Economics

What is the purpose of 401(k) and 403(b) accounts?

401(k) and 403(b) accounts are employer-sponsored retirement savings accounts that allow individuals to save some of their income before paying taxes on that income. 403(b) accounts are available only to employees of nonprofit organizations.

. What is a bond?

A bond is a debt instrument—like an IOU—issued by a government or corporation. When you buy a bond, you are lending money to a government or corporation.

What are some reasons company owners might decide to " go public" and issue stock?

A company owner may issue stock to raise money for expansion because the money could be difficult to obtain from another source.

What are some primary differences between newly issued coupon and zero-coupon bonds?

A coupon bond is sold at its face, or par, value, and interest is paid to the bondholder for a set time (usually semi-annually or annually) until the bond matures. When the bond matures, the bondholder receives the initial investment back along with the final interest payment. Many bondholders use interest payments as income. A zero-coupon bond is sold at a price lower than its face value; the bondholder receives the face value when the bond matures. Thus, with a zero coupon bond, all of the return (interest) is received at maturity.

What is direct deposit and how can it help you save?

A direct deposit is an electronic transaction on which money is deposited directly into a payee's bank account from the payer's bank account. A direct deposit helps you save because you " pay yourself first ", so money is set aside before you spend it on anything else

What is a stock?

A stock is a share of ownership in a company; ownership in the company is equal to the number of shares owned by the shareholder relative to the total number of shares owned by all members. Stocks are often traded publicly. A publicly traded company issues stock that is trade on a stock exchange, such as the New York stock exchange.

What are advantages and disadvantages of traditional retirement account?

Advantage: With pre-tax saving, you have higher take-home pay while working. Your employer may match your savings. Disadvantage: Your savings is taxable upon withdrawal in retirement.

What are advantages and disadvantages of Roth retirement account?

Advantages: Your savings is not taxable upon withdrawal at retirement. Your employer may match your savings. Disadvantages: When you pay taxes before saving, you have lower take-home pay while working.

List several factors contributing to an investor's level of risk tolerance.

Age, income, personality, the investment purpose, and when the money is needed.

In what way is interest rate like a price?

An interest rate is like a price because the higher (or lower) the interest rate, the higher (or lower) the amount you must pay to borrow money.

Explain why FDIC-insured savings and checking accounts do not offer a high potential for reward.

Because these types of accounts are insured, they are very low risk.

What is the relationship between bond prices and interest rates?

Bond prices move opposite the market interest rate.

What are three main types of investment companies?

Closed-end funds, unit investment trusts, and mutual funds.

What are some differences between owning common stock and preferred stock?

Common stockholders are considered company owners and may vote in matters affecting the company. Preferred stockholders do not have voting rights in the company but receive dividends before any return is paid to common stock holders. In the event of liquidation--- that is, the company sells its assets and closes its doors--- preferred stockholders would receive payment before common stockholders.

What is the general relationship between risk and potential reward when investing?

In general, the higher risk of loss of principal for an investment, the greater the potential reward, and, conversely, the lower the risk of loss of principal for an investment, the lower potential reward. To attract buyers, the seller of potentially risky investments must offer higher return than the buyer could potentially earn on less-risky investment. In other words, when the risk of potential loss is high, people expect greater returns. When the risk of potential loss is lower, people are willing to accept lower returns.

What is an investment company?

It is a company that collects and pools money from many investors and invests in stocks, bonds, and other assets.

What is an actively managed fund?

It is a fund managed by a group of investment professionals, or managers, that buy and sell securities within the fund and attempt to make it profitable.

What is an index mutual fund?

It is a fund that attempts to replicate the returns of a particular index, like the S&P 500 or Dow Jones Industrial Average. (An index is a group of stocks or other investment instruments used to replicate the fluctuations of a particular market. It's a mathematical construct, or weighted average, based on the various prices of stocks.)

Based on the risk-reward pyramid of investment, give two examples each of investments with potentially low, medium, and high risk and corresponding potentially low, medium, and high reward.

Low: Treasury securities or government bonds, certificates of deposit (CDs), savings accounts, cash, and checking accounts Medium: Stocks, mutual funds, and corporate bonds High: Commodities, antiques and collectibles, and real estate

What is the main difference between regular 401(k), 403(b), and IRA accounts and Roth versions of each?

Money saved in Roth retirement accounts is deposited after paying taxes on that money (income). Because the taxes have already paid, no additional taxes will have to be paid when money is withdrawn from the account during retirement.

For what two purposes do people generally buy stocks?

People generally buy stocks to earn capital gains or to receive dividends. Capital gains are the money earned when an asset increases in value form the time it is purchased to the it is sold. That is, when you sell an asset for more than you paid for it, you earn capital gains. A dividend is a share in the company's profit--- it is money you are paid when you are a stockholder.

What are some benefits of participating in an employer-sponsored savings plan?

Some employers match your savings up to a certain amount You cane make direct deposits to these plans from your paycheck on a regular basis There may be tax advantages for saving through these plans

If you have a savings account and a goal for how much money you want to save, what three factors will affect whether you meet your goal?

The amount of money you save on a regular basis ( per pay period or monthly) The interest rate Time when you start saving and how long you save

Explain the opportunity cost of waiting to start a savings account and spending money instead

The opportunity cost of waiting to start a savings account and spending the money now is that you have money to spend later and you will not earn the extra money--- compound interest--- that would have been earned with a savings account.

How do financial professionals generally define the term "investment"?

They use the term investment to describe an asset that is purchased with the hope that it will gain value and provide a financial return.

What does it mean to " pay yourself first "?

To pay yourself first means to put money in savings, before spending it on anything else.

What is a major cost a company incurs by selling stock?

When a company sells stock, it gives up sole ownership of the company and therefore must share the profit and control (management) of the company with its stockholders.

Why is it so important to understand and take advantage of compound interest?

When you earn compound interest, you earn money on the principal and on all the interest you have earned along the way. The earlier you start saving, the more you will earn over time on the previously earned interest, so saving for a longer period can help your savings grow substantially and more quickly.

What is the general relationship between risk and potential reward when investing?

In general, the higher the risk of loss of principal for an investment, the greater the potential reward, and, conversely, the lower the risk of loss of principal for an investment, the lower the potential reward. To attract buyers, the seller of a potentially risky investment must offer a higher return than the buyer could potentially earn on a less-risky investment. In other words, when the risk of potential loss is high, people expect greater returns; when the risk of potential loss is lower, people are willing to accept lower returns.

What is an investment risk?

Investment risk is the uncertainty that an investment will gain, or even retain, its value.

What is a mutual fund?

It is an open-end company that pools investors' money then issues shares to its investors.