Personal Finance: Unit 4

What are four factors that influence stock price?

*company (if it is in a good financial position the stock will rise) *interest rates (when interest rates are low people buy more stocks because other investments aren't profitable) *the market (popularity of company/ industry) *earnings per share (co. earnings divided by the number of common stock shares)

What does a professional mutual fund manager do?

*research and buy individual stocks, bonds, and other financial instruments *interpret market conditions, financial statements, industry trends, and other market data *they match good investments to meet their investor's objectives.

What are three ways to earn money on bonds

*the interest you earn each day you own the bond *you can redeem the bond at maturity for the amount you paid for the bond *sell the bond before maturity- if interest rates are dropping you can usually sell it for more than you paid for it.

Why do direct deposits and automatic deductions make saving easier?

Direct deposits make saving easier because the paycheck is deposited directly into your account, it's easier to save if you never see the money. Automatic deductions make saving easier because your bank is authorized to move your money from one account to another and they have a payroll savings plan, which is when you authorize your work to make deductions from your paycheck every month.

explain preferred stock

Preferred stock pays a fixed dividend regardless of how the company is doing, does not have voting rights, and if the company fails preferred gets paid out before common stock. In addition, there is less risk, so less return.

What does the term saving refer to?

Saving is the money one has saved, especially through a bank or official scheme.

What is the difference between compound and simple interest?

Simple interest has the same amount of interest every year it is added up, but compound interest increases more and more depending on how many times it is compounded.

Describe the relationship between risk and return.

The higher the risk, the bigger return or bigger loss. The smaller risk, the smaller the return or loss.

What does the law of demand state?

The law of demand states that as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.

the rule of 72

The rule of 72 is when you divide 72 by the interest rate and the answer is how many years it will take you savings to double using compound interest.

List and describe three sources of financial information.

Three sources of financial information are newspapers like the Wall Street Journal, financial magazines like Forbes or Money, and financial advisors, who give investment advice based on goals, age, and lifestyle

Name three types of depository institutions.

Three types of depository institutions are commercial banks, savings and loan associations, and credit unions.

What is a zero coupon bond?

a bond that is issued at a deep discount to its face value but pays no interest.

What is a coupon bond?

an investment bond on which interest is paid by presenting coupons.

how to calculate simple interest

p * r * t

What are the advantages of government bonds?

you will almost always get paid back and they hold a certain level of safety.

yield

Yield is also called "interest earning potential." Yield is when you want to be able to earn as much interest as possible while still keeping in mind liquidity, safety, and convenience.

What does safety of principle mean?

when you want to make sure you will not lose all your initial deposit

List and describe three high risk/high return investments.

1. penny stocks, which are investments in small companies that could go big 2. collectibles, which you could sell later in life if they become valuable 3. options, which give the right to buy or sell a commodity or stock for a specified price within a specified time period.

List and describe three medium risk/ medium return investments.

1. stocks, which depend on how the company is doing 2. mutual funds, which have a pool of money where many investors buy a large selection of securities 3. real estate, which is investing in houses and land.

How many years will it take to double an amount at 6% interest?

72/6= 12 years

Explain the two different types of money market accounts.

A Money Market Deposit Account is similar to regular savings account, but offers a higher rate of interest in exchange for larger than normal deposits. A Money Market Fund invests in low risk securities. Not FDIC insured, but considered safe because they are government securities. Pay higher interest rates that the deposit accounts, but are riskier.

What is an advantage of a money market account over a regular savings account

A money market account offers a more competitive interest rate than a regular savings account.

What is a prospectus?

A prospectus is a legal document that offers securities or mutual fund shares for sale. They must contain the terms, a summary of the fund's portfolio of investments, its objectives, and financial statements showing past performances.

What is the difference between a corporate bond and a municipal bond?

Corporate bonds are sold on the open market through brokers, have a fixed-income investment, and the interest rate is the % of the value of the bond you will receive as interest. A municipal bond is issued by a state or local government and has lower rates than corporate bonds.

List and describe the types of corporate bonds.

Debentures are based on the general creditworthiness of the company. Secured bonds, aka mortgage bonds, are backed by specific assets which serve as a security to assure a repayment of the debt. Convertible bond: a corp. bond that can be converted to shares of common stock

What causes stock prices to rise and fall?

Supply and demand causes changes in stock prices. If more people want to buy a stock than sell, the price will move up. Likewise, if more people want to sell than buy then the price moves down.

What does the law of supply state?

The law of supply states that as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa.

What is a revenue bond?

a government municipal bond that raises money for things like airports, hospitals, and public housing fields.

What are cyclical stocks?

do well when the economy is growing and poorly when it is not

What does liquidity mean?

how quickly you can turn your savings into cash

Why do corporations issue stock?

in order to make money. They make more money than what the investor makes.

What are blue chip stocks?

large, well-established companies that have safe, moderate stocks.

What are growth stocks

reinvest profits in the company, and pay little to no dividends now, but the stock will be worth more in the future.

What are defensive stocks?

remain stable and pay dividends during an economic decline

What are dividends?

the sum of money paid regularly by a company to its shareholders out of its profits.

What is a general obligation bond?

a government municipal bond backed by the power of the government to levy taxes to pay back the debt.

What interest rate is necessary to double an amount in 5 years?

72/x= 5 x=14.4%

how to calculate compound interest?

A=p(1+%)^t or A=p(1+%/amt compounded)^t*amt compounded

What is one advantage and one disadvantage of a certificate of deposit

An advantage of a certificate of deposit is how it has a higher interest rate than a savings account. A disadvantage is you have to wait until the maturity date to get the money.

What is one advantage and one disadvantage of a regular savings account?

An advantage of a regular savings account is the high liquidity, which means you can get your money out very easily. A disadvantage is low interest rates because you do not get a lot of money back in interest.

What are emerging stocks?

Emerging stocks are investments in small, young, companies that have high risk.

What are four advantages of mutual funds

Four advantages of mutual funds are professional management, liquidity, diversification, and small initial and ongoing purchases.

What are income stocks?

Income stocks have a consistent history of paying high dividends.

Who makes money in the secondary market?

Investors purchasing the stock make money because other investors purchase securities or other assets from them

What are mutual funds?

Mutual fund is when a professional manages a group of investments bought using a pool of money from many investors. Individuals buy shares in a mutual fund and fund managers use this pooled money to buy stocks, bonds, and other securities.

What is stock ownership?

Stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater.

List and describe three low risk/ low return investments

1. corporate and municipal bonds because they have a debt obligation and the investor is repaid on the maturity date. 2. US gov. savings bond because the investor lends money to the US and the only situation in which you wouldn't get your money back is if the gov. went bankrupt which is unlikely. 3. Treasury securities, which include US treasury bills (mature w/in an year), US treasury notes (mature within 10 yrs/ higher interest than tbill), and US treasury bonds (mature in 30 yrs, highest interest rate...every 6 months) are low risk/ low return investments.

Why do banks pay you interest

Banks pay interest in order to attract deposits, and they make a profit

what are benefits?

Benefits are payments or gifts made by an employer, the state, or an insurance company.

explain common stock

Common stock pays dividend and depend how the company does. They also give the holder voting rights.