Personal Finance Exam #2

List some important documents you will need to collect and organize.

- Birth and marriage certificates - military service records - Social Security and Veteran's documents insurance policies - automobile registration - titles to stock and bond certificates

What might you do if your expenses during retirement are higher than you expected?

- Convert assets - work part or full-time - dip into the nest egg.

What are the four major types of trusts?

- Credit-shelter - living trust - disclaimer - testamentary trust

What are the two basic types of employer pension plans?

- Defined-contribution plan - defined-benefit plan

What are the four major types of taxes to consider in estate planning?

- Estate tax - estate and trust federal income tax - inheritance tax - gift tax

What are the three assets you should review on a regular basis during retirement?

- Housing - Life Insurance - Other Investments

What are responsibilities of an executor?

- Preparing an inventory of assets - collecting any money due - paying off the deceased's debts

What are four major sources of retirement income?

- Public pension plans - employer pension plans - personal pension plans - annuities

What expenses are likely to increase during retirement?

- Recreation - Health Insurance - Medical expenses

What are the four basic types of wills?

- Simple will - exemption trust - traditional marital share - stated dollar amount

What expenses are likely to decrease during retirement?

- Transportation - clothing - federal income taxes

Make a list of criteria you will use in deciding who will be the guardian of your minor children if you and your spouse die at the same time.

- You should take great care in selecting a guardian for your children. - You should choose a guardian whose philosophy on raising children is similar to yours - who is willing to accept the responsibility

How can you obtain the money needed to begin investing?

1. Pay yourself first. 2. Take advantage of employer-sponsored retirement programs. 3. Participate in an elective savings program. 4. Make a special savings effort one or two months each year. 5. Take advantage of gifts, inheritances, and windfalls

Closed end, exchange-traded, or open ended mutual funds are available today. Describe the differences between each type of fund.

A closed-end fund is a mutual fund whose shares are issued by an investment company only when the fund is organized. After all the shares originally issued have been sold, an investor can purchase shares only from another investor who is willing to sell them. An exchange-traded fund (ETF) is a fund that invests in the stocks contained in a specific stock index or securities index like the Standard & Poor's 500 stock index. Although most closed-end funds are actively managed, ETF managers are more passive. Shares for both closed-end and exchange-trade funds are traded on organized exchanges or in the over-the-counter market. An open-end fund is a mutual fund whose shares are issued and redeemed by the investment company at the request of investors. Investors are free to buy and sell shares at the net asset value

Why do corporations split their stock? Is a stock split good or bad for investors?

A corporation splits its stock because management has a theoretical ideal price range for the firm's stock. If the market price of the stock rises above the ideal price range, a stock split brings the market price back in line. Also, a decision to split a company's stock makes the stock more attractive to the investing public. Over a period of time, stock splits may be good for investors. And yet, there are no guarantees. Note: Many investors assume that there will be immediate profits from a stock split. Generally this assumption is false

What factors should you consider when performing a financial checkup?

A financial checkup allows investors to determine if they are ready to invest. The five factors to consider are: (1) pay your bills on time, (2) work to balance your budget; (3) manage credit card debt; (4) start an emergency fund; and (5) have access to other sources of cash for emergency needs

Explain the difference between a general obligation bond and a revenue bond.

A general obligation bond is a bond backed by the full faith, credit, and unlimited taxing power of the government that issued it. A revenue bond is a bond that is repaid from the income generated by the project it is designed to finance

What is a will?

A legal declaration as to the disposition of one's property after death

Describe how each of the following sources of investment information could help evaluate a mutual fund investment

A lot of information is available to help investors evaluate mutual funds. The Internet can provide investors with current market values, information about the fund provided by the investment company sponsoring the fund, and research information provided by professional advisory services. Professional advisory services provide investors with the most detailed research information about mutual funds—see Exhibit 13.5. The mutual fund prospectus contains a summary of the fund and information about fees, past financial performance, and the fund's management and can provide answers to a number of questions investors may have. The mutual fund annual report also contains detailed financial information on the fund's performance, assets and liabilities, statement of operations, and statement of changes in net assets. The annual report also contains a schedule of investments and a letter from the fund's independent auditors. Financial publications provide investors with another detailed source of information about specific mutual funds and the economy. Newspapers provide current information about a mutual fund's net asset value, change in net asset value, and performance

Explain the important characteristics of each of the following types of stock transaction orders

A market order is a request to buy or sell a stock at the current market value. A limit order is a request to buy or sell a stock at a specified price. A stop-loss order is an order to sell a particular stock at the next available opportunity after its market price reaches a specified amount.

