sections to identify currently popular stocks. You can leaf through the financial section of your newspaper to find stories on companies you might investigate. Your parent(s) or another adult may have information and can recommend a company. 2. Preliminary Research 89 Record all the information you can find about the stock, including its name and symbol. Include highs, lows, and
volume. Indicate from your research whether you think this company is a good investment and support your opinion with information gleaned from your research. 3. Web site Go to the web site http://www.tsx.ca 4. Financial Snapshot Go to the box beside Get Quote and type in the stock symbol. Click Get Quote to continue. Notice that if you have forgotten the symbol, there is a link to help you search for the symbol. Under Detailed View investigate 4 links and make notes as you investigate. a. Company Information Use this link to find out three or four facts about the company and its products. Get a sense of what this company is all about. Note, you might have to go back through the screens. Look at the annual reports for important information about the companys future plans. b. Company Snapshot Use this link to find three or four key financial facts about this company, such as sales (revenue), profits, and total assets. Remember to record the name of the industry for this company and the names of its top competitors. c. Price History Look at the price and try to describe the trend. Is the trend of price and volume upward, downward, stable or volatile? What evidence supports this? d. Charts The charts cover the same material as the price history but contain a variety of time periods. Look at them and try to identify any trends you see about price and volume of this stock. Offer some support for your conclusion. e. Other Sources Use a search engine to find other information about this company. Write down the URL to use as the reference for what you found. 5. Comparison Report Brainstorm in class and find some of the areas of information that most people found, e.g., stock price, high and low, revenue, industry, number of employees, head office location. With a partner, prepare a similarities and differences report about the companies you found, based on some of the criteria developed in class. Using Data to Analyse a Particular Stock - Worksheet 1. The company Ive chosen to investigate is ________________________________________________ 2. Information about the company (highs, lows, symbol, volume). Is this company a good investment? Why? _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ 3. Web site - http://www.tsx.ca List facts about the company and its products. _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ 4. Financial Snapshot List the companys sales, profits/losses, total assets. Industry___________________________________________________________________________ Competitors _______________________________________________________________________ 5. Price History Describe the trend; include evidence. _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________
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6. Charts What trends have you identified? Offer support for your conclusion. _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ 7. Other Sources (URLs) _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ Partner __________________________________________________________________________ Partners company _________________________________________________________________ Compare and contrast your companies _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________
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Lesson 4 Exercises
Below is stock market information on 5 stocks and a brief description of each company Active Cell is a software company producing Internet interface products for small businesses that want to start an e-commerce branch. It has been in business since 1998. Lava Auto is an auto parts company manufacturing low pollution devices for North American cars. Can Wear is a retail store specializing in Canadian and Native products. It is beginning to open new stores in Europe where the interest in native products is high. Nickel Mine is an integrated mining operation in northern Ontario producing primarily nickel and zinc. Bank of Calgary is a diversified financial institution comprising two units: the personal and commercial bank, which provides financial services for small businesses and farms; and Calgary Oil Funds, which serves investors. The financial page of the newspaper gives the following market information on May 1. 52Wk 52Wk High 125 67.2 42.3 87.5 48.4 Low Stock Symbol ACT BC CW LAC NMW.PR High 123.45 59.10 14.5 74.5 47.5 Low 120.50 58.75 14.25 73.65 47.25 Close 122.8 59.0 14.4 74.1 47.3 Chg 1.50 0.20 -0.10 0.20 0.15 Vol 100s 4 500 1 500 26 000 6 500 3 600 $2.25 $0.02 $1.80 $3.20 3.81 0.14 2.43 6.77 Div Yield EPS -$0.20 $4.69 $0.10 $2.20 12.6 151.6 33.7 P/E
22.5 Active Cell 54.5 B of C 12.5 Can Wear 45.6 Lava Auto 43.5 Nickel Mine
52Wk 52Wk High 4 032.70 2 779.67 9 632.80 1 336.9 14 256.09 Low 3 703.60 Mining 1 240.00 Tech Software 8 455.00 Banks & Trusts 803.00 Household Goods 12 383.00 Auto Parts Index High 3 422.05 2 748.67 8 558.00 996.85 13 296.85 Low 3 410.50 2 743.29 8 553.45 991.78 13 191.78 Close 3 421.05 2 747.56 8 557.38 994.50 12 294.50 Chg +39.17 +22.10 +12.14 -9.78 +2.78 Vol 1 166 374 1 688 988 2 185 596 27 008 1 56 983
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Most Active Issues Stocks NS Tell Can Wear Kitchenin Sym NTE CW KLT Volume 292 777 290 648 281 531 Close 23.05 14.40 78.50 Chg +0.40 -0.10 +0.10
Biggest % Gainers Gainers Active Regal Catso Sym ACT TML COB Volume 31 150 851 283 4 000 Close 122.80 7.00 0.12 Chg +23 +21 +20
Biggest % Losers Losers CTS Inc Evergreen Batch Sym CTS ECG.A CoBTC Volume 30 000 27 150 45 000 Close 0.23 1.80 0.25 Chg -35 -26 -25
1. In addition to the information in the newspaper, there is a partial ticker. CW 14.20B14.60 NMW.PR 5.47.45 BC 3.59.10 BC 4.58.95
CW 14.30B14.60
Based on all the information given, answer the following questions: a. What stock has the symbol CW? b. What is the closing price for Lava Auto? c. If you bought 100 shares of Nickel Mine at the closing price how much money would you spend? d. What profits would you have made if you bought 100 shares of Active Cell at its lowest price for the whole year and sold it at its close today? e. What price did the Bank of Calgary close at yesterday? f. What number of shares of Lava Auto was sold? g. If Can Wears trades were all trades involving one board lot, how many trades were there? h. What stock has the highest dividend yield? i. What is the lowest P/E ratio? j. What was the most active stock on the exchange? k. What stock decreased the most in price on the exchange? l. Which index was the most active? m. Did the change on the ticker for Can Wear indicate more or less demand? n. What is significant about one of the trades for the Bank of Calgary? 2. You have $60 000. You can buy any combination of the five stocks on the stock page. Commissions are set at $29 a trade. You must buy at least one board lot. You can choose to keep any cash in a treasury bill, which has an interest rate of 3.5% annually. Submit to your teacher a well-organized summary of what you have done showing all costs and how you used the $60 000. Internet Exploration Your teacher will provide you with the closing prices and the dividends for all five of the stocks as of December 31. When you have this information, calculate how much you have earned on paper for your portfolio. Show all work. How do you calculate broker commissions? Visit the web site below to discover how to calculate the commissions a broker charges on a stock transaction. http://www.tdwaterhouse.ca/services/fcschedule.jsp
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1. In addition to the information in the newspaper, there is a partial ticker. CW 14.20B14.60 NMW.PR 5.47.45 BC 3.59.10 BC 4.58.95 CW 14.30B14.60
Based on all the information given, answer the following questions: a. What stock has the symbol CW? Can Wear b. What is the closing price for Lava Auto? $74.10 c. If you bought 100 shares of Nickel Mine at the closing price how much money would you spend? $4 730.00 d. What profits would you have made if you bought 100 shares of Active Cell at its lowest price for the whole year and sold it at its close today? $10 030.00 e. What price did the Bank of Calgary close at yesterday? $59.00 f. What number of shares of Lava Auto was sold? 650 000 g. If Can Wears trades were all trades involving one board lot, how many trades were there? 26 000 h. What stock has the highest dividend yield? Nickel Mine i. What is the lowest P/E ratio? 12.6 of B of C j. What was the most active stock on the exchange? NS Tell k. What stock decreased the most in price on the exchange? CTS Inc. l. Which index was the most active? Banks and Trusts m. Did the change on the ticker for Can Wear indicate more or less demand? More n. What is significant about one of the trades for the Bank of Calgary? Price change of $0.15 2. Answers to Exercise 2 and Internet Exploration will vary.
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Misconception / Concept
Five main concepts underlie the material found in lesson 4. Sometimes people have misconceptions about the stock market and its processes. This activity is designed to help clarify. After you have learned the material in lesson four, see if you can identify the concept vs the misconception by writing "Mis" or "Con" on the lines below. _____ You can visit TSX and see trading taking place on the floor of the Exchange. _____ There is no trading floor at the TSX. Trading occurs in cyberspace. _____ Stockbrokers handle all aspects of stock trading. _____ Stock exchanges manage trading, while stockbrokers carry out the trade. _____ Stock prices are determined by the law of supply and demand. _____ Stock prices are set by companies and regulated by the government. _____ Most trading occurs among investors in secondary markets. _____ Most trading occurs among corporations and investors in primary markets. _____ Insider trading is illegal. _____ Insider trading is legal in some circumstances, but it must be reported.
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Worksheet 2: Investment Goal(s)*

