finance midterm review

credit card

A plastic card that allows you to make purchases now with borrowed money, which then you must repay to the lender in one lump sum or in monthly payments with interest

WHERE do you get a check register?

A register often comes with every order of checks

Bond

A security in which the investor loans money to a company or government, which then pays regular interest to the bondholder and returns the principal on the bond's maturity date

Stock

A share of the value of a company, which can be bought, sold, or traded as an investment and which gives the investor small partial ownership of the company

Charge Card

A special type of credit card with no interest because you must pay the balance in full each month

Secured Credit Card

A type of credit card that requires the borrower to pay the company a fixed, up-front amount of money as collateral, which becomes the credit limit of the card, thereby making it low-risk to the credit card company

Target Date Fund (TDF)

A type of investment fund that rebalances its asset mix over time based on a projected retirement year

Personal Loan

A type of loan issued by a bank, credit union or online lender that you pay back in fixed monthly payments, typically over two to seven years

401(k) Loan

A type of loan where you borrow money from your retirement savings account. You must pay that borrowed money back, plus interest, within 5 years of taking your loan, in most cases.

Annual Fee

A yearly fee that may be charged for having a specific credit card, independent of how you use the card

All of the following are risks of owning an individual stock EXCEPT A. Demand could unexpectedly increase in your company's stock B. Stock prices are hard to predict n the short term C. The stock price could decrease and you could lose money D. unforeseen developments could cause the company to go out of business

A. Demand could unexpectedly increase in your company's stock

How can you make money from investing in a stock? select all that apply. A. receive dividends from company B. increase the cap size of the company C. sell the stock for less than the purchase price D. sell the stock for more than the purchase price

A. receive dividends from company and D. sell the stock for more than the purchase price

you receive a check for $50 from Jo you go to an atm to deposit. how do you endorse the check? A. sign your name, write deposit only and your checking account number on back B. sign Jo's name C. sign name on front of check D. no need to sign since it's addressed to you

A. sign your name, write deposit only and your checking account number on back

Reflect on what you've learned about what bonds are and how they work. A. why might a corporation or government issue a bond? B. How might an investor benefit from investing in a bond?

A. they might issue a bond to raise funds, similar to taking out a loan. B. Investors benefit from bonds because they receive a regular interest payments, as well as the reurn of the principa investment. some advantages of investing in bonds include lower risks than stocks, generatng steady income, and diversifying your investments.

List the steps for balancing your account.

Add all your deposits to the beginning balance for an account's statement period Subtract from the subtotal the checks you've written, ATM and debit card withdrawals, and bank fees

Brokerage Account

An account that lets individual investors trade stocks, bonds, mutual funds, and other investments

Loan

An agreement where you are credited with a fixed amount of money for a fixed period of time, usually with interest

Rate Of Return

The ratio of money gained or lost on an investment relative to the amount of money invested; also known as return on investment (ROI)

Nasdaq

The second largest stock exchange in the world behind the NYSE

Minimum Payment

The smallest amount of a credit card bill that a credit card holder must pay during a billing cycle to remain in good standing with the lender

Fixed-Rate Mortgage

A mortgage that has a fixed interest rate for the entire term of the loan as long as ontime payments are being made

Credit Union

A nonprofit financial institution that is owned by its members and organized for their benefit

Down Payment

A partial payment made in cash at the beginning of the purchase of a good or service, while the remaining balance is due later or is financed as part of a loan

Authorized User

A person who has permission to use and/or carry another person's credit card, but isn't legally responsible for paying the bill

Opening a checking account

2 forms of Identification (i.e. Social Security card, driver's license), Proof of Address, Opening Deposit (between $25 and $100)

Joint Account

A bank or credit account that is shared between two or more people which allows everyone named on the account to access the funds

Maturity

A bond reaches maturity at the end of a set time period. Then, the investor receives the principal amount invested.

Treasury Bond

A bond, generally considered to be a risk-free investment, issued by the U.S. Treasury with a maturity of more than 10 years

In your own words, explain the difference between a bull market and bear market.

A bull market is when stock prices are rising and the economic outlook seems strong. A bear market is when stock prices are falling, which is sometimes accompanied by high unemployment or a recession.

