Econ Ch. 11 Quiz

stock exchange

a secondary market where securities (stocks and bonds) are bought and sold

preferred stock

a share of ownership in a corporation giving the holder a share of profits but no voting rights

common stock

a share of ownership in a corporation that gives the holder voting rights and a share of profits

what are financial markets?

a situation in which buyers and sellers exchange particular types of financial assets

what are junk bonds?

a type of corporate bond- considered to be high risk with the potential for high yields

what are the two types of financial intermediaries?

banking and nonbanking

according to bond ratings, which is the best rating and which is the lowest rating?

best= AAA lowest= D

What are corporate bonds?

bonds issued by corporations- LEAST SAFE

what are banking financial intermediaries?

commercial banks, S&L's and credit unions

what are the two types of investments?

economic and personal

what are nonbank financial intermediaries?

financial companies, life insurance companies, mutual funds, and pension funds

What are financial intermediaries?

financial institutions that collect funds from savers and then invest these funds in loans and other financial assets

what are pension funds?

funds that allow employees to save money for retirement and sometimes include contributions from employees (same as mutual funds but they cannot be accessed until you retire)

define coupon rate

interest rates a bondholder receives every year until a bond matures

Initial Public Offering (IPO)

this stock raises money for the company

What is a certificate of deposit?

time deposits offered primarily by banks, savings and loans, and credit unions (CD's have a maturity date)

what are the 2 characteristics investment objectives are based off of and what do they mean?

time-how long you are looking to invest (short-term) income- how much money you have to invest

why buy stock? (2 reasons)

to earn dividend payments (shares of the company's profits) & to earn capital gain (selling the stock at a higher price than the purchasing price)

bear market

when stock prices decline steadily

bull market

when stock prices rise steadily

diversification

the practice of distributing investments among different financial assets to maximize return and minimize risk

what are two reasons why people buy bonds?

1) interest paid on bonds 2) gains made by selling bonds

What are municipal bonds?

Bonds that have been issued by state or local governments- SECOND SAFEST

what are 3 examples of risk free investments?

CDs, government bonds, and savings

what are the 3 stock indexes?

Dow Jones Industrial Average (tracks the stocks of 30 of the largest companies traded on the NYSE), S & P 500, and NASDAQ Composite

Would you want a higher or lower market interest rate?

HIGHER- we would want whatever year is highest

equation for calculating interest:

P(1+r)^t

What are government bonds?

THE SAFEST BONDS- federal government is super safe because it is very unlikely to fail

they allow investors to own a variety of short-term assets (treasury bills, municipal bonds, large denominations CD's and corporate bonds). Short Term.

What are money market mutual funds?

define bond

a contract issued by the government or a corporation promising to repay the borrowed money, plus interest, on a fixed schedule

investment objective

a financial goal that an investor uses to determine if an investment is appropriate ex: saving money for a house, retirement, college, or vacation

NASDAQ

a nationwide electronic system that links dealers across the nation so that they can buy and sell securities (stocks and bonds) electronically

define economic investments

money lent to businesses to help them finance their operations and development

what are mutual funds?

pools of money from personal investors that are managed by an investment company

return

profit made from an investment

define personal investments

putting money into financial assets, such as CD's, stocks, bonds, or mutual bonds

what determines stock prices?

supply & demand

define par value

the amount that the bond issuer promises to pay the borrower at maturity

define maturity

the date when the bond is due to be repaid

what is one of the biggest risks investors face?

the loss of the purchasing power of money invested due to inflation... interest rates may not keep up with inflation

what are capital markets?

the market for buying and selling long-term financial assets

what are money markets?

the market for buying and selling short-term financial assets (usually less than a year)

what is a primary market?

the market for buying newly created assets directly from the issuing entity

what are secondary markets?

the market where financial assets are resold (most prominent)

New York Stock Exchange (NYSE)

the oldest and largest organized stock exchange in U.S., auction based format

risk

the possibility of loss on an investment