*Goals: Short term one year, medium term one to three years, long term more than three years. 1. Read Step 2: Investment Goals and write the definitions for the following terms. Risk: _____________________________________________________________ Time Frame:___________________________________________________ _____________________________________________________________ Return: _______________________________________________________ _____________________________________________________________ Liquidity: ______________________________________________________ _____________________________________________________________ Inflation:_______________________________________________________ _____________________________________________________________ Diversification: _________________________________________________ _____________________________________________________________ 2. Describe your clients prime investment goal in the space below. (See page 2 of this worksheet for a web site and questions for your team to think about.) a. Goal, e.g., Further education, retirement
b. Dollar value of goal (*Note: You will need to use the Education or Retirement Calculator from the Planning Tools for Education and Retirement Goals Exploratory Activity). c. Anticipated investment/savings per month or year towards goal
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Worksheet 2: Investment Goal(s) Cont'd Detailed questions to ask in your investment team discussions to assist with your investment plan (Source IFIC Investment Funds Institute of Canada Web site www.ific.ca) 1. What are the client's objectives? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 2. How much risk is the client comfortable with and why? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 3. What are the client's up-coming financial needs, and goals, when will they need money to meet or achieve these needs/goals? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 4. How much does the client have to invest? Do you know how much money can be invested on a monthly or yearly basis? Will the client be adding to their portfolio each year? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 5. What are the client's current investments? How much are they worth? What is the client's family situation? How much money do they require each month to maintain their standard of living? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 6. If relevant, when do they plan to retire? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________
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Exploratory Activity Step 2: Planning Tools for Education and Retirement Goals
Your client has a specific goal; either educational or retirement. These sites are organized into educational and retirement goals so you can choose the sites that match your clients goals. Educational Goals TD Canada Trust operates an Educational Planner site that can be used by students. There are many web sites with education planning tools to help you calculate the amount of money your client will need to go to college or university. Try this test first to determine how much money your client will require. Remember to plan and record your approach. Lives at Home Estimated Total Future Cost Additional Future Savings Requirements Amount Needed to Be Saved Monthly TD Canada Trust (Planning page): http://www.tdcanadatrust.com/planning/goal_planner.jsp Bank of Montreal (Intuition page): http://www4.bmo.com/personal/0,4344,35649_36907,00.html Human Resources Development Canada (Canada Education Savings Grant): http://www.hrsdc.gc.ca/en/gateways/nav/top_nav/program/cesg.shtml Retirement Goals Many online calculators ask you for information you may not know because you are not working yet or they may use terms you dont understand, such as defined pension plan benefit. You might have to do some research before you use the calculator. In either case, record the results of your research and your assumptions. See also the caveat about online calculators in Step 2 Investment Goals. Some sites that you will find easy to use are: Scotiabank Reality Check: http://www.scotiabank.com/cda/content/0,1608,CID5239_LIDen,00.html Canada Trust: http://www.tdcanadatrust.com/planning/rrsp_planning.jsp Government of Canada ( Canada Pension Plan and Old Age Security). http://www.sdc.gc.ca/en/gateways/topics/rzp-gxr.shtml The key question is always how much money you need to save weekly, monthly, or yearly to achieve these goals. Lives Away
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Step 3: Asset Allocation Model
Asset allocation is the method used to divide a portfolio into different classes of investment. This allocation should reflect the investor personality of the client. There is a poster from the Canadian Securities Administrators titled, Characteristics of Various Types of Securities, available from the securities commission in your province. Asset Allocation Categories - Decreasing Risk, Increasing Potential Return Decreasing Risk Increasing Potential Return Options High Yield Bonds Precious Metals or Gems Aggressive Growth Stocks Emerging Markets Mutual Funds Collectibles, Antiques, Stamps Small-Cap Stocks Real Estate Futures Growth Stocks Growth Mutual Funds Preferred and Utility Stocks Blue Chip or Quality Growth Stocks Preferred Shares Common Shares
Speculative A riskier form of equity investment. Equity These assets, e.g., stocks and mutual funds, can grow in value but may not pay dividends. Though risky over the short term, they have greater long-term potential. Fixed Income These generally offer higher returns than cash and savings accounts. They provide a source of regular investment income, which remains the same over time ("fixed"). Examples are term deposits, GICs, bonds and income mutual funds.
Strip Bonds Commercial Paper Bond Mutual Funds Bankers' Acceptances Short-Term IOUs Issued by Corporations Corporate Bonds & Debentures Canada Savings Bonds Government Bonds Corporate Bonds Cash and Cash Equivalents Current and Savings Accounts Money Market Funds Treasury Bills Insurance
Cash & Cash Equivalents These are assets that can be made accessible at any time ("liquid"). This is generally the safest category of investment, but it produces the lowest returns. Examples are savings accounts, treasury bills, and money market mutual funds.
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Worksheet 3: Asset Allocation Model

Goals: Short term one year Medium term one to three years long term more than three years
Names Of Investment Team Group Members: ____________________________________ _________________________________________________________________________ 1. Read "Step 3 - Asset Allocation Model" then define the following asset allocation categories and give three examples of each: a. Cash and Cash Equivalents ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ b. Fixed Income ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ c. Equity ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ d. Speculative ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ 2. Discuss and describe an asset allocation mix which is suitable for your clients personality profile and investment goal(s). Consider risk and return carefully. Use the back if more room is required.
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Terms Students Will Learn in this Lesson
G G G G G G G G G
Asset Allocation Deflation Mutual Fund Cash Diversification Portfolio CPI Inflation Risk Tolerance
Instructional Strategies This lesson is divided into six sections. A. B. C. D. E. F. The Risks & Safeguards in Stock Trading Economic Factors That Affect Stock Prices Using Data & Statistics to Assess Economic Trends: Measuring Inflation Using Data & Statistics to Assess Economic Trends: Measuring the Economy Researching the Economic Indicators Promoting a Fair and Equitable Market Instructional Steps 1 2 Make a transparency of A. Risks and Safeguards of Stock Trading Ask students, in pairs, to brainstorm reasons for stock market corrections. Record their answers when you ask for reasons from the whole class. Some reasons include statistics that suggest inflationary or deflationary trends, such as changes in the consumer price index, bank rate, currency exchange rates, gross domestic product, or percentage unemployment. 3 Ask students to explain the concepts of inflation and deflation. They may need to search for these terms on the Internet or in the library. Students should work in pairs and use B. Economic Factors That Affect Stock Prices as a guide. Describe gross domestic product and complete Question 1 from Using Data & Statistics to Assess Economic Trends: Measuring Inflation. Show students how they can relate prices and expenses in 1995 to those in 1970 using a chain rule as shown in the work below. Prices in 1995 = Prices in 1995* Prices in 1992* Prices in 1970 = 104.2%* 1/24.2%* Prices in 1970
5 6
In pairs, ask students to complete Question 1 - Researching the Economic Indicators. Invite some students to give a report to the class. Ask students to identify various regulations that apply to each situation.
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Use the answers from Question 2 - Promoting a Fair and Equitable Market to assess the student reports. Check out new web sites that could be used to teach this activity. What follow-up homework assignments would reinforce this concept?
Teacher Notes The latest economic indicators can be found at the Statistics Canada web site at: http://www.statcan.ca Use this opportunity to explore some of the new terminology associated with the concept of fair and equitable markets. It is important to help students understand that all investments involve risk and that stock markets fluctuate. Students must also learn that stock exchanges like the TSX monitor the trading process to promote fair and equitable trading practises. The concepts in the first three sections should be developed through class discussion.
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Lesson 5 A. The Risks & Safeguards in Stock Trading
On October 19, 1987 (referred to as Black Monday), the New York stock market plunged 22.6%. This means that investments in equities on that market fell on average by almost one-quarter of their value. (On the TSX the drop was just under 12%.) Imagine losing several years worth of income in a single day! Many people panicked, fearing that the market would continue to tumble and that they would lose almost all of their savings. Others saw this as a market correction and an opportunity to buy stocks at bargain prices. The news clip below describes a more recent single-day decline in stock values on October 27, 1997, when stocks on the TSX fell by about 6%. More recently, the markets saw another correction on April 14, 2000 when stocks on the technology-based Nasdaq market sustained one of the greatest single day losses in its history. With such risks, why would anyone invest money in equities? Between these dramatic downturns in the market, there were sustained periods of steady and sometimes explosive growth in stock values. Most investors who bought stocks during the past decade have enjoyed annual growth rates that significantly exceed the rates of return on cash or fixed income securities. In fact the S&P/TSX Composite Index was just under 3 000 in 1985, approached 5 000 in 1995 and passed the 10 000 mark just five years later in the year 2000. Thats a doubling of value in the last five years! Check the newspaper or www.tsx.ca for the latest index levels. The investor must be aware of the potential risks in equity investment. Two of the many factors causing fluctuations in equity markets are the fear of inflation and its opposite, deflation. Hope for the best, prepare for the worst.
Marty Zweig (His newsletter advised investors to sell stocks just before Black Monday.)
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Lesson 5 B. Economic Factors That Affect Stock Prices
Inflation A period of inflation is a time when costs are rising faster than productivity. The rising prices decrease the purchasing power of a dollar, meaning that a dollar does not buy as much as it did before. To prevent inflation from growing too quickly, the Bank of Canada raises the rate of interest that it charges banks for the money it lends them. Commercial banks raise interest rates on their loans to compensate for the greater interest that they must pay the Bank of Canada. Since many companies carry large loans to finance their operations, the higher interest reduces their profitability and hence their desirability as investments. Usually the demand for these stocks decreases and the stock market falls. This prompts many investors to sell their stocks and buy treasury bills or bonds to take advantage of the higher rates of return and protect against the risk of losses in the stock market. Decisions by the Bank of Canada to stabilize or stimulate the Canadian economy by raising or lowering interest rates is known as monetary policy. In 1923, inflation in Germany turned into hyperinflation and prices rose so quickly that restaurant patrons would ask for the bill before receiving their meal because the price was rising while they ate! As a result the German currency (called the mark) became virtually worthless. The United States and Canada have never suffered hyperinflation, but did sustain significant inflation in the 1970s and 1980s. Deflation As noted above, the Bank of Canada may raise interest rates to slow down the rate of inflation. A substantial increase in interest rates by the Bank of Canada is referred to as a tight monetary policy. If a tight monetary policy is in effect for a prolonged period, it could induce a period of deflation. Deflation is the economic opposite of inflation. It is a time when the cost of goods and services is decreasing, that is, the purchasing power of a dollar is increasing. The high interest rates discourage borrowing and reduce the demand for credit to expand business. Furthermore, people anticipating further decreases in prices postpone purchases and economic activity begins to slow. (Economists call this the Mundell effect.) One of the worst periods of deflation occurred in the period from 1929 to 1939, called the Great Depression. The causes of the Great Depression are complex. However, there is some consensus among economists that tight monetary policy was a principal factor. The ensuing drop in investment was signaled by the crash of the New York stock market in the fall of 1929. The Market Is Bearish When
G
The Market Is Bullish When

G
there is general pessimism about the health of the economy. the prices of stocks are falling.
there is general optimism about the health of the economy. the prices of stocks are rising.
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Diversification One way to reduce investment risk is to invest in a variety of stocks that may span several market sectors, such as utilities, natural resources, technology, or financial services. In this way, any capital losses sustained by stocks in one sector may be partially or fully offset by capital gains of stocks in another sector. Such hedging of investments is called diversification. One investment vehicle that facilitates diversification is the mutual fund. A mutual fund is a collection of investments such as stocks, bonds, or cash equivalents (investment that easily can be changed into cash) that can be purchased as a single entity. Some mutual funds provide diversification across sectors, while others provide diversification across international markets.
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Lesson 5 C. Using Data & Statistics to Assess Economic Trends: Measuring Inflation
Analysts and investors use economic data and statistics to anticipate the risks of inflation, deflation, and interest rate changes that may cause fluctuations in the market and the values of various types of investments. These data, called economic indicators, are issued by Statistics Canada on a regular basis and are available at their web site at: www.statcan.ca. Among the most widely used economic indicators are the consumer price index (CPI), the gross domestic product (GDP), the unemployment rate, the prime rate, the currency exchange rates, and housing starts. Consumer Price Index (CPI) The consumer price index is used to measure inflation in the prices of goods and services to Canadians. It is obtained by comparing the cost of a fixed basket of goods and services purchased by Canadians in that year compared to the cost of the same items in 1992. (Observe that 1992 is currently used as the comparison year by Statistics Canada, but this is subject to change.) The CPI is a measure of price change and is useful in detecting levels of inflation and its reciprocal, the purchasing power of a Canadian dollar. The table shows the CPI in Canada every five years from 1970 to 2000 relative to 1992. The entry 24.2 opposite 1970 in the table indicates that on average the purchasing power of a Canadian dollar in 1992 was only 24.2% of its purchasing power in 1970. Alternatively, we can say that prices of goods and services to Canadian consumers in 1970 were only 24.2% of the prices in 1992 for a comparable basket of goods and services. The example that follows shows how we can use the CPI to compare monetary amounts from different years in terms of their real values.
Measuring Inflation Year 1970 1975 1980 1985 1990 1995 2000 CPI 24.2 34.5 52.4 75.0 93.3 104.2 113.5
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Purchasing power can also be used to compare the currencies of different countries. The Economist magazine created the Big Mac Index. This index compares the price of a Big Mac in the United States with its cost in another country. Assuming the cost in both countries represents the same value enables us to calculate what the currency conversion should be. For example, a Big Mac in the United States costs about $US 2.44. The graph shows that in Brazil it costs about $US 1.61 when the actual exchange rate used is $US 1.00 = 1.84 real (Brazilian currency). However, if we assume that the Big Mac has the same value in both countries, then the value of the burger in Brazil should be $US 2.44, not $US 1.61. That is, the Brazilian currency is exchanged at only 1.61/2.44 or about 66% of its true value. In other words the Brazilian currency is undervalued by about 34%. Research the cost of a Big Mac in your area and assume its close to the average Big Mac cost in Canada. Then calculate the Big Mac Index for Canada and compare this with the current exchange rate. Does the Big Mac Index suggest that the Canadian dollar is overvalued or undervalued?
The Economist, January 8 14, 2000, page 100
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Lesson 5 D. Using Data & Statistics to Assess Economic Trends: Measuring the Economy
Question 1 - Using Data & Statistics to Assess Economic Trends: Measuring the Economy A family of four had an income of $18 500 in 1970. a. Approximately what income would they need in 1995 to have the same standard of living? b. If their living expenses increased from $14 750 in 1970 to $67 800, by what percent did their expenditures increase in real terms? Solution - Using Data & Statistics to Assess Economic Trends: Measuring the Economy a. From the CPI table, we see that prices in 1995 were 104.2% of 1992 prices and 1992 prices were 1/24.2% of prices in 1970. That is, 104.2% Prices in 1995 = x Prices in 1970 24.2% = 4.305785 x Prices in 1970 Therefore the income needed in 1995 would be 4.305785 x $18 500 or $79 657.02 b. Living expenses of $14 750 in 1995 dollars are 4.305785 x $14 750 or $63 510.33. Their living expenses have increased by a factor of 67 800 / 63 510.33 = 1.0675 or 6.75% in real terms. Gross Domestic Product (GDP) The Consumer Price Index tells us how much prices have increased relative to any particular year, but it does not tell us whether the economy is robust and productive or whether it is sluggish and unproductive. One of the measures used to assess the health of the economy is the gross domestic product (GDP). This is the total value of all the goods and services produced in Canada. However, as observed above, the purchasing power of the dollar changes from year to year, so the GDP obtained in any particular year must be converted to a constant-dollar GDP before it can be compared to the GDP in another year. The conversion factor used is called a GDP price deflator and it is used much like the CPI was used in the Worked Example above to compare different years. The table shows Canadas GDP indexes for the years 1992 through 1999 (expressed in constant 1992 dollars) and relative to the GDP in 1992. A total GDP growth of between 2.0% and 2.5% is generally considered consistent with a stable economy when there is full employment, i.e., 94.0% to 94.5%. It is believed that a higher growth rate than this in the GDP indicates the threat of inflation, while a significantly lower growth rate in the GDP is consistent with a weak or stagnant economy.
Year 1992 1993 1994 1995 1996 1997 1998 1999
GDP in $billions 1992 = 100 100.0 101.8 103.8 105.0 106.6 107.5 106.9 108.7
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Lesson 5 E. Researching the Economic Indicators
GDP Question 2 - Researching the Economic Indicators Financial Post Saturday, June 3, 2000 THIS WEEK IN MONEY Economy Hits the Trillion Mark - BY PAUL VIEIRA Canada has entered an exclusive field the trilliondollar economy club. Statistics Canada reported this week that the countrys gross domestic product (GDP) exceeded $1-trillion for the first time with growth of a solid 1.2% in the first quarter of this year. Continuing export demands and strong growth in the domestic economy helped fuel the advance. GDP in March rose 0.7% after receding in February for the first time following 18 months of continuous growth. All of the economys main industrial sectors advanced, except utilities and health services, Stats Can said. Over the first quarter, exports grew 3.3%, business plant and equipment investment rose 2.7%, while personal income increased 1.4%. Statistics Canada is the main source for most economic data about Canada. (See the Financial Post article below.) Visit their home page at http://www.statcan.ca and proceed as outlined below. 1. Working with a partner, select from this home page Canadian Statistics Menu > Economic conditions > Prices > Consumer Price Index, historical summary. Record the CPI all-items index for 2002. What does this number mean? 2. Then access: > National accounts > Gross domestic product, expenditure-based Record the GDP at market prices for the year 2002. Use the CPI obtained in Exercise 1 to estimate the GDP at market prices in 1992 dollars. 3. Go back, then: > National accounts > Gross domestic product at 2002 prices (expenditure-based) Record the GDP at market prices in 1992 dollars for the year 2002. Compare this number with your estimate in 2. Is your estimate close to the actual value? Explain why or why not. 4. Study the GDP at market prices in 1992 dollars for the years 1999-2002. In what year did the GDP increase the most as a percentage of the previous year? Explain what this means in terms of the economy during that year. Employment 5. Go back to economic conditions, then: > Labour market > Labour force, Characteristics. In what year between 1999 and 2002 was the unemployment rate the lowest? What does this suggest about the Canadian economy in that year? 6. What was the employment to population ratio in 1999? Can we calculate the employment to population ratio by dividing the number of employed people by the population of Canada? Explain why or why not.
Money Supply 7. Go back to economic conditions, then: >Money market >Exchange rates, interest rates, money supply and stock prices. To preserve the value of Canadian currency, the Bank of Canada sets a monetary policy that attempts to keep inflation within the 1 to 3 percent range (as measured by the CPI). One of the factors that the Bank of Canada uses to assess potential inflation is the money supply. Roughly speaking, this is the amount of Canadian money in circulation. Two of the most useful measures of the money supply are M1 and M2 defined as follows: M1 is the total value of the currency in circulation (i.e., outside the banks) plus the total demand deposits in banks.
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M2 is M1 plus the values of all savings accounts and term deposits in banks. Record the values M1 and M2 for the years 19982002. Was the money supply increasing significantly during this period? Do you think this was an inflationary period? Give reasons for your answers. 8. The Bank of Canada web site at www.bankofcanada.ca/en/backgrounders/bg-m2.htm, states: The Banks economic research indicates that the growth of M1 provides useful information on the future level of production in the economy. The growth of the broader monetary aggregates, e.g., M2 is a good leading indicator of the rate of inflation. No growth in the money supply is consistent with modest growth or deflation, while strong growth in the money supply might suggest impending price inflation. Study the interest rates for the years 1998 2002. Do the interest rates suggest an inflationary trend during those five years? Does your conclusion agree with your conclusion in Exercise 7? Explain. For more information on the money supply, you might wish to visit The Royal Canadian Mint web site at http://www.rcmint.ca/en/
January 2000
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Lesson 5 F. Promoting a Fair and Equitable Market
Who Regulates the Stock Markets? Whenever significant amounts of capital are involved, there is opportunity for a variety of abuses. In Canada, provincial and territorial authorities regulate the securities industry to promote capital markets that are fair, efficient and free of improper practices. The Ontario Securities Commission (OSC) administers Ontarios securities legislation. The OSC is also a member of the Canadian Securities Administrators (CSA). The CSA is a council of securities regulators from the ten provinces and three territories. The regulators share a common mandate for investor protection. Securities regulators oversee Canadas stock exchanges, self-regulatory organizations (SROs) and industry practitioners such as mutual fund dealers or financial advisers. Based on mutual reliance among its members, the CSA is streamlining its administration of rules and regulations to ensure a more efficient capital market, improve harmonization of requirements to disclosure, and support a fair and equitable marketplace. Where Is Important Company Information Found? CSA sponsored initiatives include the System for Electronic Document Analysis and Retrieval (SEDAR) and the System for Electronic Data on Insiders (SEDI). SEDAR is an online database of documents filed with securities regulators and provides information on all publicly-traded companies in Canada, including annual reports, financial statements, news releases, and company prospectuses. SEDAR also profiles more than 6 500 companies and mutual funds, and is available free of charge to the public at www.sedar.com. SEDI provides information to the market about the trading activities of those who manage or control issuers. It also serves to deter insiders (a director or senior officer of a reporting issuer, or company, with more than 10% direct or indirect voting authority) from trading based on confidential information. SEDI improves public access to insider reports by making such reports available on www.sedi.ca. Who Administers the Regulations? An important part of the regulatory framework is the role fulfilled by self-regulatory organizations. The Investment Dealers Association (IDA), www.ida.ca, was established in 1916 and was recognized as an SRO in 1995. In 2001, The Mutual Fund Dealers Association (MFDA), www.mfda.ca, was established as the SRO for the mutual fund industry. Under the Securities Act in Ontario, the OSC may recognize an SRO if it is satisfied that doing so would be in the public interest. This allows the SRO to regulate the standards of practice and business conduct of its members and their representatives in accordance with its bylaws, rules, regulations and policies. Trading on the TSX is regulated by Market Regulation Services. As a recognized stock exchange, the TSX has been delegated powers by the OSC to monitor brokers who have access to the Exchanges trading system. All participating organizations must follow the rules and policies governing the trading of securities listed on the TSX. In addition, all companies listed on the TSX must satisfy specific requirements established by the TSX. Question 2 - Promoting a Fair and Equitable Market To explore safeguards employed by these organizations, visit Market Regulation Services at http://www.regulationservices.com and the OSCs Insider Reporting in Ontario at the OSC web site: http://www.osc.gov.on.ca/en/About/Publications/insider_reporting_in_ontario_may199.html. Then write a report to answer each of the questions below. 1. When a mining company discovers a rich new source of minerals or a business negotiates in secret a profitable merger, the companys officers and directors have this privileged information before the public. In markets that are not regulated, 111 these insiders have the opportunity to profit by purchasing large numbers of shares below their actual value. Profiting
from such information by either buying or selling stock is called insider trading. What measures do market regulators such as Market Regulation Services and OSC take to ensure that such insider trading does not occur? 2. If a company employs senior officials whose decisions drive the company into bankruptcy, thousands of investors could lose their life savings. What safeguards are in place at the Toronto Stock Exchange to offer some protection for investors? 3. To decrease the share value of a company, a major shareholder of a company, in an unregulated market, could offer a large number of shares for sale. Once the price fell, the shareholder could repurchase the shares at a lower price and enjoy a substantial profit. This manipulative trading gives an unfair advantage to both insiders and major shareholders. How might Market Regulation Services prevent this from happening? 4. In an unregulated market, a broker could take your order to offer your stock for sale at a particular price and then sell it at a higher price. The broker might then purchase the stock from you at the price you requested and pocket the difference. How does Market Regulation Services seek to prevent this from happening? 5. Research these Canadian stock exchanges on the Internet and report what they are and what kinds of investments they include as their specialties. H TSX Venture Exchange H Montreal Exchange. Solution 2 - Promoting a Fair and Equitable Market Student answers will vary. However, the elements that will appear frequently in the answers are given below. 1. Insider trades must be reported within 10 days. In certain situations, insiders are prohibited from making market transactions. In other situations, full disclosure must be made through the Insider Trade Reporting System. Market Regulation Services requires that a listed company issue a news release of any material changes in its affairs that could affect the price of its stock. This requirement is called timely disclosure and is designed to ensure that all investors have access to important information at the same time. 2. To protect the investor from such a loss, the Toronto Stock Exchange requires that all officers, directors and owners of more than 10% of the stock must file documents that profile their background, business experience and industry knowledge before the stock is listed on the TSX. Also, not every company can be listed on the TSX. There is a strict set of requirements that a company must satisfy to be listed on the TSX and once listed, the company must continue to maintain these requirements. 3. To safeguard against manipulative trading, Market Regulation Services requires that its participating organizations maintain an orderly market. This means that price fluctuations should occur only as a result of market demand and not from price manipulation by those with an advantage. 4. Market Regulation Services has established a strict set of trading rules with which brokers must comply. These trading rules are designed to prevent this kind of abuse. Furthermore, Market Regulation Services investigates complaints involving any trading practice that is not in compliance with these requirements. 5. The goal of the TSX Venture Exchange is to provide venture companies with effective access to capital while maintaining a high level of protection to investors. The Montreal Exchange specializes in derivative products while the Toronto Stock Exchange has been established as the senior equities market in Canada.
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Creating an Investment Portfolio: A Unit of StudyLesson

