Chapter 11-Financial Markets

What are the pros and cons of mutual funds?

Pros: Diversification, Expert management, liquidity, convenience, reinvestment of income, affordability. Cons: No control over portfolio, fees and expenses, cash drag, capital gains

What are the pros and cons of a savings account?

Pros: easy to open, save money on bank fees, insured for up to $250,000 Cons: interest earned is very low, no tax benefits

What are the pros and cons of stocks?

Pros: opportunity for substantial returns, liquidity, abundant choices Cons: investing can be time-consuming, volatility.

What are the pros and cons of a CD?

Pros: safety, better return than savings deposits, wide selection, fixed, predictable return Cons: limited liquidity, inflation risk

What are the pros and cons of savings bonds?

Pros: save automatically, diversify your risk, end up with a safe investment, avoid paying any sales commission, invest minimal amounts, pay no or low taxes, gain educational tax benefits Cons: Face penalties for early redemption, need to be careful when you redeem your bonds

How does the financial system bring together borrowers and savers?

The Financial System allows savers to save and borrowers to borrow. The system backs up the savers money if the borrowers don't pay the savers back.

portfolio

a collection of financial assets

savings bond

a low-denomination bond issued by the United States Government

certificate of deposit

a savings certificate entitling the bearer to receive interest

mutual fund

an organization that pools the savings of many individuals and invests the money in a variety of stocks, bonds, and other financial assets

investment

the act of redirecting resources from being consumed today so that they can create benefits in the future; the use of assets to earn income or profit

risk

the chance that macroeconomic conditions like exchange rates, government regulation, or political stability will affect an investment, usually one in a foreign country.

return

the money an investor receives above and beyond the sum of money initially invested

diversification

the strategy of spreading out investments to reduce risk

maturity

the time at which payment to a bondholder is due