What is the difference between a prospectus and an annual report?

A prospectus discloses information about corporate earnings, assets and liabilities, products or services, and the qualifications of top management when a corporation sells stocks and is given to prospective investors. An annual report is provided to stockholders and other interested parties once a year—usually before the annual meeting. It contains information about the corporation's finances and other important data

In your own words, describe the advantages and disadvantages of mutual fund investments

Advantages: - diversification - professional management - ease of buying and selling shares - multiple withdraw options - distribution or reinvestment of dividends and capital disbursements - switching privileges within the same fund family - services that include toll-free telephone numbers, complete records of all transactions and savings and checking accounts disadvantages: - purchase/ withdrawal costs - ongoing management fees and 12b-1 fees - poor performance that may not match the standard & poor's 500 stock index or some other index - inability to control when capital gain distributions occur and complicated tax-reporting issues - potential market risk with all investments - some sales personnel are aggressive and/ or unethical

What is an expense ratio? Why is it important?

An expense ratio is the amount that investors pay for all of a mutual fund's management fees and operating costs. It is important because it is an ongoing fee—year after year. Many financial planners recommend that you choose a mutual fund with an expense ratio of 1 percent or less.

In your own words, describe the difference between an investor and a speculator.

An investor is an individual who holds an investment for a long period of time usually in excess of one year. Individuals who routinely buy and then sell stocks within a short period of time are called speculators (or traders)

As people get closer to retirement, their investment goals often change. Assume that you are now 45 and have accumulated $110,000 in a retirement account. In this situation, what type of mutual fund would you choose? Why

As people get older, they tend to choose more conservative investments. Since most people don't retire until they are 60 to 65 or older, you still have a number of years for your investments to appreciate and grow. Perhaps conservative mutual funds that emphasize both growth and income could be chosen

Why should investors be concerned with asset allocation and the time their investments have to work for them?

Both asset allocation and the time their investments have to work affect the choice of investments. Asset allocation is the process of spreading your assets among several different types of investments to lessen risk. The term is a fancy way of saying you need to diversify and avoid the pitfall of putting all your eggs in one basket—a common mistake made by investors. The amount of time that your investments have to work for you is another important factor when managing your investment portfolio. If you can leave your investments alone and let them work for 5 to 10 years or more, then you can invest in stocks and mutual funds. On the other hand, if you need your investment money in two years or less, you should probably invest in short-term government bonds, highly rated corporate bonds, or certificates of deposit. By taking a more conservative approach for short-term investments, you reduce the possibility of having to sell your investments at a loss because of depressed market values or a staggering economy

What are the two stages in planning your estate?

Building your estate and estate distribution

What is the major difference between a regular IRA and a Roth IRA?

Contributions to a regular IRA may or may not be tax-deductible. Contributions to a ROTH-IRA are not tax-deductible, but earnings accumulate tax-free

In your own words, describe why corporations sell corporate bonds.

Corporations sell corporate bonds to help pay for major purchases or to finance their ongoing business activities. They usually sell bonds when it is difficult or impossible to sell common stock or preferred stock. The sale of bonds can also improve a corporation's financial leverage—the use of borrowed funds to increase the corporation's return on investment. Finally, the interest paid to bond owners is a tax-deductible expense and thus can be used to reduce the taxes the corporation must pay to the federal and state governments

Why do corporations sell stock? Why do investors purchase stock?

Corporations sell stock to finance their business start-up costs and help pay for expansion and their ongoing business activities. Since stock is a form of equity financing, it does not have to be repaid and dividends are not necessary. Investors purchase stock for three reasons: (1) dividend income, (2) dollar appreciation or increase in value, and (3) the possibility of increased value from stock splits

What is the difference between the dividend yield and total return calculations that were described in this chapter?

Dividend yield is calculated by dividing the annual dividend amount by the current price per share. Dividend yield only measures the amount of dividends an investor receives in one year. Total return, on the other hand, includes both the yearly annual dividends and any increase or decrease in the original purchase price of the investment

How do income, growth, and liquidity affect the choice of an investment?

Each of these factors can affect the choice of investments. Investors purchase certain investments because they want a predictable return or distribution of income from the investment. Growth means that their investment will increase in value. Liquidity is the ability to buy or sell an investment quickly without substantially affecting the investment's value. Usually, investors must give up some of one factor to get more of another factor

Why are earnings per share and price-earnings ratios important?