Lesson 6 - Future and Present Value
Concepts for the Lesson
G G G
Understand approaches for saving money Define future and present value Practice calculating time value of money
A. Understand Approaches for Saving Money

Making Purchases List five major purchases or expenditures you predict you will want to make over the next fifteen years, i.e.,: university, a car, a house, a snowmobile, etc., and record the estimated cost of these items and an estimated time of purchase.
Item 1. 2. 3. 4. 5. Brainstorming
Estimated Cost
Estimated Purchase Date
In the oval below, brainstorm with a partner, ways that you see yourself building wealth to save for these goals.
Meeting the Goals In the exercises above, you have thought about five different purchase goals for yourself over time and you have recognized that each one of these items will cost you a certain amount of money. In order to save enough to realize the goals you have set forward, you must understand what can happen to your money over time. Some of you may already have money in your bank account, and you will want to take a look at how that money will grow in the time period you have outlined. Or, you can take a reverse approach by first considering the amount of the item you want to purchase and then figure out how much you will need to keep in the bank in order to achieve your goals. These two different approaches to understanding saving are called Future Value and Present Value. 113
B. Define Future and Present Value

Defining Terms Future Value : This means you put a lump sum of money in your bank account today at a known rate of interest, and you calculate the value of your savings at the end of a given amount of time. Here is the Future Value Formula. FV = principal (1 + interest rate) number of periods FV = Future Value Principal = dollar value you have now Interest Rate = annual rate of return in decimal, i.e., use .05 for 5% Number of Periods = number of years, months, etc. 2. Present Value: Present value is the reverse of future value. In this calculation, you start with the amount of money you would like to have in a given number of years. In other words, you decide in advance how much you want to have in the future and save accordingly. The concept of present value assumes that you know how much money you want to save. You can then calculate the lump sum you will need to put away today assuming a particular interest rate. Here is the Present Value Formula PV=FV/(1+interest rate) number of periods PV = Present Value FV=Future Value Interest Rate = annual rate of return in decimal, i.e., use .05 for 5%. Number of Periods = number of years or months, etc.
Review
In your own words, describe the difference between future and present value. Future Value
Present Value
In Relation to the Stock Portfolio you are creating in this unit, why is it important to know how to calculate growth in these two ways? 114
Exercises for Practice 1. Assume that you have $5,000 in your bank account that is earning 5% interest annually. How much money will you have available for the purchase of the items on your wish list at the end of the fifteen years?
2. Take one of the items on your wish list above and calculate the lump sum that you will need to put away in a bank account today to reach that purchase goal. Assume that the interest rate is 5%.
Partner Reflection: How did you decide which formula to use? Share your answer with a partner.
Exercises
1. Explain why a cash payment of $1 000 now is worth more than a cash payment of $1 000 five years from now. 2. Determine the present value of each future amount if money is worth 6% per annum compounded monthly. a) $1 000 a month from now b) $5 000 a year from now c) $10 000 five years from now 3. The table below shows the yields for Government of Canada strip bonds on a particular day in May 2000. Government of Canada Bond Yields Canada 2-year bond 6.25% Canada 10-year bond 6.19% Canada 30-year bond 5.81% a) Calculate the cost of each of the bonds if each has a face value of $1 000. b) Which bond would you choose if you were to invest? Give reasons for your answer. 4. If money can earn 8% per annum compounded annually, what is worth more: $600 000 now or one million dollars ten years from now? Show how you obtain your answer.
5. How much money must be invested now at 6% per annum compounded monthly to grow into one million dollars: a) 15 years from now? b) 25 years from now? c) 35 years from now? 6. A 20-year strip bond with a face value of $10 000 is offered for sale when it has 15 years to maturity. a) What is the price of the bond if the yield is to be 9% per annum compounded annually? b) When the bond has only 10 years left to maturity, it is offered for sale at $3 855.43. Estimate the yield on the bond if it is then purchased and held to maturity. 115
7. A $100 10-year bond offers annual coupons (payments) of 5% of its face value, as shown in the time diagram below. What price should an investor pay for the bond now to obtain a yield of 6%?
8. A $1 000 20-year bond offers semi-annual coupons of 6% of its face value. What should an investor pay for the bond now to obtain a yield of 8% compounded semi-annually over the 20-year period? 9. A lottery pays $4 000 per month for life. What is the present value of this prize if money is worth 6% per annum compounded monthly and the recipient lives for another: a) 10 years? b) 20 years? c) 40 years? (Assume the first payment of $4 000 is made one month from now.) By how much is the present value of the prize increased if the recipient lives 45 instead of 40 more years?
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Exercise Solutions - Future and Present Value
1. A cash payment of $1 000 now will grow in five years to $1 000(1 + i )5, where i is the annual rate of return at which it can be invested. Since $1 000(1 + i )5 is greater than $1 000, then $1 000 now is worth more than $1 000 later. 2. The present value of $P payable n months from now is given by PV = $P (1 + 0.06/12)n. a)When P = $1 000 and n = 1, PV = $ 995.02. b) When P = $5 000 and n = 12, PV = $ 4 709.53. c) When P = $10 000 and n = 60, PV = $ 7 413.72. 3. a) The costs of the bonds are: 2-year: $1 000(1.0625)2 or $885.81 10-year: $1 000(1.0619)10 or $548.48 30-year: $1 000(1.0581)30 or $183.74 b) Answers will vary. The 2-year bond has the highest rate. It is the best investment if you expect interest rates to rise in the long run. However, if you expect interest rates to fall, then the other bonds may be preferable because they will rise in value. Note: As interest rates rise, the difference between the fixed interest rate offered by that bond and other competing investments diminishes. This reduces the demand for the bond and hence its price. During a period of increasing interest rates, a long-term bond traps the owner for a long period in an investment that gives a relatively low yield. Conversely, if interest rates fall, the long-term bond becomes the better choice. 4. The present value of $1 000 000 now is: $1 000 000(1.08)10 or $463 193.49. Therefore it is better to take $600 000 now. 5. The amount of money that must be invested now at 6% per annum compounded monthly to grow into $1 000 000 is: a) $1 000 000(1 + 0.06/12)180 or $407 482.43. b) $1 000 000(1 + 0.06/12)300 or $223 965.68. c) $1 000 000(1 + 0.06/12)420 or $123 098.87. 6. a) The price of the bond is $10 000(1.09)15 or $2 745.38. b) If i is the annual rate of growth, then: $3 855.43(1 + i )10 = $10 000. That is, (1 + i )10 = 2.5937, so i =(2.5937)1/10 1 0.1. The annual growth rate is about 0.1 or 10%. 7. The time diagram below shows the present values of all the payments including the final face value.
The total present value of the annual payments is: 5(1.06)1 + 5(1.06)2 + + 5(1.06)10 = 5(1.06)10 [1.0610 1] / 0.06 = $36.80 The present value of the face value is 100(1.06)10 $55.84. The present value of the bond is $36.80 + $55.84 = $92.64. Therefore, the investor should pay $92.64 now to yield 6%. 8. Construction of a time diagram as in the solution to Exercise 7 yields the following expression for the sum of the present values of all the $60 coupons. 60(1.04)1 + 60(1.04)2 + + 60(1.04)40 = 60(1.04)40 [1.0440 1] / 0.04 1 187.57 The total present value of the coupons is $1 187.57.
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The present value of the face value is $1 000(1.04)20 or about $208.29. So the total present value of the bond is $208.29 + $1 187.57 or $1 395.86. Therefore, the investor should pay $1 395.86 now to yield 8%. 9. Construction of a time diagram as in the solution to Exercise 7 yields the following expression for the sum of the present values of all the $4 000 payments over a period of n years. 4 000(1.005)1 + 4 000(1.005)2 + + 4 000(1.005)12n = 4 000(1.005)12n [1.00512n 1] / 0.005 a) For n = 10, the total present value of the payments is $360 293.81. b) For n = 20, the total present value of the payments is $558 323.09. c) For n = 40, the total present value of the payments is $726 990.34. For n = 45, the present value is $745 872.67. That is, the present value is increased by $18 882.33 if the recipient lives for 45 more years instead of 40 years.
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Step 4: Investment Decisions
The investment pyramid in the previous section shows there are many different investments possible within each asset allocation category. Mutual funds are included in all categories because there are a variety of different kinds of mutual funds, each with its own liquidity and risk level. Mutual funds offer diversification across industries and over various international markets. Thus the small investor can reduce the risk that is inherent in the ownership of a small number of stocks. In a mutual fund, a professional money manager decides how to invest your money and that of others. Each fund has its own investment objectives and invests in some combination of bonds, cash or stocks. On purchasing a mutual fund, the investor receives exchange units or shares of that fund. A mutual funds unit value is described as the net asset value per share (NAVPS). The NAVPS is calculated by taking the total value of the fund if everything were sold on that day, less any outstanding debts it owes, and dividing by the number of units held by all the funds investors. For example, if a fund is worth $10 million (value less what it owes) and has one million units outstanding, the NAVPS will be $10. If you own 10 units your investment is worth $100. There are also a variety of alternatives to mutual funds, such as: index-linked GICs, royalty trusts and REITs. Research these terms to discover what they are and consider them for inclusion in your clients portfolio. Choose from all the available investments those that are best for your client. You will need to decide how much of your clients savings will go to each investment. You must also decide on a date of purchase and the cost.
REITs (Real Estate Investment Trust) is a company that owns and sometimes operates income-producing real estate, i.e., apartments, malls, offices, and industrial parks GICs (Guaranteed Investment Certificates) are certificates offered by banks, trust companies and credit unions, which offer a form of principal and interest guaranteed for the term of the certificate. Royalty Trusts Investments that tend to be energy-related, focusing on fossil and synthetic fuels.
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Terms Students Will Learn in this Lesson
G
Prospectus
Instructional Strategies This lesson is divided into six sections. A. B. C. D. E. F. G. When Should You Buy Stocks? What Stocks Should You Buy? The Annual Report: A Snapshot of a Companys Economic Health How to Read an Annual Report: The Balance Sheet How to Read an Annual Report: The Income Statement Summary of Criteria for a Financial Analysis How to Evaluate Internet Sites Instructional Steps 1 Distribute the section, A. When Should You Buy Stocks? and ask students to review the graph. Have students identify periods of strength in the Canadian economy and the years when equity gains were greatest. In groups, have students brainstorm indicators of strong and weak economic growth. Using the same groups as in 3, distribute copies of the stock page from a recent newspaper to each group. Have students read the section titled,B. What Stocks Should You Buy? and record their groups answers to the questions posed in that section. Debrief the activity, noting the information found. Assign students, in pairs, to explore on the Internet C. The Annual Report: A Snapshot of a Companys Economic Health. Have students print out the annual reports of at least two companies. Using the overhead projector, review Question 1 - How to Read an Annual Report: The Balance Sheet of section D. Ask students to decide which company is in better financial health and to explain their reasons. As a class, discuss the conclusions and review the solution. Repeat the procedures in 7 for Question 3 - How to Read an Annual Report: The Income Statement Distribute the table, F. Summary of Criteria for a Financial Analysis and introduce some of the more common ratios, such as P/E. Assign Lesson 6 Exercises to review and consolidate the concepts in this activity.
2 3 4
5 6
8 9 10 Teacher Notes
Two themes pervade Lesson 6. The first deals with finding the information: Where do I find the names of companies?, Where do I find annual reports?, Where do I find news reports on companies? and Where do I find financial information? The second deals with integrating the information to analyse the stock as an investment. A web site to which you can direct your students: TD Bank Financial Group at: http://www.td.com Students should be reminded that evaluation requires a comparison. So a companys performance is compared to last year,
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compared to another company, or measured relative to an existing benchmark such as industry ratios and indexes. The key focus should not be on how to calculate the ratio as much as interpreting what 2:1 or 4% means and whether or not it signals a promising potential investment. Lesson 7 Exercises - Answers will vary. Students should recognize that this company has a good dividend, a good P/E ratio and a high degree of solvency.
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Lesson 7 A. Analysing Stocks as Investments
When Should You Buy Stocks? Value investors like Warren Buffett believe that if a stock has intrinsic value, and you can purchase it below this value, then buy and hold the stock until its price rises to its true worth. Other investors believe in the adage, Dont tell me what to buy, tell me when to buy. That is, they believe that most stocks gain in price during a rising market, so it is important to buy early in a bull market trend. Included in this school of thought are the so-called technical analysts who study graphs such as the one below to determine the opportune time to buy stocks. They tend to be more concerned with timing the purchase than with the particular stock that is chosen.
The graph above shows the average of the S&P/TSX Composite Index each year between 1955 and the year 2000. Using this graph, identify and record the years when it would have been most profitable to buy the stocks that contribute to the S&P/TSX Composite Index. Describe the shape of the graph during a bull market and during a bear market. Do you think there is a way to predict whether the graph will turn upward or take a downward dive? Explain your answer. After we buy a stock, we would not be disturbed if markets closed for a year or two; we don't need a quote on our position....to validate our well being.
Warren Buffett (One of the worlds most successful stock investors)
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Lesson 7 B. What Stocks Should You Buy?
We noted on the previous page that value investors, like Warren Buffet, believe in searching for stocks that have intrinsic value. This process involves researching information about stocks that may be good candidates for investment and then analysing them to determine whether they have promising growth and earning potential. But where do you go to research companies? You may find a prospectus, which is a legal document that provides detailed information about a companys line of business, financial position and plans for the sale of stock. Other useful sources are shown below and others will be visited later in this activity. 1. Brokerage firms usually publish periodicals that list stocks that are recommended for purchase and present useful information to help you analyse the companys earning and growth potential. The clip below is taken from a newsletter issued on March 30, 2000. What was the price of Bombardier on that day? What price did the newsletter set as a oneyear target?
2. Journals and newspapers such as the National Post (formerly Financial Post), the Globe and Mail, and Canadian Business, all produce annual magazines that rank Canadian companies according to various criteria such as profitability. Check those rankings to find the names of those companies that appear at the top of the list. 3. As noted in the exercises of Lesson 4, the list of the biggest gainers, as well as the most actively traded stocks, are found daily in the newspaper. They will lead you to stocks that have made the greatest gains in a single day as well as the stocks that traded the greatest number of shares. This one is taken from The Toronto Star, June 9, 2000.
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4. Newspapers and magazines are useful sources of articles about companies. The article on the right is taken from The Toronto Star, June 10, 2000. What does it report about the change in price of the Bombardier class B shares? What was the price at the end of trading on June 9, 2000? How does the price of the Bombardier shares on June 9, 2000 compare with the price on March 30, 2000 given in the article in Exercise 1. above? How close was the price on March 30 to the target price given in the newsletter shown above?
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Lesson 7 C. The Annual Report: A Snapshot of a Companys Economic Health
If you are a value-oriented investor, a companys annual report will be the most important document in your analysis of that stock. But first you must find out how to get it. 1. Many companies have their annual reports available at their company web site. Therefore a good place to start is at http://www.tsx.ca 2. One of the sites accessible through these links is SEDAR (System for Electronic Documentation and Retrieval) http://www.sedar.com From the SEDAR web site, you can find the information you need from an online database of annual reports, financial statements, news releases, and company prospectuses. And / Or Call the investor relations department for the company and ask for the following H Annual Report H Quarterly Results H Press Releases these give current information on company activities H Analysts Reports Analysts are hired by stock brokerage firms to analyse companies and make recommendations to buy, sell or hold a particular stock for clients of the firms. They are helpful in providing a base against which to see if current earnings per share match the expectations of the analysts. Parts of an Annual Report 1. Report to the Shareholder from Chair/Directors/CEO 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 3. Financial Highlights and Key Financial Ratios 4. Financial Statements 'a' and 'b' are two of the most important sections in the annual report. The balance sheet and the income statement will be studied more closely in the pages that follow. a. Balance Sheets b. Income Statements c. Cash-Flow Statement d. Statement of Retained Earnings e. Notes to the Financial Statements 5. Historical Review or Summary Data 6. Corporate Information a. Names of Officers and Directors b. Corporate Facts i. Dividends ii. Share Capital iii. Annual Meeting iv. Stock Codes v. Head Office Location vi. Legal/Auditors 7. Auditors Report
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Lesson 7 D. How to Read an Annual Report: The Balance Sheet
The balance sheet is a snapshot of a companys financial position or shareholders equity on a given date. A study of a balance sheet helps you determine whether a company is solvent and rich in assets or whether it is heavily encumbered with debt and at risk of not meeting its financial obligations. The shareholders equity in a public company is the value it has when everything it owes, called its liabilities, is subtracted from everything it owns, called its assets, i.e., Shareholders Equity = Assets Liabilities Question 1 - How to Read an Annual Report: The Balance Sheet From the balance sheets of two companies, A and B, which company appears to be in better financial health? Company A in thousands of dollars Assets Current Assets Fixed Assets Liabilities Current Liabilities Long-Term Liabilities Shareholders Equity 39 000 000 Common Shares Outstanding Retained Earnings $ $ $ $ 1 456 872 513 017 1 969 889 9 743 63 017 72 760 Company B in thousands of dollars Assets Current Assets Fixed Assets Liabilities Current Liabilities Long-Term Liabilities Shareholders Equity 18 500 000 Common Shares Outstanding Retained Earnings $ $ $ $ 186 359 3 496 847 3 683 206 312 569 370 307 682 876
22 925 1 874 204 $ 1 897 129
$ $
11 784 2 988 546 3 000 330
Solution 1 - How to Read an Annual Report: The Balance Sheet Solution A comparison of the shareholders equity for both companies reveals that Company B has retained earnings of $2 988 546 000, while Company A has retained earnings of $1 874 204 000. This might suggest that Company B has greater value. A closer look at the balance sheets reveals that most of Company Bs assets are fixed assets, which may be illiquid, i.e., cannot be readily turned into cash to pay bills. But its current liabilities exceed its current assets. Company B could run into a cash flow problem. One way to measure a companys liquidity is to calculate the ratio of its current assets to its current liabilities, i.e., immediate payables. This is called the current ratio. For Companies A and B, the current ratios are respectively 150 and 0.60. Company A appears to be more solvent than Company B. However, the current ratio does not tell the whole story, so it would be necessary to look at last years profit found in the income statement. Current Ratio current assets current liabilities Current Ratio for A $1 456 872 150 $9 743 Current Ratio for B $186 359 0.60 $312 569
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Lesson 7 E. How to Read an Annual Report: The Income Statement
While the balance sheet enables us to determine the net worth of a company and assess its liquidity, its prospects for profit in the current year are more accessible from its income statement. The income statement of a company displays its revenue and expenses for a given year. The profit (or loss) is found by subtracting the expenses from the revenue. Profit (or Loss) = Revenue Expenses Question 3 - How to Read an Annual Report: The Income Statement a. From the income statement of companies A and B, which company offers the higher earnings per share? b. If prices of A and B are respectively $16 and $84.50 per share, which stock seems to offer better value?
Solution 3 - How to Read an Annual Report: The Income Statement a. A comparison of the two income statements reveals that the profits or earnings made by Companies A and B were $44 351 990 and $50 428 134 respectively, so Company B made a larger profit. However, these earnings are distributed over different numbers of shares, so we must calculate the earnings per share for each company as shown on the right. We see that Company A made $1.14 per share while Company B earned $2.73 per share. Clearly Company B earned more per share than Company A. b. Although Company B earned more per share than Company A, the price of a share of stock of Company B is $84.50 compared to $16 for Company A. With $84.50, we could buy more than five shares of Company A and earn more than 5 times $1.14. That is, to compare the prices of the shares for the two companies, we divide the price per share by the earnings per share. This is called the price:earnings ratio, or more often, the P/E ratio. For stock in Company A, the P/E ratio is $16/$1.14 or about 14. For stock in Company B, the P/E ratio is $84.5/$2.73 or about 31. Stock in Company A has the lower P/E ratio and this suggests it offers a better value. Traditionally, companies sold at P/E ratios between 8 and 16. However, some technology stocks in recent years are trading with P/E ratios as high as 100 and greater. Those who buy these stocks believe that the company is in a rapid growth phase that will ultimately yield high profits or that someone will soon buy the stock at a higher price.
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Lesson 7 F. Summary of Criteria for a Financial Analysis
The analysis of the balance sheet and an income statement has led us to consider two ratios: the current ratio and the P/E ratio. It would require a small book to define and describe the numerous ratios that exist to analyse stocks. The table below summarizes some of the commonly used formulas. These ratios are tools that, used in combination, can provide useful indicators to assess the progress of a company over time or to make comparisons among similar companies. Criterion Profitability Explanation Return on Assets Expressed as a percentage Ratio Net Income Total Assets What it Measures how well a company is using its assets (compared to last year or another company) how well a company is using money from shareholders (compared to last year or another company) how well a company is generating profits from sales (compared to last year or another company) how long it takes a company to sell merchandise
Return on Equity
Net Income Equity
Profit Margin on Sales
Net Income Net Sales
Asset Management (Efficiency)
Inventory Turnover time it takes to turn over inventory (the fewer days, the more efficient management) Accounts Receivable Turnover
Inventory Cost of Goods Sold / 365
Accounts Receivable Sales / 365 Current Assets Current Liabilities
how long it takes a company to collect its accounts receivable The current ratio measures whether or not the company has enough liquid assets to pay debts. 2:1 is generally considered to be favourable. how much of these assets are financed by the shareholders(50:50 is generally considered to be favourable) how much of the assets are financed by borrowing measures the efficiency of management in turning over the companys goods at a profit (the higher the ratio, the better)
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Cash Management (Liquidity or Solvency)
Current Ratio Liquidity is a measure of the companys ability to meet current debts. Debt/Equity Ratio Leverage is measured by the ratio of assets financed by shareholders to the total assets owned by the company. Debt Ratio
Debt Management (Leverage)
Debt Equity
Total Liabilities Total Assets Gross Profit Revenue
Cost Management (Control)
Gross Profit Margin The companys rate of profit after allowing for the cost of goods sold.
Financial Ratios
Dividend Yield
Annual Dividend Share Price
measures the return on investment (should show an increase) measures how much each share has earned (should show an increase) facilitates the comparison of different stocks (8:12 is generally considered to be normal. Historically, P/E ratios have tended to fall in the 8:12 range; however, market conditions can lead to significant variations.) the stock price relative to the expected growth in earnings of a company
Earnings per Share (EPS)
Net Income Number of Shares
Price Earnings Ratio (P/E)
Price per Share Earnings per Share
Price Earnings Growth Rate (PEG)
Price Earnings Ratio Growth in Earnings per Share
The ratios in column 4 are general benchmarks and may vary with the industry.
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Lesson 7 Exercises
1. The closing price per share, the dividend and the earnings per share are given for several stocks in the table. Complete the table by calculating the dividend yield, i.e., the dividend as a percentage of the share price and the P/E ratio for each stock. Note that dividend yields are 0 if no dividend is paid. Also P/E ratios do not exist if the EPS is negative.
a. Which of the stocks in the table has the highest growth expectation? Give reasons for your answer. b. Which companys earnings are not expected to grow as fast as the others? How do you know? c. Which stock gives the highest yield? Explain how you know. a. The table below shows some data from the 1999 annual reports of Company S and Company N. Enter these data in a spreadsheet. Then calculate the percentage change in the assets of each company from year-end 1998 to year-end 1999. Save your spreadsheet for Part b).
From your completed spreadsheet, identify which company is growing faster. Give reasons for your answer.
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b. The table on the right shows the industry standards for various indicators. Add rows to the spreadsheet you created in Part a) to calculate the quantities shown in this table for Companies S and N. Using the appropriate quantities, describe which company is more profitable, and which company investors seem to favour. Describe how these companies compare with the industry standard.
3. The table below displays ratios calculated for Company XYZ for 1998 and 1999. Complete column 4 by indicating for each ratio whether the company is better or worse in 1999 than in 1998. Then complete column 5 by identifying the criterion associated with that particular ratio,. e.g., profitability, efficiency, control of costs, leverage (debt), and liquidity.
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4. The table to the right displays selected ratios calculated for a company from the 1997, 1998 and 1999 annual reports. Study this table, then indicate whether you would invest in this company. Support your answer with reasons.
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1. The completed table is shown below. a. High Energy may be the riskiest investment because it has the highest P/E ratio. b. Beta Factors has the lowest P/E ratio, suggesting it is the cheapest stock with the lowest growth expectations. c. Alpha Industry gives the highest dividend yield.
a. The completed table is shown below. The assets of Company S increased by 29.1% between 1998 and 1999, while the assets of Company N increased by only 14.3%, thus the assets of Company S grew more quickly. Comparison of the third and sixth columns in the table reveals that Company S grew more quickly than Company N in assets, net income, revenue, equity, stock price, and dividends. Company N increased its number of shares by more than Company S, but this is not necessarily an indicator of growth.
b. The completed table is shown below. Company N has a higher return on assets, a higher profit margin on sales, and a higher return on equity, so it is more profitable than Company S. Investors seem to favour Company N because it has a higher P/E ratio. That is, people are willing to pay a higher price for its relatively smaller earnings because they expect it has growth potential. A perusal of the completed table shows that in some cases a company is performing above industry standards, while in other cases it is performing below those standards, e.g., both companies have a higher dividend yield than the industry standard of 5.0%.
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3. The completed table is shown below.
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Lesson 7 G. How to Evaluate Internet Sites
Not all web sites are created equal. Some web sites are authoritative, well-researched, and frequently updated, while others may be erratic, contain incorrect information, or have a special interest that can bias the information given. Here are some criteria that will help you evaluate web sites. Check the Content Ask yourself these questions as you peruse the web site.
G
G G
G G G
Purpose: What is the purpose of the web site? to inform? to persuade? to sell? to explain? Audience: Who is the audience for this web site? Links: Are there any criteria for link selection? Is the site inward-focused (links within the site) or outward-focused? (links outside the site) Is there a balance between inward- and outward-focused links? Does the web site agree with information you have already found? Is the information fact or opinion? Is the content biased?
Analyse the URL (Universal Resource Locator) The URL consists of the domain name plus three letters that describe the sponsoring organization. These three letters suggest the answers to some of the questions above. .com means commercial and is business oriented .edu means education and is a university or college .k12 means it is a school (kindergarten to grade 12) .org means it is a non-profit organization .gov means government .net means it is an internet provider ~ means it is a personal web page. Personal web pages tend to be opinion-based. In addition, countries have their own codes, e.g., .uk United Kingdom, .ca Canada, .jp Japan, and .fr France Ascertain the Currency and Source
G G G
Is the author of the material identified? What is the authority or expertise of the individual or group that created this site? When was the web page created and last updated? Are there any links that dont work?
Question 4 - How to Evaluate Internet Sites Step 1 There are many sites on the Internet that provide information on stocks. Visit one of these sites and find a company to investigate further: http://www.tsx.ca http://www.investorsfund.ca http://ipo.investcom.com http://www.webfin.com
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Step 2 Visit the company web site you selected in step 1 and see what you can find out about the company. Step 3 Search other sites using a search engine to find out more about the company you have chosen. Select some of the evaluation criteria from the previous page and evaluate the web sites as you access them. Record your assessments. Step 4 Write a report that includes the following elements:
G G G
an evaluation of the web sites you visited; a recommendation to buy or not to buy stock in the company you investigated; a list of at least ten pieces of evidence to support your recommendation.
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Exploratory Activity Step 4: Investment Decisions
See the list of investments for each category in Step 3 - Asset Allocation Model. Searching the internet using the names of the potential investments found on the allocation model pyramid will point you to lots of information on the various choices. For example, you might explore options (a contract between a buyer and a seller that carries terms allowing an investor to lock in a predetermined purchase or sale price for a particular security) or futures (contracts to buy or sell an investment or asset at an agreed price with delivery on a specified date in the future). Option Contracts between a buyer and a seller that carries terms allowing an investor to lock in a predetermined purchase or sale price for a particular security Future Contracts to buy or sell an investment or asset at an agreed price with delivery on a specified date in the future As you learn more about each of the investment choices, you will be more secure with the recommendations you make for your client.
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Glossary of Financial Terms
Bolded terms are more relevant for students studying Business at the Senior level while terms that are not shown in bold are general terms for both the Intermediate and Senior levels. Account Accumulated Value Annual Growth Annuity Appreciate Asset Asset Allocation Ask Bank Barter Bear Market Bid Billion Blue Chip Stocks Board Lot Bond Budget Bull Market Canada Savings Bond Capital An arrangement or facility at a bank for depositing and withdrawing money Sum of original investment plus money earned through interest Yearly increase Any series of equal payments or deposits designed to repay a loan (installment loan or mortgage) or to accumulate to a particular sum Increase in value over time A possession that usually increases in value or provides a return The way to divide a portfolio into different classes of investments The lowest price at which anyone is willing to sell a stock A financial establishment which uses money deposited by customers for investment, pays it out when required, making loans at interest, exchanges currency, etc. An exchange of goods and services for other goods and services A weak market where stock prices are falling The highest price at which anyone is willing to buy a stock One thousand million Common stocks of leading companies that offer a record of continuous dividend payments and other strong investment qualities A standard trading amount, usually 100 shares, which has been agreed upon by stock exchanges A loan made to a company or government for a fixed amount of interest for a specified period of time A monetary plan - that may be simple or detailed - with forecasts of earnings and expenditures for a set period A strong market where stock prices are rising Backed by the government of Canada, this fixed interest investment involves lending the government money for a set period of time, and receiving income throughout that period. To an investor, capital means the total of the financial assets they have invested in securities, their home and other fixed assets plus cash. To an economist, it means machinery, factories and inventory required to produce other products Profit from the sale price of an asset being higher than its purchase price Loss from the sale price of an asset being lower than its purchase price Markets where debt and equity funds are traded To convert a cheque into money, by depositing it into an account or by exchanging it in return for cash Investments that can be changed easily into currency A piece of paper that can be used in exchange for goods or services (It tells the bank to pay the recipient a specific sum of money) Items thought to increase in value over a period of time. Investing in collectibles carries the risk that their value will not increase
138
Capital Gain Capital Loss Capital Markets Cash a cheque Cash equivalent Cheque Collectibles
Commission Compound Growth Contract Coupon
A payment method where you make a portion of the amount you sell. The fee that is paid for buying or selling investments The interest earned on an investment is added to the base amount, and this new figure is used to calculate the following year's investment A written or verbal agreement enforceable by law A slip that entitles the holder to a discount when purchasing goods or services A part of a bond, which can be presented at a bank to receive specified interest payments after the due date A measure of change in consumer prices as determined by a monthly statistical survey A card issued by a financial institution that allows you to buy ''on credit.'' (The financial institution pays the purchase price, but the loan must be repaid within a certain time to avoid an interest fee). A non-profit co-operative (Members can borrow money, make deposits, and pay low interest rates). Money circulated within an economy including coins and paper notes A decrease in the cost of goods and services over a period of time resulting in an increase in the purchasing power of the dollar Money that has been borrowed and must be repaid with interest by a set date A card that allows you to transfer money from one bank account to another (When used, money is deducted from your bank account and added to the merchant's account). Money that is borrowed (The borrower pays interest for the use of the money and is obligated to pay at a set date). Decrease in value over time A class of trading instruments that has no tangible net worth but get their value from the claim to some other financial asset The difference between the lower price paid and the original price Reducing risk by spreading money among various types of investments A portion of a companys profits paid to shareholders A cash payment using profits that is announced by a company's board of directors to be distributed among stockholders Net income for a company during a specific period Net income for a specific period divided by the number of outstanding shares To sign the back of a cheque to prove you are the person to whom the cheque is written A sum of money used for a need or a want Stocks, which represent a share in the ownership of a company Institution that collects funds from the public to place in financial assets such as stocks, bonds, money market instruments, bank deposits or loans Any 12-month period that a company uses for accounting purposes Contracts to buy or sell an investment or asset at an agreed price with delivery on a specified date in the future Certificates offered by banks, trust companies and credit unions, which offer a form of principal and interest guaranteed for the term of the certificate The compounded annualized rate of growth of a company's revenues, earnings, dividends, etc. A fixed amount earned per hour An increase in the cost of goods and services over a period of time resulting in a decrease in the purchasing power of the dollar
139
CPI (Consumer Price Index) Credit Card
Credit Union Currency Deflation Debt Debit Card Debt Depreciate Derivatives
Discount Diversification Dividend
Earnings Earnings Per Share Endorse (a cheque) Expenditures Equities Financial Institution Fiscal Year Futures GIC (Guaranteed Investment Certificates) Growth Rate Hourly Wage Inflation
Interest
Money that is paid for the use of someone elses money A fee charged by a financial institution for borrowing money, or for late payments OR the charge for the privilege of borrowing money, typically expressed as an annual percentage rate
Invest Investment Invoice IPO (Initial Public Offering) Liability Market Index Minimum Wage Minting;Mint Money Management Mutual Fund Needs Net Worth Option Overtime P/E Ratio
In business, to layout money with the view of obtaining an income or profit The use of money to make more money, to gain income and/or increase capital A list of goods and services rendered, showing the amount to be paid The first sale of shares by a company to the general public, also called Primary Distribution Debts that must be paid A statistical measure of the market of economy based on the performance of stocks, bonds and commodities The lowest hourly wage a company can legally pay (Different province have different minimum wages). To make a coin by stamping metal; a place where money is coined Planning how to take care of and protect your money, including budgeting, saving and investing A pool of money invested in a wide range of investment options Requirements necessary to live a certain lifestyle The difference between your assets and liabilities (It defines your wealth). A contract between a buyer and a seller that carries terms allowing an investor to lock in a predetermined purchase or sale price for a particular security Each additional hour worked over 40 hours a week Calculated by dividing Market Value per share by Earnings per Share ( A high P/E can indicate high projected earnings in the future. It is useful for making comparisons between companies or against the company's own historical P/E Ratios). Type of employment that pays according to the amount of pieces produced Holdings of securities by an individual or institution The value today of a future payment discounted at some appropriate compound interest rate A financial gain, or the money left over after subtracting expenses from income A legal document that provides detailed information about a companys line of business, financial position and plans for the sale of stock A company that owns and sometimes operates income-producing real estate, i.e., apartments, malls, offices, and industrial parks An investors ability to accept the possibility of losing capital The cumulative total of annual earnings kept by a company after payment of all expenses and dividends The profit or loss resulting from an investment The amount of annual sales, including discounts and returned merchandise Investments that tend to be energy-related focusing on fossil and synthetic fuels
Piecework Portfolio Present Value Profit Prospectus REITs (Real Estate Investment Trust) Risk Tolerance Retained Earnings Return on Investment Revenue Royalty Trusts
RRSP A personal retirement fund to which a Canadian can contribute in order to save money (The (Registered Retirement Savings Plan) money in an RRSP can be invested in approved stocks, bonds or money instruments. The advantage of an RRSP is that the tax on any money contributed to this fund, as well as any money earned on the investments in this fund, is deferred until the money is withdrawn). Rule of 72 The Rule of 72 states the product of the annual growth rate of an investment and the number of years for the investment to double in value is approximately 72, i.e., an investment growing at a rate of 8% per annum could be expected to double in value in approximately 9 year A fixed amount paid in regular intervals by an employer
140
Salary
Savings Savings Account Share Stale dated Stocks Stock Market Strip Bonds
The difference between earnings and expenses An account intended for depositing funds Certificate representing ownership in a corporation Cheques older than 6 months, which are usually no longer valid Shares in the ownership of a corporation that are a claim on its earnings and assets A place that brings together users and providers of capital Bonds where the interest coupons have been detached from the principal (The principal and the coupons trade separately, usually at a substantial discount. Examples of strip bonds are federal and provincial government bonds). Money levied by the government on income and sales A record of current trading that has occurred on an exchange, previously printed on paper, currently displayed on an electronic board Payment of one and a half times the regular hourly wage, usually paid for each hour over 40 hours worked in one week A sum of money given as a reward for service in addition to the cost of the service An exchange in which buyers and sellers agree on a price
Taxes Ticker
Time and a Half Tip Trade
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Worksheet 4: Capital Markets and Investing

Goals: Short Term one year Medium Term one to three years Long Term more than three years.
Names of Investment Team Group Members: ____________________________________ 1. Write the definition of: a. Capital Market _________________________________________________ ____________________________________________________________ ____________________________________________________________ b. Institutional Investor ____________________________________________ ____________________________________________________________ ____________________________________________________________ c. Individual Investor ______________________________________________ ____________________________________________________________ ____________________________________________________________ 2. Stocks/Equities: When you are selecting shares of a business for your client, he/she will become a part owner in that company. To help your client understand the types of stock purchases available, define the difference between the following two types of purchases: a. Primary Market (Initial Public Offering) Stocks: __________________________ ______________________________________________________________ ______________________________________________________________ b. Secondary Market Stocks:___________________________________________ _______________________________________________________________ _______________________________________________________________ 3. Practise Group Task For Your Portfolio: Invest $3,000 in stocks for your client. Complete the chart as a group activity and place the completed chart in your groups portfolio. Design a spreadsheet to help you with your groups work. Some column headings may be: A Date B Company C Symbol D No. of Shares D Price per Share E Total F Amount Left ($3000-F)
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Worksheet 4: Capital Markets and Investing (cont'd) 4. To complete your portfolio assignment for mutual funds follow the instructions in the order listed below. a. Read through the information on Investment decisions. b. Go to the web site to read about mutual funds. 5. Answer the following questions to help with your understanding of mutual funds: a. Write the definition of a Mutual Fund.______________________________________ ____________________________________________________________________ ____________________________________________________________________ b. Describe Net Asset Value Per Share (NAVPS). ______________________________ ____________________________________________________________________ ____________________________________________________________________ c. Describe Management Expense Ratio (MER). ______________________________ ____________________________________________________________________ ____________________________________________________________________ d. What is the main benefit of a mutual fund investment? ________________________ ____________________________________________________________________ ____________________________________________________________________ e. Make a list of five to seven types of mutual funds.____________________________ ___________________________________________________________________ ___________________________________________________________________ 6. Practise Group Task For Your Portfolio: Invest $3,000 in some mutual funds for your client. To record your investment, design and complete a chart in your group and place the completed chart in your group's portfolio. In your chart, state the name of the mutual fund, the purchase price, the number of shares and the total amount invested. Name Purchase Price NAVPS Number of Shares Total Amount
143

