Personal Finance Chapter 11

Inflation Formula:

($10,000 x 3.5%) - ($10,000 x 4%) $350 - $400 = $50

Municipal Bonds are used to finance:

-Airports -Schools -Toll Roads

3 Advantages that corporations have by issuing convertible bonds are:

-Attracts investors who are interested in speculative gain -Interest rates are lower -If the bond is converted, it no longer has to be redeemed at maturity

Safe investments:

-Certificates of Deposit -Government bonds -Select mutual funds

Types of Bonds:

-Debenture -Mortgage Bond

Advantages of Purchasing US Treasuries:

-Decreased risk of default -safe investment -Backed by the government

Bonds:

-Govt and corporate bonds are often seen a safer than stocks -considered a safe harbor in tough economic times -a way to diversify your portofolio

Relationship of companies with potential dividends:

-Growth company; no dividend -Non-Growth company; better chance of receiving a dividend

Investors Purchase Bonds because:

-Interest income -Repayment at maturity -Interest income

Speculative Investments with High Risks:

-Investors with financial training and investment background -Younger investors -Higher-income investors -Married couples with no children or single individuals -Employees with secure employment positions

For Investment Incomes you should choose:

-Municipal Bonds -Corporate Bonds -Preferred Stocks

Conservative Investments with Less Risk

-People with no financial training or investment background -Old investors -Lower-income investors -Families with children -Employees worried about job loss

Which is a better bond buyer?

-Stagger your bond holdings to receive interest each month -the most useful yield calc is yield to maturity -realize that commission on existing bonds are usually higher than on new bond issues

Callable Bonds:

-The money for calling bonds comes from profits, a new bond issue, or the sale of addition stock -Companies usually cannot call bonds for 5 to 10 yrs -Companies will often call bonds to reissue bonds with lower interest rates

Reasons Why Corporation Sell Bonds:

-They find it difficult to sell stock -They use interest as a tax break -They need money to finance ongoing activities

When evaluating if a bond is a good investment, you can use:

-reports provided by the federal reserve system -reports on corporations by the SEC -business periodicals at your libs

Steps to Investing:

1. Establishing Goals 2. Performing a Financial Checkup 3.Work to Balance Your Budget 4. Manage Your Credit Card Debt

Taxable equivalent yield is equal to tax-exempt yield divided by X minus your tax rate. X is equal to:

1.0

Maturity of a Treasury Bond takes:

30 years

General Obligation Bond:

A bond backed by the full faith, credit, and unlimited taxing power of the government that issue

Convertible Bond:

A bond that can be exchanged at the owners option for a specified number of shares of the corporations common stock

Debenture:

A bond that is backed only by the reputation of the issuing corp -If corps fail to make payments debenture bondholders become general creditors

Registered Bonds:

A bond that is registered in the owners name by the issuing company. -tracked electronically

Mortgage Bond/Secure Bond:

A corporate bond secured by various assets of the issuing firm -interest rates on mortgage bonds are lower than interest rates on unsecured debentures

Sinking Fund:

A fund in which annual or semiannual deposits are made for the purpose of redeeming a bond issue

Bond Indenture:

A legal document that details all of the conditions relating to a bond issue

Revenue Bond:

A municipal bond that is repaid from the income generated by the project it is designed to finance

Line of Credit:

A short-term loan that is approved before the money is actually need

Bond Ratings Range:

AAA (highest) to D (the lowest)

Call Feature:

Allows the corporation to buy outstanding bonds from current bondholders before the maturity date

Emergency Fund:

An amount of money you can get quickly in case of an immediate need

Risk:

An investment means a measure of uncertainty about the outcome

Safety:

An investment means minimal risk or loss

Bond Quotations:

Are given as a percentage of face value

Relationship of Interest Rates and Values of Bonds:

As one increases the other decreases

Business Failure Risk:

Associated with investments in stock and corporate bonds -Bad management, unsuccessful products, competition, or other factors with cause the business to be less profitable than originally anticipated or experience loss. -The business could fail and become worthless

Interest Rate Risk:

Associated with preferred stocks or govt corp bonds is the result of changes in the interest rates in the economy

Corporations who prefer debt financing over equity financing choose:

Bonds

Serial Bonds:

Bonds of a single issue that mature on different dates

When evaluating bonds:

Business periodicals and federal agency publications are 2 additional sources of information that can be valuable

With a lower risk of a bond and the possible high return of a stock, investors may choose which investment option?

