BUS 101F - Ch 11

6 Steps to Survive a Financial Crisis

1 - Establish a larger than usual emergency fund 2 - Know what you owe 3 - Reduce spending 4 - Notify credit card companies and lenders if you are unable to make payments 5 - Monitor the value of your investment and retirement accounts 6 - Consider converting investments to cash to preserve value

4 Types of Risk

1 - Inflation risk 2 - Interest rate risk 3 - Business failure risk 4 - Market risk

3 Reasons to Purchase Bonds

1 - Interest income 2 - Possible increase in value 3 - Repayment at maturity

5 Suggestions to Accumulate Money Needed to Fund Your Investments

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 month each year 5 - Take advantage of gifts, inheritances, and windfalls

4 Types of Securities Issued by the U.S. Treasury

1 - Treasury bills 2 - Treasury notes 3 - Treasury bonds 4 - Treasury inflation-protected securities (TIPS)

Formula for a Bond's Current Market Value

= Dollar amount of annual interest / Comparable interest rate

Formula for the Taxable Equivalent Yield for a Municipal Security

= Tax-exempt yield / (1.0 - Your tax rate)

General Obligation Bond

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

Convertible Bond

A bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock

Debenture

A bond that is backed only by the reputation of the issuing corporation; If the corporation fails to make either the interest payments or repayment at maturity, debenture bondholders become general creditors, much like the firm's suppliers

Registered Coupon Bond

A bond that is registered for principal only, not for interest; While only the registered owner can collect the principal at maturity, interest payments can be paid to anyone who presents one of the detachable coupons to the issuing corporation

Registered Bond

A bond that is registered in the owner's name by the issuing company

Revenue Bond

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

Corporate Bond

A corporation's written pledge to repay a specified amount of money with interest

Municipal Bond

A debt security issued by a state or local government

Call Feature

A feature that allows the corporation to call in, or buy, outstanding bonds from current bondholders

Trustee

A financially independent firm that acts as the bondholders' representative - usually a commercial bank or some other financial institution

Sinking Fund

A fund to which annual or semiannual deposits are made for the purpose of redeeming a bond issue; IE - Saving with the goal of retiring bonds prior to the bond maturity date

Speculative Investment

A high-risk investment made in the hope of earning a relatively large profit in a short time

Bond Indenture

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

Risk in an Investment

A measure of uncertainty about the outcome

Line of Credit

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

Government Bond

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

High-Yield Bond

AKA "junk bonds"; A corporate bond that pays higher interest but also has a higher risk of default

Mortgage Bond

AKA "secured bond"; A corporate bond secured by various assets of the issuing firm

Emergency Fund

An amount of money you can obtain quickly in case of immediate need; An amount equal to 3 months living expenses is considered reasonable

What are a bondholder's rights in the event of bankruptcy?

Bondholders have a claim to the assets of the corporation prior to that of stockholders

Serial Bonds

Bonds of a single issue that mature on different dates

Current Yield

Determined by dividing the yearly dollar amount of interest by the bond's current price

Inflation Risk

During periods of high inflation, there is a risk that the financial return on an investment will not keep pace with the inflation rate

Maturity Date

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

Is interest paid on US government securities taxable?

It is taxable for federal income tax purposes, but is exempt from state and local taxes

Safety in an Investment

Refers to minimal risk or loss

Liquidity

The ability to buy or sell an investment quickly without substantially affecting the investment's value; Investments range from near-cash investments to frozen investments

Face Value

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

Interest Rate Risk

The interest rate risk associated with preferred stocks or government or corporate bonds is the result of changes in the interest rates in the economy. The value of these investments decreases when overall interest rates increase; In contrast, the value of these same investments increases when overall interest rates decrease

What is the basic rule about risk for investors?

The potential return on any investment should be directly related to the risk the investor assumes

Asset Allocation

The process of spreading your assets among several different types of investments to lessen risk; IE - You need to diversify

Yield

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

Market Risk

Unpredictable fluctuations in economic growth; Generally, a period of rapid expansion is followed by a period of recession; Fluctuations may be caused by political or social conditions

Business Failure Risk

With investments in stocks or bonds, you face the possibility that bad management, unsuccessful products, competition, or other factors will cause the business to be less profitable than anticipated or experience a loss - or file for bankruptcy