CNSR 275 Exam 3
A time of wealth allocation
- through age 54 - Investment horizon is quite long, investors should place majority of savings into common stocks. - 80% common stocks and 20% in bonds quite common.
par value
- typically $1000 per bond (face value)
Disadvantages of mutual funds
- you can't diversify away a market crash - risks - costs and taxes - lower than market performance (maybe)
You've decided you want to retire in 40 years with $3,000,000 in your retirement account at that time. How much do you need to invest each month for the next 40 years to meet that goal? Assume an annual growth rate of 9%. (There is no adjustment for inflation.) Please consider whether your answer will use a negative or not. Go to 4 decimal points.
-640.8449
risk of investing short term
- Short-term investments in stocks are very risky - Holding stocks longer reduces variability of average annual return - Investors can afford to take on more risk as investment time horizons
A P/E ratio measures how much investors are willing to pay for
$1 of the company's earnings.
If you bought a 20-year bond issued by the government, with a par value of $1,000 and an interest rate of 8%. At maturity you will be returned the principal of
$1000
Assume you own 200 shares of General Dynamics selling at $120/share. The stock splits. What is your total investment worth prior to the split? What is your new price per share immediately after the split?
$24,000; $60
total rate of return
((ending value - beginning value) + income return) / beginning value
investment returns formula (also total returns)
(Ending value - purchase price) / Purchase Price (Ending value - purchase price) + income received / Purchase Price
Earnings Per Share (EPS)
(net income - preferred stock dividends) / # of shares of common stock outstanding
determining how much a bond will yield
(par value x coupon rate) / period
asset allocation
- Arranging assets to keep volatility of portfolio in line with risk tolerance. - Process of combining asset classes to reduce volatility. - Properly adding asset classes to portfolio reduces risk*** - how your money should be divided among stocks, bonds, and other investments - Investments diversified in different classes of investments. - Common stocks are more appropriate for the long-term horizon. - Asset allocation is the most important investing task that is not a one-time decision. - asset allocation is closely tied to personal situation (age, financial needs, family, etc.)
When you own shares in a mutual fund you make money in which of the following ways?
- As the value of all of the securities held by the mutual fund increase, the value of each mutual fund share also increases. - If a fund receives interest or dividends from its holdings this income is passed on to share holders. - If the fund sells a security for more than it originally paid for it, the shareholders receive this in the form of capital gains.
Fundamental Analysis
- Assumes that any security has an intrinsic value as estimated by an investor - Fundamental analysis compares the intrinsic value to the current market price of the security - Profits are made by acting on the intrinsic value of stock before the market price changes to accurately reflect the correct information - Top-down approach 1. Analyze the overall economy and conditions in security markets 2. Analyze the industry within which a particular company operates 3. Analyze the company, which involves the factors affecting the valuation models - Bottom-up approach (the opposite)
Dividend Reinvestment Plans
- Automatically reinvest the dividends in the same firm's stock without brokerage fees - Still pay income taxes - encourages reinvesting rather then spending your dividends - stuck reinvesting in old company instead of further diversifying
benefits of trusts
- Avoid probate - More difficult to challenge in court - May reduce estate taxes - Professional management - Confidentiality - Provide for a child with special needs - Hold money till a child reaches maturity - Ensures children from previous marriage receive inheritance
why own bonds?
- Bonds carry less risk than stocks. - They also reduce risk through diversification because they often behave differently than stocks. - True for category of bond but not always individual bonds - Bonds provide steady income. - Bonds can be a safe investment if held to maturity. If the company lasts that long....
Advantages of ETF
- Can be bought and sold throughout the trading day - Can be sold short or bought on margin - Allow you to take an instant position in a sector or country that you may not otherwise have access to - Very low annual expenses - More tax-efficient than most mutual funds
you pay for a stock through
- Cash Accounts - Margin Accounts - use money borrowed from broker/dealer to purchase securities
Why use an ETF?
- Charges lower annual expenses but still pay trading commissions - More tax-efficient than most mutual funds - Allow investors to stake out an investment position in a sector, industry, or country - Investors can buy or sell throughout the market's trading hours
For your investment program, you have occasionally been holding a few stocks that you purchased from various brokers. Based on this, which advantages of mutual funds would be appealing to you?
- Diversification - Professional management
defined contribution plan
- Either your employer alone or you and your employee together contribute directly to a retirement (savings) account set aside for you - You are responsible for how your account is invested based on the funds you have available - Employer's will often provide a match to retain employees - Employer's will often apply a vesting schedule - All new employees are enrolled at a certain % of pay going towards contributions
Use the following data to answer the question. Sovoy Corp | beta=0.70 Badger Industries | beta=1.35 Graham Records | beta=2.05 Expo Enterprises | beta=0.45 S&P 500 | beta=1.00
- Expo - Sovoy
Roth IRA
- Tax advantaged later - Contributions are not tax-deductible but made out of after-tax income - Money grows tax-free and withdrawals are tax-free - Restrictions on timing and amount of withdrawals - Can't take money out until age 59 ½, Can withdraw your contributions at anytime, Earnings cannot be withdrawn w/o a penalty choose Roth IRA if you plan on making more money in the future - provides tax free income in retirement - ability to withdraw contributions prior to age 59 1/2
When you own shares in a mutual fund you make money in which of the following ways? Mark all that apply:
- If a fund receives interest or dividends from its holdings this income is passed on to share holders. - If the fund sells a security for more than it originally paid for it, the shareholders receive this in the form of capital gains. - You receive a portion of the commissions that the fund manager charges for trades. - As the value of all of the securities held by the mutual fund increase, the value of each mutual fund share also increases
primary markets
- Initial public offering (IPO) - place where new securities are traded - Investment Banker - sells securities - Underwriter - administer the IPO and distribution of securities - Prospectus - document delivered to potential investors containing information about a security - Tombstone advertisement - provides basic details about the public offering of a security
Stocks fluctuate in value because
- Interest Rates and Stock Valuation - Risk and Stock Valuation - Earnings (and Dividend) Growth and Stock Valuation
Buy-and-Hold Strategy
- Involves buying stock and holding it for a period of years - Avoids timing the market - Minimizes brokerage fees and transaction costs - Postpones capital gains taxes - Gains taxed as long-term capital gains
Key elements of bonds
- Lend a specified amount of money - Face or purchase price - Known value at the end of term (face or "par") - Usually, payments during the life of the bond
Lending Investments
- Lending Investments - "lend" your money to an institution and receive income from: - Interest Savings accounts, money market accounts, and certificates of deposit (CDs)/time deposits - Dividends Bonds Government, Municipal, Corporate - - Bonds Key: dividends paid on a quarterly, semi-annual, or annual basis - Traditionally offered by banking institutions: Savings Accounts, Certificates of Deposit, Money Market Accounts - Interest credited Daily Monthly Quarterly Term - Bonds originally were issued in paper form - Bonds paid out in: Coupons, Redemption, Checks, Electronic Fund Transfer
before distributing property to heirs you must pay:
- Medical costs - Funeral expenses - Legal fees - Outstanding debt - Estate and inheritance taxes
key features of bonds
- Much more fragmented trading market than stocks - Some bonds trade at the NYSE - Most trading is by bond dealers who deal directly with large financial institutions - Dealers hold inventory - Small investors access bond dealers through a broker - Almost all stock purchases are through an intermediary, sometimes directly through company -
Why you should save for retirement
- One year delay can cost you a lot - almost $235,000. - You only end up with more when you begin saving for retirement earlier. - Start now with any amount you can - Strive to save 10% during your 20s - Increase to 15% in your 30s (or before - Invest the maximum allowed in tax-sheltered plans according to your investment time horizon - Monitor before and after retirement
Which of the following is/are a typical cash need(s) of one's estate? Mark all that apply.
- Outstanding debt - Liquidity to cover the cost to maintain the property of the deceased (business, real estate, etc.) - Funeral expenses - Legal expenses - Estate and inheritance taxes
goals of estate planning
- Pass on as much of your estate as possible - Distribute according to owner's wishes - Minimize taxes and transfer costs - Privacy
Disadvantages of ETF
- Pay commission - Don't necessarily trade at their net asset value - Bid-ask spread - Can be more expensive than typical mutual funds due to brokerage costs
Dollar Cost Averaging
- Purchasing a fixed dollar amount of stock at specified intervals - Purchasing the same dollar amount each period will average out the fluctuations - Buy more shares at a lower price, fewer shares at higher prices - Protects you from trying to time the market - Retirement plans are great for this
treasury and agency bonds
- Risk-free - Not callable - Lower interest rate - due to lower risk by investor -Most interest payments are exempt from state and local taxes. - Bills, notes, and bonds differ only by maturity and denomination. - Treasury-issued debt has maturities from 3 months to 30 years.
when you buy a stock you are paying for
- Sales commission to buy stock - Commission to sell stock - Transaction fee - Annual fee for inactive accounts
key features of stocks
- Secondary market - market in which previously issued securities are traded For both Stocks and Bonds - Where the buying & selling occurs: Organized exchange - a physical location where stocks trade New York Stock Exchange (NYSE) American Stock Exchange (AMEX), Over-the-counter market - transactions conducted over phone or computer (NASDAQ)
corporate bond
- Secured vs unsecured corporate debt - Secured: Mortgage bond, Unsecured: Debenture - Legal evidence of a long-term loan - Typically the loan must be repaid as of a specified date "Maturity date" - Interest at a stated rate paid by the corporation to the bondholder. - Subject to larger default risk than government securities
Traditional IRA
- Tax advantaged now - Whether or not contribution is tax-deductible depends on the following: Individual's level of income Whether he/she/spouse is covered by a company retirement plan - Restrictions on timing and amount of withdrawals - Money MUST start to be withdrawn by age 72, Can't take money out until age 59 ½
Diversification
- The reduction of risk by investing in different assets. - investing in stocks from different industries (technology, retail, medicine, etc.) - Allows extreme good and bad returns to cancel each other out. - Reduce risk without affecting expected return.
defined benefit plan
- Traditional pension plan where you receive a "defined" pension payout at retirement - Usually based on # of years served and salary - Receive a check per month throughout retirement - Common in government sector
Technical Analysis
- Use of published market data for analysis of both aggregate stock prices and individual stocks - Used by investors and investment advisory firms - Focuses on demand and supply - Uses charts and computer programs to identify and project price trends - May produce insight into the psychological dimensions of the market - Psychological assumptions: Greed pushes money into a rising market. Fear pulls money out of a declining market. - More likely to be used by analysts and professionals - Less value for individuals - PROBABLY BEST TO AVOID- encourages moving in and out of market instead of buying and holding
efficient market
- a market in which information about the stock is reflected in the stock price - The more efficient the market, the faster prices react to new information. - If the stock market were truly efficient, then there would be no benefit from stock analysts.
gambling
- activity that results in either gain or loss - Zero-sum (there's a winner & a loser) - Depends on chance - Someone wins & someone looses - Investing is not gambling because both sides of activity can come out ahead
pre-retirement allocation
- ages 55 to 64 - Preserve level of wealth and allow it to grow. - Start moving some of retirement portfolio into bonds. - Maintain a diversified portfolio. - Own 60% stocks and 40% bonds.
mutual fund
- an investment that raises money from investors, pools the money, and invests it in stocks, bonds, and other investments - Each investor owns a share of the fund proportionate to his/her investment - A way of holding investments such as stocks and bonds
NAV
- calculated at the end of the market day - Unit = price per share
The primary reasons people decide to set up trusts are: check all that apply
- control asset distribution after death - avoid probate costs - privacy
before you invest
- decide what your goals are (dictates the timeline and amount) - how much can you set aside to meet these goals? - know the difference between investing and speculating
zero coupon bonds
- don't pay interest and are sold at a deep discount from their par value - Return in increase in value to Par at maturity
passively managed funds
- follow an index (ex: S&P 500) and make few changes - Buy the market or a segment of the market
actively managed funds
- have a portfolio manager(s) making buy/ sell decisions - May utilize fundamental and/or technical analysis
Exchange Traded Fund (ETF)
- hybrid between a mutual fund and an individually traded stock or bond - Trade like an individual security - Can be bought and sold through the trading day - The investments inside the ETF do not change very often
risks of owning preferred stocks
- if interest rates rise, value of preferred stock drops - if interest rates drop, value of preferred stock rises and it is called away - investor does not participate in the capital gains that common stockholders receive - investor doesn't have the safety of bond interest payments, preferred dividends can be passed without the risk of bankruptcy
why would someone purchase preferred stock?
- income relatively certain - typically paid quarterly - investors capital is relatively secure, priority for liquidation and profits - prices more stable then common stock - some are "convertible"
Munis
- issued by states, counties, cities, public agencies e.g. school districts - Generally, interest from these bonds is exempt from federal income tax
Beta
- measure of how responsive a stock or portfolio is to changes in the market portfolio - Beta benchmark for market = 1 - Beta > 1 - stock is more volatile than the market - Beta < 1 - stock is less volatile than the market
retirement years allocation
- over age 65 - Spending more than saving. - Income primary, capital appreciation secondary. - Safety through diversification and movement away from common stocks. - Own 40% stocks, 40% bonds, 20% T-bills. Later, own 20% common, 60% bonds, and 20% T-bills.
Treasury Inflation Protected Securities (TIPS)
- par value changes with the consumer price index to guarantee investor a real rate of return - Government bonds for individual consumers
ownership investments
- participate in success and or failure of the company -Because you have ownership interest in a corporation, you are entitled to a proportionate share of the control, profits, and assets of the corporation. - Exercise control through voting rights. - Receives share of corporate profits through dividends. - If corporation is sold or liquidated, share net proceeds
Intestate
- persons dying without a will are considered to have died "intestate" - Died without attesting to what their wishes are - the state will pass your assets to your family.
A buy-and-hold investment strategy
- postpones capital gains taxes. - minimizes transaction costs. - means your gains will be taxed as long-term capital gains. - avoids timing the market.
P/E Ratio or earnings multiple
- price per share divided by earnings per share - common form of fundamental analysis - when the required rate of return for investor increases, P/E ratio decreases - when the earnings growth rate of a firm increases, P/E Ratio
social security
- senior citizens: Primary source of retirement income - younger workers: Pay taxes but benefits might be different than today or not existent at all - The money you pay is not being saved up and invested in an account for you - At age 67 you are considered "full" retirement age making you eligible to receive full benefits - When you die, your family may be eligible to receive survivors benefits. - Social Security may help you if you become disabled - even at a young age. - A young person who has worked and paid Social Security taxes in as few as two years can be eligible for disability benefits. - Social Security credits you earn move with you from job to job throughout your career.
Advantages of Mutual Funds
- service - liquidity and flexibility - minimal transaction costs - professional management
Probate
- the legal procedure that validates a will and then distributes the estate's assets - allows for challenges to be settled. - allows for the orderly distribution of assets for someone who dies intestate. - Probate fees are collected for the court's work
short selling
- the more the price drops, the more money you make 1) Borrow stock from the broker - Margin requirement - collateral 2) Sell high 3) Later buy low - This is the key! - If price increases, you buy back for more than the sold price and lose money. 4) Return stock to broker Profit = Sales Price - (Repurchase Price + Dividends)
How do mutual funds work?
-a mutual fund pools money from investors with similar financial goals -you are investing in a diversified portfolio that's professionally managed according to set goals -investment objectives are clearly stated -as the value of securities in the fund increases, the value of each mutual fund share also rises -most pay dividends or interest to shareholders -shareholders receive a capital gains distribution when the fund sells a security for more than originally paid -fund is set up as a corporation or trust -shareholders elect a board of directors -fund is run by a management company -each individual fund hires an investment advisor to oversee fund -contracts with custodian, a transfer agent, and underwriter
returns can be from
-income (rental income, dividend income) -interest -appreciation -buying or selling any right to any of asset that can generate any of above
General return differences
-income return= any payments you receive directly from the company or organization in which you've invested -investment return= return is the increase or decrease in value of an investment over time (ending value-purchase price/purchase price) -historical returns- investment returns vary significantly by: asset class, holding period - investments that produce higher returns have higher levels of risk associated with hem 1) common stocks: highest risk highest returns 2) long term corporate bonds and long term government bonds: medium risk medium returns 3) treasury bills and inflation: low risk low returns
Fluctuation of bond prices
-there is an inverse relationship between interest rates and bond values in the secondary market: when interest rates rise, bond values drop, and when interest rates drop, bond values rise -bond prices fluctuate dramatically - Bonds with longer maturations fluctuate more when rates change - As a bond approaches maturity, the market value approaches its par value
why own a stock?
-when you buy common stock, you purchase a small part of the company --> when the company does well, you do well and receive a small part of the profits -->if the company does poorly, either you receive no return or you lose money -->returns: form of dividends (company's distribution of profits to stockholders) and capital appreciation (the increase in the selling price of a share of stock) -neither dividends nor capital appreciation is guaranteed with common stock -dividends are paid at the board's discretion -capital appreciation takes place when the company does well 1. over time, common stocks outperform all other investments 2. stocks reduce risk through diversification 3. stocks are liquid- easy to get cash back fro a stock 4. growth is determined by more than just interest rates (earning prospects and performance of firm will affect stock prices)
long selling
1) Buy stock 2) Price rises 3) Sell stock 4) Make profit Profit = (Sale Price + Dividends) - Purchase Price
Suppose that you have a bond that has a par value of $1,000 and a coupon interest rate of 9%. Its current price is $950 and it will mature in 7 years. What is the yield to maturity? Go to 2 decimal places as xx.xx.
10.03
Marketing expenses on mutual funds are covered by a
12b-1 fee.
You just started a new job. You are going to put $275/month info your 401(k) retirement account. If you earn 8.5% annually, how much will your account be worth in 30 years? (go to 4 decimal points)
453,944.0706
You own a bond with a $1,000 par value that pays a 4.5% coupon interest rate and pays semi annually. How much will you earn each period (every six months) if you hold the bond to maturity?
22.5
You purchased a stock for $50/share one year ago. It is now worth $56/share and paid $7 in total dividends during the year. Inflation was 1.5% during this time. What is your real rate of return? (2 decimal points as xx.xx not 0.xxxx)
24.5
On Jan 2 you purchased 125 shares of common stock of GE for $16/share. You sold it exactly one year later for $19/share. During the year it paid a quarterly dividend of 25 cents per share. What was your total return on this stock (2 decimal places as xx.xx not 0.xxxx)
25
You are considering a bond with a coupon rate of 4.5% and the bond is currently valued at $1150. What is the current yield? (go to 2 decimal points & answer as xx.xx)
3.91
You purchased 100 shares of a fund for $15.50 per share. Its current NAV is 20.75 per share. There were no distributions. What is your total return?
33.87
What is the total return for a mutual fund with the following characteristics? beginning NAV = $55.82 ending NAV = $70.52 dividends distributed = $2.25 capital gains distributed = $3.50
36.64
To be eligible for Social Security benefits, you receive one credit for a certain amount of income in wages that you earn, up to 4 credits per year. How many total credits do you need to qualify for benefits?
40
You purchased 100 shares of Gibraltar Strength Fund for $12.75 per share. Its current NAV is 18.75 per share. There was a total of $0.25 in dividends and $0.75 in capital gains distributed. What is your total return?
54.9
You purchased an investment for $2000 on which you earned $165 in dividends last year. The inflation rate was 2.0%. What is your real rate of return? (go to 2 decimal points and answer as xx.xx not 0.xxxx)
6.25
Zippo Mutual Fund is one of your best performers. It just announced a year-end distribution of $2.50 per share in capital gains and $4.25 in dividends. Assuming the NAV increased from $31.50 to $43.75, calculate your total annual return.
60.32
You just purchased a corporate bond with a par value of $1,000 for $951.25. It carries a 7% coupon rate and will mature in 5 years. What is the yield to maturity? Go to 2 decimal places as xx.xx.
8.23
Jahwana works for a large corporation with a 401(k) retirement plan. The company matches dollar for dollar the first 5% of the employee's salary contributed to the 401(k). Jahwana currently earns $40,000 in gross salary and she currently contributes 15% of her salary into her 401(k). How much money in dollars is the total contribution to her account (her contribution plus the employer match) every year?
8000
Ivan the Investor is considering two different bonds. The first is a taxable corporate bond paying 8%. The second is a tax-free municipal bond paying 6½%. If Ivan's marginal tax bracket is 33%, what is the taxable equivalent yield for the municipal bond? (answer as xx.xxxx going to 2 decimal points)
9.7
bond
A bond is a - Promise to pay: Specified interest/dividend Face Value at Maturity - In return for: Lending money to initial bond issuer - Bonds trade after their initial sale at prices above or below par
401k
A defined contribution plan that automatically takes out money from an employee's paycheck before income taxes and invests it in mutual funds for purposes of retirement savings
stock
A share of ownership in a corporation.
lump sum
A single amount of money.
Vesting Schedule
A time-table for determining at what point the employers contributions become the property of the employee in a pension plan.
Each individual actively managed mutual fund hires an investment advisor, generally from the management company, who oversee the particular fund. How is this advisor paid?
Based on a percentage of the total value of the fund on an annual basis
What is the value of the current yield?
It allows the investor to compare the bond with alternative investment opportunities.
You and your brother have decided to invest in the stock market together. You will put in $5,000 each and open a single account at a brokerage. How should the ownership of this account be established if both of you wish the other to keep all the money in the event that the other should die?
Joint tenancy with the right of survivorship
Which of the following starts off with the highest risk bond and ends with the lowest risk bond?
Junk, Corporate, Municipal, Treasury
2 types of investing
Lending investments and ownership investments
management fees and expenses
Managing a mutual fund costs a lot of money -expense ratio= the ratio of a mutual fund's expenses to its total assets -invest in a fund with a low expense ratio -turnover ratio= measure of the level of a fund's trading activity, indicating what percentage of the fund's investments are turned over during the year -higher turnover rate, higher the fund's expenses
EXAMPLE OF REAL RATE OF RETURN QUESTION WITH STEPS You purchased a stock for $50/share one year ago. It is now worth $56/share and paid $7 in total dividends during the year. Inflation was 1.5% during this time. What is your real rate of return? (2 decimal points as xx.xx not 0.xxxx)
STEP 1: calculate nominal rate of return a) invested: 50, current value: 56, dividend: 7 b) profit on investment = change in value of investment + dividend -----> (56-50) + 7 = 13 c) return on investment = (profit on investment/initial investment) x 100 ------> (13/50) x 100 = 26 d) nominal rate of return = 26% STEP 2: calculate real rate of return a) real rate of return = nominal rate - inflation rate ----> 26% - 1.5% = 24.5%
current yield
Shows your return given the price the bond is worth at that time
Which of the following investors will potentially receive dividends on their investments?
Stockholders
real rate of return
Total Return - Inflation the current or nominal rate of return minus the inflation rate - can be negative *
What provides a measure of the level of a mutual fund's trading activity?
Turnover ratio.
determining value of estate
Value of Your Estate - