Notesale: Turn your study into money

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ECONOMICS NOTES
I
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Mutual Fund
Investors put money into a portfolio that invests the money into DIVERSIFIED ASSETS
Include: Stocks, bonds, metals, cash, real estate
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72/9 = 8 (8 years with 9% interest)
B
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1
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Capital Gains = Buy low, Sell high (increase in value)
Dividends = Companies pay a portion of their profits to shareholders a few times a year
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Risks of Buying Stock
No guarantee it will rise
Limited Liability = Long on an investment, you can only lose the amount of your initial investment
Risk Aversion = People who don’t risk an option with an uncertain outcome
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CDs, Bonds, Savings Account
Risk Tolerance = how much loss someone can handle
3
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Infinite exposure to loss
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Stock Prices
Stock is worth what someone it willing to pay for it
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Demand up, price up
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5
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Licensed stockbrokers work on the exchange, execute trades

EX
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S&P 500 = 500 leading companies’ progress
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Bull Versus Bear
Bull Market = stock prices rising (long)
Bear Market = prices are falling (short selling)
D
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Eventually demand decreases/stagnates while there is still much in supply = bubble bursts
E
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Illegal because it gives
insiders an unfair advantage, so people won’t want to invest
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Social Security
Gov’t safety net
Today’s workers pay for today’s retirees
Problem #1: Just a promise to pay back the money collected from paychecks with interest
Problem #2: Surplus goes elsewhere
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Problem #3: Less workers per retiree
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Baby boomers
Problem #4: People live longer
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III
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Lien theory = buyer holds the deed to the property with the promise to make all payments to the lender
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Percentage of the total amount of money borrowed
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Lenders will collect them monthly along with your loan payment and then pay the tax and
insurance bills when they are due
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Equity = portion of your home’s value that you have already paid for
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1
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Subprime
Loan given to people with bad credit scores
Credit score = likelihood of you paying back loan
Higher interest rates
Plus side: People with low credit scores can enter the market
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Type of subprime : Adjustable Rate mortgages (no guarantee it will be fixed at the introductory rate) =
since there is no guarantee, it can increase by 50% or more despite the initially low interest rates
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Foreclosures =
When a borrower defaults (FAILS TO PAY), they go into foreclosure
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A
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Lender sells mortgage to Investment Bank (purchases mortgages, car loans, credit card debt, student loans
packaged as a CDO-collateralized debt obligation)
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Investor buys Credit Default Swap (insurance of CDO failure) from AIG ( insurance company) b/c they
know it will fail
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Not held liable for ratings, like ARM (type of subprime)
Gov’t gives AIG money to pay it all off (money from us)
Conditions that contributed to the Housing Crisis
1
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Creation of CDOs
Investment banks pay rating agencies to falsify the investment grade
Lenders give out and sell SPMs to borrowers and Investment banks
SPM supply increases, bank profits increase, then foreclosures increase (borrower can’t pay off the
mortgage)
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-Sellers have more buyers resulting in an artificial rise of prices
-Foreclosures occur = can’t sell house overvalued so sell low, then surrounding homes decrease in price
-All industries related to housing lose value in stock market
-AIG loses money insuring investors and paying out credit default swaps to Investment banks at the
expense of the taxpayers who lost job, retirement fund, home
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IV
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Colleges - Financial aid packages are misleading
Colleges market they school with deceptive language that hides negative financial terms (aka Rating
Agencies)
Colleges lowering standards to make money (such as: the more SPMs, the more banks profit)
2
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Students
4
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Parents and students think taking a loan out with low interest will be easier to pay back
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Also raise rates to
get more subsidies from the gov’t
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Less return on your investment b/c more people graduating reduces the value of college degrees
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(AKA a group of people
not financially prepared get SPM’s and eventually default)

PROBLEM with current gov’t lending practice :
Risk not priced into student loans so all given equal rate
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credit scores determine your risk)
Proposed Solution: Peer to peer lending (alumni)
Downside of SOFI lending =
They look at your degree and school to determine your likelihood of paying back loans
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