Earnings per share (EPS) is a corporation's after-tax income divided by the number of shares outstanding of the corporation's stock. The price-earnings ratio (PE) is the price per share of the corporation's stock divided by the corporation's earnings per share. Both calculations help investors "dig in" a little deeper and provide investors with more than just the corporation's after-tax income amount

What is estate planning?

Estate planning is a process of creating plan for managing your assets so you can make the most of them while you're alive and ensure that they're distributed wisely after your death

Is it ethical to spend more than you make month after month? What repercussions could you encounter if you overspend on a regular basis?

From both a legal and ethical standpoint, people have an obligation to pay for credit purchases. If you don't pay for products or services purchased on credit, there are serious repercussions. For example, merchandise can be repossessed, a business can sue to recover the cost of the product or service, your credit score can be lowered, and the cost of additional credit, if available, may be higher. In the event of bankruptcy, there are also long-term consequences

How can choosing the right fund help you save for retirement?

Fund investments can help you save for retirement for at least three reasons. First, funds are often used to meet long-term investment goals—like retirement. Second, investors can use dollar-cost averaging when investing in funds because of the long-term nature of fund investing. Third, investors can often participate in an employer-sponsored retirement plan. Employer-sponsored plans provide a way to reduce the amount of current income tax that is withheld from your paycheck. Also, many employers will match your contributions. Other factors that can help you save for retirement include choosing the right fund based on your tolerance for risk. Finally, you should consider your stage in life. Often younger investors choose more growth-oriented investments while older investors choose more conservative investments

After performing a financial checkup, you realize that you have too much credit card debt. What steps can you take to reduce the amount of money you owe on your credit cards?

Given the amount of credit card debt that many students accumulate while in college, this is a very important question. A specific suggestion made in this chapter was to limit consumer credit payments to 20 percent of net (after-tax) income. Eventually, the amount of cash remaining after the bills are paid will increase and can be used to start a savings program or finance investments

What are the most popular personal retirement plans?

IRAs and Keogh accounts

What is the difference between a revocable and an irrevocable trust?

In a revocable trust you have the right to end the trust or change its terms during your lifetime; but you cannot do so in an irrevocable trust

In the table below indicate how each of the key terms affects a mutual fund investment and how each would be taxed.

Income dividends are the earnings a fund pays to shareholders from its dividend and interest income and are taxed as income. Capital gain distributions are the payments made to a fund's shareholders that result from the sale of securities in the fund's portfolio. Capital gain distributions are taxed as long-term capital gains regardless of how long you own shares in the fund. Capital gains resultwhen a shareholder decides to sell shares in a mutual fund at a price that is higher than the price the shareholder paid for the shares. Capital gains are taxable income and may be taxed as short-term or long-term depending on how long the shares have been held

What type of information about bonds is available on the Internet?

Information about the firm's finances is contained on its Web site. By accessing a corporation's investor relations page, an investor should find the answers to the following questions: (1) Is the firm profitable? (2) Are sales revenues increasing? (3) Are the firm's long-term liabilities increasing? You can use the Internet in three other ways. First, you can obtain price information on specific bond issues to track your investments. Second, it is possible to trade bonds online and pay lower commissions than you would pay a full-service or discount brokerage firm. Third, you can get research about a corporation and its bond issues

List the three reasons investors purchase corporate bonds.

Investors purchase corporate bonds for (1) interest income, (2) dollar appreciation of bond value, and (3) repayment at maturity

Explain the relationship between earnings per share, projected earnings, and the market price for a share of stock.

Many analyst believe that a corporation's ability or inability to generate earnings in the future may be one of the most significant factors that account for an increase or decrease in the value of a stock. Simply put, higher earnings generally equate to higher stock value. Unfortunately, the reverse is also true. If a corporation's earnings decline, generally the stock's value will also decline. As a result, serious investors watch for reports about a corporation's current earnings and also projections for future earnings

Explain the relationship between earnings and a stock's market value.

Many analysts believe that a corporation's ability or inability to generate earnings in the future may be one of the most significant factors that account for an increase or decrease in the value of a stock. Simply put, higher earnings generally equate to higher stock value. Unfortunately, the reverse is also true. If a corporation's earnings decline, generally the stock's value will also decline

In your own words, describe how an investment in common stock could help you obtain your investment goals

Many students are tempted to invest in stocks because of the historically high returns when compared to other investment alternatives. And yet, there are no guarantees. Typically, stock investors choose stock because they want dividend income, dollar appreciation, or the possible gain that may result from stock splits. (Be warned: A stock split is not a guaranteed path to quick wealth.)