Convertible bonds

Corporate Bond:

Corporations written pledge to repay a specified amount of money along with interest

To calculate the current price for a bond:

Current price = bond price quotation x face value

Municipal Bond:

Debt security issued by a state or local govt

Current Yield:

Determined by dividing the annual interest amount by the bond's current price Current Yield= Annual Interest Amount/Current Price the lower the yield the less interest you will pay

Trustee:

Financially independent firm that acts as a bondholders' representative

Maturity Date:

For a corporate bond, the date on which the corporation is to repay the borrowed money

If the corporation fails to make either interest payments or repayment at maturity, debenture bondholders become:

General Creditors

False:

General obligation bonds are repaid from income generated by the project that the bond issue is financing

A disadvantage of selling bonds is that in the event of bankruptcy, bondholders:

Have a claim to the corporations assets

Speculative Investment:

High-Risk investment made in the hope of earning a relatively large profit in a short time

Treasury inflation-protected securities pays:

Interest twice a year at a fixed rate

Registered Coupon Bond:

Is registered for principal only, not interest

Inflation:

Is the rise in the general level of prices

Rule of thumb for consumer credit payments:

Limit consumer credit payments to 20% of after-tax income

Guaranteed municipal securities usually carry a slightly:

Lower interest rate than uninsured bonds

For treasury securities, most investors are willing to accept the interest rate determined at auction so they are using:

Noncompetitive bids

Bonds paying 10% in an economy where the average is 5% are advantageous for the investor, and the investor would prefer for the bond:

Not to be called

Market Risk:

Rapid expansion is followed by a period of recession -the nation is still experiencing economic problems that are affecting the value of investments

Captain Gain:

Results when you sell a municipal bond before maturity and at a profit may be taxable just like gains on other investments sold as a profit

TRUE

Revenues bonds are repaid from income generated from project the bonds are financing

Interest Rate:

Risk in the result of changes in the interest rates of the economy

Inflation Risk:

Risk that the financial return on an investment will not keep pace with the inflation rate

Emergency Fund:

Should be how much you spend a month times 3 months

Speculative investments:

Should not be considered for long-term growth A high risk investment made in the hope of earning a relatively large profit in a short time

Interest paid on U.S. government securities is:

Taxable for federal income tax purposes, but is exempt from state and local taxation

Yield is:

The Percentage Rate of Interest earned by an investor who holds Bonds for a state period of time

Liquidity:

The ability to buy or sell an investment quickly without affecting the investments value

Face Value:

The dollar amount the bondholder will receive at the bond's maturity

As the common stock value increase:

The market value of the convertible bond

Asset Allocation:

The process of spreading your assets among several different types of investments to lessen risk; based on % diversifying

Yield:

The rate of return earned by an investor who holds a bond for a stated period of time

One Disadvantage of investing in U.S. treasuries is:

They have low interest rates

Capital Gains Tax:

This is enforced if you sold the bond for more than you paid it.

The advantage for an investor to trade bonds through an online broker is discounted commissions on trades

True

If you are a young married couple with no children, you will most likely choose investments:

With higher risks

Government Bond:

Written pledge of government or a municipality to repay a specified sum of money, along with interest

Government Bonds:

a written pledge of a government or a municipality to repay a specified sun of money along with interest

Dollar amount of annual interest formula:

dollar amount of annual interest = face value x interest rate

When a company calls a bond when the current interest rates are lower than the bond's interest rate, this is:

unfavorable for inestors

The risk associated with bad news that a company may bring to the public is the risk in decreased...

value