Portfolio

A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including mutual funds and ETFs

Mutual Fund

A collection of stocks and/or bonds combined into one fund which will be traded as a unit, typically chosen and actively managed by an "expert" in exchange for a fee from each investor

Lease

A contract (often used for cars or property) by which one party gives property to another for a specified time, usually in return for a periodic payment

Cash Back

A credit card benefit that pays the cardholder a small percentage of their net expenditures, often as cash, payment toward their balance, reward points, travel miles, or gift cards

Cash Advance

A credit card service that allows cardholders to withdraw a certain amount of cash, either through an ATM or directly from a bank, typically at a high interest rate or for a fee

Social Security

A federal program that provides monthly benefits to millions of Americans, including retirees, military families, surviving families of deceased workers, and disabled individuals

Late Payment Fee

A fee charged if your payment is received after the due date

Security

A financial asset, such as a stock or a bond, that can be bought and sold in a financial market

Asset Class

A group of financial instruments which have similar financial characteristics and behave similarly in the marketplace (like stocks, bonds, and cash)

Penalty APR

A higher interest rate triggered by being late with or missing a credit card payment

Credit Card Agreement

A legal document that outlines the terms and conditions for using your credit card

Variable-Rate Loan

A loan in which the interest rate can change, based on prime rate or index rate, over the course of the loan

Mortgage

A loan taken by individuals and businesses to make real estate purchases without paying the entire value of the purchase up front

Small Business Loan

A loan used to fund expenses connected with operating a small business

Fixed-Rate Loan

A loan with an interest rate that does not change over the life of the loan

Index Fund

A low-fee portfolio of stocks chosen to track or mimic a stock market index, thereby removing the human element of investing because no one is choosing the individual stocks

Bear Market

A market in which prices are falling, encouraging selling.

Bull Market

A market in which there is increased stock trading and rising stock prices

Stock Exchange

A market where shares in corporations are bought and sold through an organized system

Bond Rating

A measurement of the likelihood that a bondholder will be paid back

Peer-To-Peer Lending

A method of debt financing that enables individuals to borrow and lend money without the use of a financial institution as an intermediary

Statement

A monthly record of your account transactions provided by your credit card company electronically or on paper

Adjustable Rate Mortgage (ARM)

A mortgage in which the initial interest rate is normally fixed for a specified period of time after which it is reset periodically, often every month

Explain why a passively managed fund guarantees the average return of the individual securities in that fund, but it cannot ever outperform the return of the index it tracks. What is one advantage and one disadvantage of this strategy?

An index fund mirrors the performance of a select group of stocks that make up an index. Since it invests in only that group of stocks and nothing else, there is no way for it to outperform that index. One advantage of this strategy is that it is a generally safe and well-diversified approach to investing. If the market increases in value, so will the fund. One disadvantage to this strategy is that if the market loses value, so will the fund.

S&P 500

An index of 500 large cap companies chosen based on their size, industry, and other factors, used to represent the entire market

Revolving Credit

An open line of credit that can be used for any purchases as long as you are under the limit; its payments vary monthly based on size of the debt

Describe the two ways an investor can make money by investing in a mutual fund. Appreciation: Dividend Payment:

Appreciation: When the assets a fund invests in go up in value, so does the value of the fund. If at the end of the day a fund's value closes higher than when it opened, you'll have made money. Dividend Payment: The fund can decide to make dividend payments to its investors, just like companies can choose to do for their shareholders.

HOW OFTEN should you update your check register?

As often as possible; every time you make a transaction; some people do weekly or even daily

Which of the following is a similarity between a prepaid card and a debit card? A. both require credit check to use B. both are limited by the amount of money you currently have C. both are linked to a bank D. both require a fee to put money in the account

B. both are limited by the amount of money you currently have

Which is the process of comparing your own records to the records provided by your bank? A. writing a check B. reconciling your checking account C. completing a check register D. balancing your checking account

B. reconciling your checking account

Which of the following are NOT a method of depositing money into a checking account? A. mobile app deposit B. sending your money to the branch through mail C. through an ATM machine D. direct deposit through employer

B. sending your money to the branch through mail

Historically, why was it important to balance and reconcile your account?

Balancing was crucial to keep track of checks that had been written but could take a week or longer to be processed through the banking system. Reconciling was important to check that the bank had not made any errors, such as double-posting a check so the amount was withdrawn twice for the same payment

How does a company benefit by having their stock listed on an exchange?

By having stock listed on an exchange, companies are able to raise capital to grow their business.

Which of the following best describe what FDIC insurance is? A. a bank program that protects you from overdraft fees B. a budging program offered by a bank to help you save for the future C. a government backed policy that protects your money if the bank fails D. additional accounts offered by banks to save for car and home insurance

C. a government backed policy that protects your money if the bank fails

Explain why someone who is not interested in selling their bond before its maturity date does not have to worry about the current bond market and its impact on the price of their bond.

Changes in the bond market do not change the terms of your investment, so you will continue to receive the same interest payments. If you are not going to sell your bond, your initial investment will not be impacted by price changes. Bonus: Even if your bond's price falls, you can reinvest your interest payments at the new higher interest rate.

List the steps for reconciling your account.

Compare each item from your check register to the items the bank has listed on your statement. Add all of the deposits the bank has not yet credited to the bank's balance Subtract all the payments, withdrawals and bank fees the bank has not cleared yet

Inflation

The rate at which the price of goods increases and consumer purchasing power decreases over time

Which tends to be a riskier investment - corporate bonds or government bonds? Why?

Corporate bonds are riskier because corporations are less stable than governments, so they are more likely to go bankrupt or default.

Difference between credit & debit

Credit card: Is a loan, has a spending limit, requires monthly payments, interest charged on your unpaid balances, not linked to a bank account, card does not say debit on it Debit card: linked to a bank account and money comes out immediately

What factors determine interest rate?

Credit score, Employment history, Length of relationship with a financial institution, Other debts

Which of the following most accurately describes default risk? A. Can't invest because high price value B. a government pays back the investor the principle amount plus interest over the term of the bond C. the invester invests in multiple bonds to increase their chances of getting their money back D. A corporation is unable to pay back the invester because it goes bankrupt

D. A corporation is unable to pay back the invester because it goes bankrupt

What 2 items do you need to reconcile your checking account? A. check register and voided checks B. check register and credit card statements C. credit card statements and monthly bank statements D. check register and monthly bank statements

D. check register and monthly bank statements

Which of the following statements about the sock market is true? A. we have been in a bull market for the last 20 years B. A bear market is where stocks are tending upwards C. stocks are low risk and short term investments because trends are predictable D. overtime the stock market averages 6-7% growth per year

D. overtime the stock market averages 6-7% growth per year

Unsecured Debt

Debt not tied to a specific asset, making it difficult or impossible for the lender to repossess items if payments are not made

Secured Debt

Debt tied to a specific tangible asset that can be used as collateral and repossessed if payments are not made

Risk

Degree of uncertainty on how likely the investor is to make money on an investment

Asset Allocation

Dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash

Advantages for checking accounts

FDIC insurance, no fees to cash checks, debit card use.

Interest Rate

The rate charged for borrowing money usually expressed as a percent of the amount borrowed

Overdraft fees

Fees ($35 per transaction) incurred when a customer withdraws more money from an account than what is available in the account.

How do the fees associated with a fund impact your overall return on investment?

Fees decrease your overall return on your investment. Fees are collected even if the fund doesn't perform well.

Three types of credit cards,

General purpose credit card Store or limited purpose card Charge cards (or Travel and Entertainment cards)

Are index funds actively or passively managed?

Index funds are passively managed.

Diverdification

Invest in multiple asset classes, like stocks, bonds, and cash investments. Invest in multiple companies/securities within each asset class

In your own words, describe how investing in a fund is a more diversified approach than investing in a single stock or bond.

Investing in a fund is more diversified because the purpose of a fund is to spread your money across different investments, where with a single stock or bond your return is entirely based on the performance of that one investment.

As an investor, what are the risks involved with buying one company's stock?

Investing in one company is risky because your investment's performance is based solely on the success of that company. If they do well, you make money. If they do poorly, you lose money. You have no other ways to make up for that one company's stock.

What are the two ways that investors can make money from stocks?

Investors can make money by selling stock when the price increases or by receiving dividends from the company who issued the stock.

Installment Loan

Loan used to finance a specific purchase for a specific amount of time, during which regular payments pay the accrued interest and a portion of the principal

Default

Long-term failure to repay a loan according to the terms agreed to, which has a substantial negative impact on the borrower's credit score

Market Capitalization

Market value of a company's outstanding shares calculated by multiplying the current share price by number of shares outstanding

Dividend

Money from the profits of a company that is paid out to its shareholders, typically on a quarterly basis

Are most mutual funds actively or passively managed?

Most mutual funds are actively managed.

Similarities between a prepaid card and a debit card

No credit required, limited to the current money on card, used to shop online, safer than cash.

Difference between a prepaid card and a debit card

Not linked to a checking account or bank, fee required to apply money,

Principal

Original amount of money borrowed, separate from interest or fees

Why checking account is essential

Pay bills on time because can pay online, shop online with better prices, guarantee a successful balance of budget using multiple checking accounts.

How can you avoid paying interest on your credit card?

Pay the balance in full on time (at the end of the month in the video, but could vary based on your statement dates)

During a bear market, why do many people sell their investments? Why isn't that beneficial?

People may sell their investments because they believe the market will continue to fall. However, they may lose money by selling their stocks at a low price, whereas they could have waited for prices to rebound.

Define principal, interest, & term

Principal - Amount you are borrowing Interest - Percentage that your financial institution charges you for lending you the money Term - Amount of time to pay the loan back

Capital Gain

Profit from the sale of an asset, such as a stock or a bond, calculated by subtracting the price you initially paid from the price you then sold it for

pros and cons of Fixed Rate Loans

Pros Borrowers know exactly what their monthly payment will be regardless of market rate changes. Fixed rates do not rise during periods of rising interest rates. Borrowers can self-select their own time frames for many loans ranging from 6-month to 10-year non-mortgage loans. Cons Loans are less flexible under fixed rate agreement terms. Fixed rates do not fall during periods of declining interest rates. Fixed term fees may incur additional fees should the borrower want to change terms or exit the loan early. Fixed rate loans have historically been more expensive over their life than variable rates.

pros and cons of Variable Rate Loans

Pros Loan repayments decrease when interest rates fall. Loans typically get better upfront perks like low introductory rates for an initial loan period. The interest rate for a variable loan is generally lower than a fixed loan, especially when the loan is incurred. Cons Loan repayments increase when interest rates rise. Loans may become more expensive than fixed rate loans should interest rates rise quickly. Borrowers face greater risk if overcapitalized or already at repayment capacity. Borrowers may not be able to plan or forecast future cashflow due to changing rates.

Compound Interest

Reinvesting earned interest back into the principal to allow money to grow exponentially over time

Cosigner

Someone who legally agrees to take responsibility for a person's debt if they cannot repay it

Collateral

Something valuable that the lender can take as payment if you can't or don't repay your secured loan

Disadvantages for checking accounts

Spends more than with cash, could be charged with fees, banks could fail.

Balance Transfer

The act of transferring debt from one credit card account to another, usually for a fee

Net Price

The actual cost a student pays to attend a school, calculated as the sticker price minus grants and scholarships

Term

The amount of time you have to repay your entire loan

Interest

The amount you owe as the cost of borrowing money

Coupon

The annual interest payment on a bond, usually expressed as a percentage of its face value

Overdraft protection

The bank will automatically move funds you have available in another linked account to the overdrawn account.

Annual Percentage Rate (APR)

The cost you pay each year to borrow money, including fees, expressed as a percentage

According to the article, why is it more useful to look at the percent change of a stock price, rather than the change in dollar amount?

The dollar amount change doesn't factor in the stock's price. The percent change gives a clearer idea of how much the stock price has moved.

Coupon Rate:

The interest rate on a bond. Regular interest payments are paid to investors.

Credit Limit

The maximum amount that may be borrowed on a credit card

Grace Period

The number of days between a borrower's statement date and when payment is due, often without accruing interest

Amortization

The paying off of debt over time in equal installments; part of each payment goes toward the loan principal while the other part goes toward interest

Diversification

The practice of investing in a large variety of stocks, bonds, and/or funds as a way to as a way to reduce your overall risk

Dollar Cost Averaging

The practice of putting a fixed amount into an investment over a period of time, regardless of the price of that investment

Investing

The process of setting money aside to increase wealth over time for long-term financial goals such as retirement

Introductory APR

The typically low rate charged during the introductory period after a credit account is opened, after which the regular, typically higher, APR will apply

Home Equity

The value of ownership built up in a home or property that represents the current market value of the house minus any remaining mortgage payments

New York Stock Exchange (NYSE)

The world's largest stock exchange, physically located in New York City

What is an expense ratio? Why is it important to make sure bond fund expense ratios are low?

This is the fee you pay to own your share(s) of the fund. It's important to make sure the expense ratio is low because the return on bond funds tend to be low. You don't want to spend the majority of your returns on fees!

WHY would you want to use a check register?

To identify bank mistakes, Avoid bounced checks, Helps you stay on top of transaction and know how much you can afford to spend.