List of Resources Print & Software Print
To build comprehension, reading, writing and presentation skills, we suggest that you have your students complete a book review, with both a written and oral exercise. The following list is by no means exhaustive, but provides a good basis for various topics introduced in the activities. Where possible, brief descriptions follow book titles. Author Anderson, Hugh Baird, Bob & McBurney, Craig Brown, David L. and Bentley, Kassandra Carrick, Rob & Anderson, Guy Chilton, David Cohen, Bruce Cooke, Robert Duran, Joe John with Chambers, Larry Financial Post Writers Date 1997 1999 1999 1999 2000 2001 2001 1998 2001 Title Globe and Mail: Investing for Income Bulls and Bears Electronic Day Trading to Win Getting Started in Online Investing e-investing: How to Choose and Use Discount Brokers The Wealthy Barber The Money Adviser (A comprehensive reference on finance) Personal Finance for Busy People First Time Investors Workbook Directory of Directors, 2002 FP Bonds Canadian Prices 2001 FP Bonds Corporate 2001 FP Bonds Government 2001 FP Dividends Annual Record & 10 Year Price Range 2001 FP Equities Preferred and Derivatives 2001 Guide to Investing and Personal Finance 2001 1998 Make the Most of What Youve Got 2001 You Cant Take It With You 2001 Whos Minding Your Money: Financial Intelligence for Canadian Investors Options: A Personal Seminar The Canadian Guide to Investing for Life The Canadian Mutual Funds Handbook, 3rd Ed. Ernst & Youngs Personal Financial Planning Guide The Stock Market Course Girls Just Want to Have Funds The Intelligent Investor (Analysing Stocks) Getting Started in Stocks, 3rd Ed. Options, Futures, & Other Derivatives, 4th Ed. How to Start & Run An Investment Club for Fun & Learning Investment Terms and Definitions The Bottom Line Guide to Investing What Every Canadian Should Know About Family Finance What Every Canadian Should Know About Mutual Funds Publisher Penguin Books of Canada, Ltd. Globe and Mail Series John Wiley & Sons John Wiley & Sons John Wiley & Sons Stoddart Stoddart McGraw-Hill Ryerson, Ltd. Irwin Professional FP Datagroup FP Datagroup FP Datagroup FP Datagroup FP Datagroup FP Datagroup Sarasota Press John Wiley & Sons John Wiley & Sons John Wiley & Sons Prentice Hall McGraw-Hill Ryerson, Ltd. McGraw-Hill Ryerson, Ltd. John Wiley & Sons John Wiley & Sons Hyperion (Adult Trd Pap) Harper Collins John Wiley & Sons Prentice Hall Canadian Securities Institute Canadian Securities Institute Canadian Securities Institute Canadian Securities Institute Canadian Securities Institute
144
Foster, Sandra E
Fullman, Scott Gadsden, Stephen
1992 1997 1998 1999 2001 2000 1985 1997 1999 1998 1998 1998 1999 1999
Garner, Robert J. et al. Gontanills, George A. & Gentile, Tom Goodman, Susannah Blake Graham, Benjamin & Buffet, Warren E. (preface) Hall, Alvin D. Hull, John C. Investor Learning Centre
Jones, Dominic & Bowness, Michael Jubak, Jim Kelman, Steven G.
1998 1996 1997 1999 1999
How to Read Financial Statements The Worth Guide to Electronic Investing Globe and Mail: Understanding Mutual Funds Globe and Mail: RRSPs and Other Retirement Strategies 2000 Globe and Mail: Mutual Fund Strategies 2000 Choosing the Best Financial Advisor: Sage Advice Rich Dads Rich Kid, Smart Kid Rich Dad, Poor Dad The Battle for Investment Survival (The long-term opportunities and pitfalls of investing in the stock market) Getting Started in Futures, 3rd Ed. How to Invest in Canadian Securities Classroom Instruction that Works: ResearchBased Strategies for Increasing Student Achievement The Internet Investor, 2nd Ed. (Internet sites for personal finance and investing) Guarantee Your Childs Financial Future: Practical Solutions for Todays Parents Personal Finance on the Web Money Logic: Financial Planning for the Smart Investor John Neff on Investing Whats Your Net Worth? Gordon Papes 2001 Buyers Guide to RRIFs and LIFs The Real Life Investing Guide (An introductory guide to encourage youth to begin investing) Globe and Mail Retire Right Money and Youth Essential Finance: Investing Basics 50 Tax-Smart Investing Strategies The Economist Books Pocket Investor Taming Personal Debt Words that Move the Worlds Markets: The Greenspan Effect Stock Market Panic Everything You Always Wanted to know About RIFsbut Were too Young to Ask
Canadian Securities Institute Harper Collins Penguin Books of Canada, Ltd. Nelson ITP Nelson ITP Nelson Canada Ltd. Warner Books Warner Books John Wiley & Sons
Kelman, Steven G. & Teelucksingh, Gary Kiyosaki, Robert T. Loeb, Gerald M.
1998 2000 2000 1996
Lofton, Todd Marzano, Robert J., Pickering, Debra J., & Pollock, Jane E. Maude, J. Timothy McLean, Benjamin Michaels, Jonathan Milevsky, Moshe & Posner, Michael Mintz, Steven L., Neff, John B.,& Ellis, Charles D. Openshaw, Jennifer Pape, Gordon & Tafler, David Pollack, Kenan & Heighberger, Eric
2001 2001 2001
John Wiley & Sons Prentice-Hall Canada ASCD
1999 1998 1997 1999 1999 2002 2000 1997
Harper-Collins Publishers McGraw-Hill Companies John Wiley & Sons Stoddart John Wiley & Sons Perseus Books Prentice Hall Canada McGraw-Hill Ryerson, Ltd.
Polson, Kerk Rabbior, Gary Robinson, Marc Rosentreter, Kurt Ryland, Phillip Sampson, Paul Sicilla, David B. & Cruickshank, J. Skarica, Davd Tafler, David Thomsett, Michael C. Wright, Sharon Saltzgiver
1997 1997 2000 2000 1998 1997 2001 1998
Penguin Books of Canada, Ltd. Canadian Foundation for Economic Education DK Publishing Stoddart John Wiley & Sons McGraw-Hill Ryerson, Ltd. McGraw-Hill Ryerson, Ltd. Productive Publications ITP Nelson John Wiley & Sons John Wiley & Sons
2001 1999
Getting Started in Options Getting Started in Bonds
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Magazines
Publications listed are readily available at most news stands and bookstores. 1 2 3 4 5 6 7 8 9 Equity features womens ideas on making and investing money Green provides a variety of financial information Individual Investor includes financial news, trading updates and personalized portfolios Internet Investor a guide to online personal finance Investors Digest of Canada reports on Canadian investments IE: Money Magazine a Canadian magazine of personal finance and investing, published six times a year Money tips on stocks and mutual funds Money for Women guide to investing, saving, planning and using the Web MoneyMinded a personalized and practical guide to saving, investing borrowing and spending
10 Money Talks a Canadian magazine on investments for individual investors 11 Mutual Funds Magazine - profiles stocks and mutual funds daily 12 Twenty$omething personal finance magazine for the next generation of investors 13 Worth Magazine daily news from the world of finance, access to top financial experts and tips and tools to help your money grow
Software
Canadian Loan Spread Calculator Pro view loan term comparisons Checkbook for Excel v3.1b assists in managing chequing accounts Excel 2000 a spreadsheet program Fund Manager manages investment portfolios Investment Basics educational multimedia introduction to investing Loan Calculator! Plus v2.1c compute loans, interest, and amortization Loan Spread Calculator Pro view loan term comparisons LoanAmortizer 4.1 Enterprise calculates principal and interest Lotus 1,2,3 a spreadsheet program Managing Your Money v3.0 tax and financial planning features MetaStock Pro professional program for charting and analyzing stocks Microsoft Money 2002 Deluxe assists with personal finances, financial planning, investing and taxes Personal Stock Monitor Gold v5.1.2 helps monitor stock portfolios Quicken 2002 Deluxe assists with personal finances, financing planning, investing and taxes Trading Solutions helps to analyze financial market data WinStock Pro v2.6.0 a stock tracking program
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List of Web sites
Bank of Canada http://www.bankofcanada.ca A collection of over 6 000 international financial resources http://www.canadianfinance.com Banking information http://www.cba.ca Business and financial terms http://www.cnnfn.com Financial education and understanding http://www.finpipe.com All-encompassing financial information guide http://www.fool.com Mutual funds http://www.fundlib.com A database of financial and economic information http://www.finweb.com Investing basics http://www.investorED.ca Investment articles http://www.investorguide.com Glossary of terms http://www.investorlearning.ca Risk and return http://www.mainstayinv.com Rule of 72 http://www.moneychimp.com Tools http://www.moneysense.ca Canadian Institute of Financial Planning http://www.mutfunds.com
Investor protection http://www.osc.gov.on.ca Latest market news http://www.quicken.ca All financial instruments http://www.royalbank.com All financial instruments http://www.scotiabank.ca Money supply http://www.rcmint.ca/en/ Rule of 72 http://www.ruleof72.net Financial statistics http://www.statcan.ca Mutual funds http://www.tdbank.com Market commentaries and financial research http://www.tdwaterhouse.ca Stocks http://www.tsx.ca Annuities http://www.teachmefinance.com Compound interest http://wwwebmath.com Money, budgeting http://www.yourmoney.cba.ca Wilfrid Laurier National Secondary School Stock Market Competition http://invest.wlu.ca
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Step 5: Portfolio Records and Monitoring
You have determined how much money your client needs to reach a goal. You have calculated an amount of money needed weekly, monthly or yearly to reach those goals. You have chosen an asset allocation model that reflects your clients investor personality. You have selected several investments within each category that fit your investment criteria and decided how much of your clients savings will be put into each investment. Now you must find a method to record the purchase of those investments so that your client can verify these transactions and monitor the fluctuating investment values on the Internet. You have several choices: software, spreadsheets, databases and online portfolio programs. You will find the best solution by trying them out. See how easy or hard it is to enter transactions. Look at the reports they generate and see if they provide you with the information you want.
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Exploratory Activity Step 5: Portfolio Records and Monitoring
A fundamental role in the life of a financial advisor is the regular monitoring and reporting to clients. Investors want to know what is happening in the market and how their portfolios are being affected. Normally, investment advisors send out a monthly statement that is directly mailed to the clients' home. Many clients also appreciate the freedom of being able to view the progress of their portfolio online. You can input the data from your client's portfolio into one of the sites below, and it will track the progress for you. You can then use that data to report back in writing to your client. Explore the internet sites below and decide which site best suits your needs. Feel free to include the tracking information in your client's portfolio. Globe and Mail: http://www.globefund.com Money Sense: www.moneysense.ca The Motley Fool: http://www.fool.com - click on My Portfolio at the top of the page
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Worksheet 5: Records And Monitoring

1. Read Step 5 - Portfolio Records and Monitoring 2. Determine a method for recording your clients investments. a. Describe your method of recording the purchases of your investment choices.
b. Provide your client with the forms and/or spreadsheet and/or database to monitor investments made. c. Read the portfolio project report and presentation rubrics. d. Discuss and assign tasks for the completion of your portfolio project.
150

How Well Did We Work Together Survey
5 A Whole Bunch 4 A Lot 3 Some 2 Little 1 Very Little
A Group and Individual Assessment
All members contributed ideas. All members of our group listened carefully to the ideas of others. All members of our group encouraged others to contribute their thoughts and ideas. We made certain all members of our group understood the work. Our group stayed focused on the task. All members of our group paid attention in class. All members of our group participated and shared the work. Each member of our group did his/her portfolio homework consistently. Each member of our group did some independent research which was then contributed and/or shared with the group. Summary of group responses to the scale _____________________________________________________________________________________________ _____________________________________________________________________________________________ ______________________________________________________________________________________________ ______________________________________________________________________________________________ Areas for improvement as determined by the group ______________________________________________________________________________________________ ______________________________________________________________________________________________ ______________________________________________________________________________________________ ______________________________________________________________________________________________ ______________________________________________________________________________________________
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Teaching Financial Literacy

Unit of Study: Creating An Investment Portfolio

Creating an Investment Portfolio: A Unit of Study

Project Introduction: Estimated Time: 60 Minutes

Estimated Time: 60 Minutes

Estimated Time: 30 Minutes

Recording Ideas Student Worksheet

Step 1: Investor Personality Profile Estimated Time: 60 Minutes

Step 1: Investor Personality Profile Handout Step 1 - Exploratory Activity

Identify Your Client.

Estimated Time: 30 Minutes

Describe Your Client

Estimated Time: 30 minutes

Step 2: Investment Goals Estimated Time: 3-4/ 60 minute periods

Describe Your Clients Investment Goal

Estimated Time: 60 minutes

Step 3: Asset Allocation Model Estimated Time: 45 minutes

Step 3: Asset Allocation Handout

Complete for Your Portfolio

Estimated Time: 3x60 Minute Periods

Present and Future Value

Step 4: Investment Decisions Estimated Time: 3x60 Minutes

Step 4: Investment Decisions - Handout Lesson 7

Step 4 - Exploratory Activity Glossary - Handout

Capital Markets and Investing

Estimated Time: 20 minutes

Project Completion Plan

Creating an Investment Portfolio: A Unit of Study

Creating an Investment Portfolio: A Unit of Study

Presentation: 20% of the Total Mark

Creating an Investment Portfolio: A Unit of Study

Some elements were evident

Most elements were evident

Investment Decisions (40%)

Portfolio Records and Monitoring (20%)

Few assignments, notes and classwork included in investment portfolio

Creating an Investment Portfolio: A Unit of Study

Few elements were evident

Some elements were evident

Most elements were evident

Financial Terms - Answers

Mathematical Skills 1 - Answers

Mathematical Skills 2 - Answers

Creating an Investment Portfolio: A Unit of Study

Creating an Investment Portfolio: A Unit of Study

Step 1 Investor Personality Profile

Creating an Investment Portfolio: A Unit of Study

University Ottawa McGill Carleton Toronto

Meal Plan $2 250 Residence Covered Residence Covered Residence Covered

Entertainment $350 $350 $350 $350

Transport $400 $650 $400 $650

Other $200 $200 $200 $200

Total $8 430 $13 288 $7 121 $15 227

Creating an Investment Portfolio: A Unit of Study

Creating an Investment Portfolio: A Unit of Study

Creating an Investment Portfolio: A Unit of Study

Purchase Price $779.72 $714.60 $737.60 $757.77 $11.36

Change in Value Since Purchased -$15.84 -$10.20 -$17.28 +$5.35 -$39.97

Value Last Month $500.00 0

Change in Value 0 $1 400.00 +$1 400.00

Change in Value -$422.25 -$39.97 +$1 400.00 +$987.78

Creating an Investment Portfolio

Introduction Worksheet: Investment Teams

Creating an Investment Portfolio: A Unit of Study