In what circumstances would a $1,000 corporate bond be worth more than $1,000? In what circumstances would the corporate bond be worth less than $1,000?

Most beginning investors think that a $1,000 bond is always worth $1,000. In reality, the price of a corporate bond may fluctuate until the maturity date. Changes in overall interest rates in the economy are the primary cause of most bond price fluctuations. If overall interest rates fall, an existing bond with a fixed interest rate will go up in market value. On the other hand, if overall interest rates increase, an existing bond with a fixed interest rate will go down in market value. The market value of a bond may also be affected by the financial condition of the company or government unit issuing the bond, the factors of supply and demand, an upturn or downturn in the economy, and the proximity of the bond's maturity date

In your own words, describe the difference between a managed fund and an index fund. Which one do you think could help you achieve your investment goals?

Most mutual funds are managed funds. There is a professional fund manager (or team of managers) that chooses the securities that are contained in the fund. The fund manager also decides when to buy and sell securities in the fund. Instead of investing in a managed fund, some investors choose to invest in an index fund. Over many years, the majority of managed funds fail to outperform the Standard & Poor's 500 stock index. The exact statistics vary, but a common statistic often found in mutual fund research is that the Standard & Poor's 500 stock index outperforms 50 to 80 percent of all mutual funds. Because an index fund is a mirror image of a specific index, the dollar value of a share in an index fund also increases when the index increases. Unfortunately, the reverse is true. Students must decide which type of fund is best? The answer depends on which managed fund they choose. If they pick a managed fund that has better performance than an index, then they made the right choice. If on the other hand, the index (and the index fund) outperforms the managed fund— which happens 50 to 80 percent of the time—an index fund is a better choice

From an investor's viewpoint, what is the difference between common stock and preferred stock?

Preferred stock is an alternative method of financing that may attract investors who do not wish to buy a corporation's common stock. The most important priority that an investor in preferred stock enjoys is receiving cash dividends before common stockholders are paid any cash dividends. Although not of much benefit in the real world, preferred stockholders do enjoy a preferred claim if the corporation files for bankruptcy much like general creditors. When compared to preferred stock, common stock dividends are less secure, but a common stock investment offers more potential growth and possible dollar appreciation

How would you purchase a closed-end fund? An exchange-traded fund?

Shares of a closed-end and exchange-traded funds are traded through various stock exchanges or in the over-the-counter market

How will your spending patterns change during your retirement years?

Spending patterns will probably change. A study conducted by the Bureau of Labor Statistics on how families spend money shows that retired families use a greater share for food, housing, and medical care than non-retired families.

Based on your age and current financial situation, which type of mutual fund seems appropriate for your investment needs? Explain your answer

Student answers will vary depending on their age and investment philosophy. For someone in their twenties, investments should provide the type of long-term growth possibilities that will enable them to grow their retirement nest egg over a long period of time.

Assume that you are choosing an investment for your retired parents. Would you choose a bond issued by the federal government, a state or local government, or a corporation? Justify your answer.

Student answers will vary, but the key to this question is to emphasize the fact that they are investing for their retired parents. Although the securities issued by the federal government provide lower returns, they are considered risk-free by most financial planners and investors. While the securities issued by state and local governments are for "the most part" safe investments, there is still need for evaluation. (Note: there have been defaults by some state and local governments.) The risk (and potential return) associated with corporate bonds depends on the bond. The key is to make sure students understand the relationship between the age of retired parents and the type of investments chosen

Describe each of the following investment techniques

The Buy and hold technique assumes that a long term investor purchases stock and holds onto it for a number of years. Dollar-cost averaging is a long term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals. Direct investment plans allow stockholders to purchase stocks directly from a corporation without having to use an account executive or a brokerage firm. A dividend reinvestment plan allows current stockholders the option of reinvesting their cash dividends to purchase stock of the corporation. Margin is a speculative technique whereby an investor borrows part of the money needed to buy a particular stock. Selling short is a speculative technique where an individual sells stock that has been borrowed from a brokerage firm and must be replaced at a later date. An option is the right to buy or sell—but not the obligation—a stock at a predetermined price during a specified period of time

Describe how each of the following sources of information could help you evaluate a stock investment.

The Internet provides a wealth of information about stocks and other investment alternatives. Available information can range from simple price listings to detailed research information. Some of the information is free while there is a charge for the more detailed information available online from professional advisory services. Stock Advisory Services typically provide the most detailed information about stock investments. Note: professional advisory services generally charge a fee for their services and the information may be obtained by mail, fax, or by accessing a Web site on the Internet. It may also be available at a college or public library. A newspaper provides current information about stock symbols, prices, and net change. Newspapers may also provide stories about corporations that issue stocks and the economy in general. Government publications from the SEC provide information about a corporation's finances. Other government agencies often provide information about the economy, interest rates, etc. Business Periodicals Bloomberg Businessweek, Fortune, Forbes, Money, Kiplinger's Personal Finance Magazine, and similar publications contain information about stock investing.

You are considering two different corporate bonds. One is rated AAA by Standard & Poor's and pays 5.8 percent annual interest. The other bond is rated B by Standard & Poor's and pays 7.5 percent annual interest. What do these ratings mean? Which bond would you choose and why?

The answer to this question is a good example of the basic investing rule: The potential return on any investment should be directly related to the risk the investor assumes. The bond rated AAA is the highest quality, but offers a smaller 5.8 percent return. By comparison, the bond rated B is more speculative, but does provide a larger 7.5 percent return. Each investor must decide if the higher return is worth the increased risk

Write the formula for the following stock calculations, and then describe how this formula could help you make a decision to buy or sell a stock.

The earnings per share is the corporation's earnings divided by the number of shares outstanding. It is important because it measures how much profit a corporation is earning on a per share basis. The price-earnings (PE) ratio is the price per share divided by the amount of earnings per share. It is important because it is another measure that investors can use to evaluate a corporation's financial health. The dividend yield is the annual dividend amount generated by an investment divided by the current price per share. This calculation can be used to compare the yield for a stock investment with not only other stock investments, but other investment alternatives. Generally, the higher the yield, the better the investment. The total return is the yearly dividend amount plus any increase or decrease in the original purchase price of the investment. It is important because it is an indication of how much money an investor makes if an investment is sold. The higher the total return, the more money the investor has made on the investment. The book value for a share of stock is determined by deducting all liabilities from the corporation's assets and dividing the remainder by the number of shares outstanding. Although little correlation may exist between the market value of a stock and its book value, book value is widely reported in financial publications

Assume that you are now 60 years of age and have accumulated $400,000 in a retirement account. Also assume that you would like to retire when you are 65. What type of mutual funds would you choose to help you reach your investment goals? Why?

The fact that you are now 60 should be taken into consideration. More conservative mutual funds that emphasize preservation of capital and predictable sources of income are a wise choice for people who are near retirement age. While it is still desirable to have some growth in their portfolio, investors tend to be more concerned with safety

In your own words, describe each of the four components of the risk factor.

The four components of the risk factor are: a. inflation risk - that your investment will not keep pace with inflation. b. interest rate risk - that the value of your investment will increase or decrease because of an increase or decrease of interest rates in the economy. c. business failure risk - that an investment in a stock or a corporate bonds will decrease in value or become worthless because the corporation that issued the stock or bond encounters financial problems or goes out of business. d. market risk - that your investment will increase or decrease in value because of the actions of investors in the marketplace

Why should an individual develop specific investment goals?

The goal setting process is important because it forces investors to consider what they want to accomplish in the future. You may want to remind students that these goals are not set in concrete, but can be changed if necessary.

For many investors, mutual funds have become the investment of choice. In your own words, describe why investors purchase mutual funds.

The major reasons investors purchase mutual funds are professional management and diversification. At this point in this lecture, you may want to stress that even though mutual funds provide both professional management and diversification, investors still must evaluate a fund before investing their money

How important is the investment objective as stated in a mutual fund's prospectus?

The managers of mutual funds tailor their investment portfolios to the investment objectives of their customers. As such, investors must make sure that their objectives and a prospective mutual fund's objectives match. While discussing the answer to this question, you may want to review the objective for the Janus Conservative Allocation Fund in this section

What is the difference between the primary market and the secondary market? What is an initial public offering (IPO)?

The primary market is a market in which an investor purchases financial securities (via an investment bank or other representative) from the issuer of those securities. The secondary market is a market for existing financial securities that are currently traded between investors. An initial public offering (IPO) occurs when a corporation sells stock to the general public for the first time

What options can be used to purchase shares in or withdraw money from an open-end mutual fund?

The shares of an open-end fund may be purchased directly from the investment company, through a salesperson who is authorized to sell them, through an account executive of a brokerage firm, or through a mutual fund supermarket. To purchase shares from an investment company, investors may use these options: regular account transactions, voluntary savings plans, contractual savings plans, and reinvestment plans. Shares in an open-end fund can be sold on any business day to the investment company that sponsors the fund. Investors may also use these options to withdraw funds: (1) withdraw a specified, fixed dollar amount each investment period; (2) liquidate or sell off a certain number of shares each investment period; (3) withdraw a fixed percentage of asset growth; and (4) withdraw all income that results from income dividends and capital gains earned by the fund during an investment period

Many people would like to start investing, but they never have enough money to begin. What steps can you take to get the money needed to start an investment program?

The suggestions made in Exhibit 11-1 are excellent ways to accumulate the money needed to start a savings or investment program. Specifically, the suggestions are: (1) Pay yourself first, (2) Take advantage of employer-sponsored retirement programs, (3) Participate in an elective savings program, (4) Make a special savings effort one or two months each year, and (5) Take advantage of gifts, inheritances, and windfalls

In your own words, describe the time value of money concept and how it affects your investment program.

The time value of money allows people to invest money over a period of time. At the end of the investment period, people receive not only what they have invested, but also the earnings (dividends and interest) the investment has earned. The investment could also appreciate in value over time. For most people, accumulation is built on the principle of investing small sums of money over a long period of time. Thus, the time value of money can really help people accumulate wealth

Why should you name a guardian?

To care for your children in the event that you and your spouse die at the same time.

What is the difference between a Treasury bill, a Treasury note, a Treasury bond, and TIPS?

Treasury bills are issued with maturities as long as one year although typical maturities are 4 weeks, 13 weeks, 26 weeks, or 52 weeks. Note: Treasury bills are discounted securities. Treasury notes are issued with maturities of 2, 3, 5, 7, and 10 year maturities. Treasury bonds are issued with a 30-year maturity. Both Treasury notes and Treasury bonds pay interest every six months. TIPS (Treasury Inflation-Protected Securities) are issued with 5, 10, or 30 year maturities. Interest for TIPS is paid twice a year at a fixed rate applied to the adjusted principal. At maturity, you are paid the adjusted principal or original principal, whichever is greater.

Explain the following statement: The potential return on any investment should be directly related to the risk the investor assumes.

While all investors dream of a low-risk investment that provides large returns, the fact is that this rule is an example of the risk-return trade off that many investors must consider when choosing investments. For example, if you want a safe investment, it is usually going to provide lower returns. On the other hand, if you are willing to assume more risk, there should be a higher return to compensate you for the added risk

Prepare a list of questions you could use to interview an account executive about career opportunities in the field of finance and investments.

While each student's list of questions will vary, each list should include questions about college education, working conditions, number of hours worked, reasonable expectation as related to salaries, job stress, and advancement opportunities

Today, you can use a full-service brokerage firm, a discount brokerage firm, or trade online to buy and sell stocks. Which type of brokerage firm would you use? Justify your answer.

While student answers will vary, many small investors are using discount brokerage firms or online firms to invest their money. Student answers should include the following three factors: (1) How much research information is available from any type of brokerage firm; (2) How much help do you need when making investment decisions; and (3) How easy is it to buy and sell stocks and other securities

Assume you want to purchase stock. Would you use a full-service broker or a discount broker? Would you ever trade stocks online?

While students must answer this question, you may want to review Exhibit 12-7—Typical Commission Charges for Stock Transactions on page 407. At this time, online trading is becoming more popular, but many investors still prefer more traditional methods.

What are the risks involved when investing in state and local securities?

With state and local securities, there is a risk of default (nonpayment). There is also a risk that a change in interest rates can affect the value of securities issued by state and local governments

Why should you monitor the value of your investment?

Without monitoring the value of investments, it is impossible to know if the investments are increasing or decreasing in value. It should also be pointed out that this information can help investors decide to hold specific investments, invest additional money in the investments, or sell the investments

Why are safety and risk two sides of the same coin?

You cannot evaluate any investment without assessing how the factor of safety relates to the factor of risk. Safety in an investment means minimal risk of loss. On the other hand, risk in an investment means a measure of uncertainty about the outcome