How does the credit card companies' definition of a deadbeat compare to the traditional meaning?

Traditional meaning: someone who can't deal with financial obligations To a credit card company: someone who pays their entire balance off every month, never incurring fees or interest. The credit card company makes less money off the deadbeats than revolvers.

What are the main advantages to a secured vs. unsecured loan?

Unsecured loans don't require collateral so it is less likely that a specific asset will be taken. Secured loans usually come with lower interest rates.

At least three benefits of using a credit card for purchases.

Use card to pay for unexpected emergency expenses. Consolidation of spending into one monthly statement. Don't have to carry cash or a checkbook. Extend warranty on products you buy.

invest over time

Use dollar-cost averaging to consistently invest small amounts of money over long periods of time

time

When you make an investment, be sure to leave it alone for at least five years to avoid making an irrational decision in the short-term.

HOW do you complete a check register?

When you write a check, use your debit card, or deposit money into your account, record the transaction in your check register. You also keep a running tally of the money in your account, so you update the balance according to whether you did a withdrawal or deposit. Make sure you save your ATM and debit card receipts and enter those transactions in your check register. Review your check register every time you get a statement since you will find the fees you paid the bank, interest payments from the bank, and your automatic/ACH transactions on the statement. You can also verify everything the bank has matches your records

The video mentions that diversification doesn't guarantee that if one investment goes down, another will go up to make up for it. Why is it still a good idea to diversify your investments?

While diversification cannot completely eliminate risk, it is a way to minimize it.

In your own words, explain the difference in how a person invests their money using dollar-cost averaging versus lump sum investing.

With dollar-cost averaging you consistently invest a small amount of money over long periods of time. The timing or amount of your investment doesn't change, regardless of how the market is performing. With lump sum investing you're investing a large amount of money all at once.

How does the amount of risk you take on differ between dollar-cost averaging and lump sum investing?

With dollar-cost averaging you take on less risk because you're investing small amounts of money over time With lump sum investing you take on more risk because you're investing large amounts of money at once

Explain what it means to diversify across investments.

Within each asset class (such as stocks), you spread your investments further by investing in a variety of stocks or funds that include many stocks.

Take a Guess: Amita wants to invest in a fund and choose a few individual stocks and bonds to invest in. Is she allowed to do this? Or, does she have to choose one or the other?

Yes, Amita is allowed to do this. You are not limited in choosing one or the other--you can invest in funds AND invest in individual stocks, bonds, and other investments. Funds are simply made available to give investors an option to easily diversify their investments without having to do the work themselves.

Explain what happens if you make the minimum payment every month?

You make a much smaller payment every month but you are still left with an outstanding balance. The minimum balance is often set as a small percentage of the total balance which lengthens the time it takes to pay off your card. This outstanding balance accumulates interest every month thus forcing the credit card user to pay far more over the lifetime of the balance.

Explain what it means to diversify by asset class.

You spread your investments across multiple types of investments such as stocks, bonds, cash, etc.

Describe a situation in which a person would want to use dollar-cost averaging to minimize risk in their investment.

[Answers will vary] Responses should include scenarios where market volatility is high, so a person would want to invest small amounts of capital over long periods of time rather than large amounts at one time.

Check Register

a list (on paper or electronic) you create of all of your transactions and your current balance.

Overdraft

a negative balance in your account caused by drawing more money than account has.

Disadvantages of choosing not to belong to the traditional banking system

fees for cashing in checks, fees when using a prepaid card, more gas needed, difficulty for online shopping, loss of time (i.e. paying bills in cash).

Generally, the longer the term of the bond, the ___________ (lower/higher) the chance the bond price may change due to changes in yield.

higher

When overall interest rates rise (to 10%), the bond you already own (with 5% coupon rate) becomes _______ valuable to potential buyers, so its price will __________. When overall interest rates fall (to 2%), the bond you already own (with 5% coupon rate) becomes ______ valuable to potential buyers, so its price will ____________.

less, decrease, more, increase

The higher the risk associated with a bond, the ________ (more/less) likely a corporation might be to pay an investor back. Interest rates for riskier bonds tend to be _______ (higher/lower) so that investors are ______ (more/less) willing to invest.

less, higher, more

A riskier bond usually comes from a corporation that has a ______ (low/high) credit rating.

low

Face Value

the principal loan amount for a bond.

3 important factors of managing risk

time, Diversification, Invest over time.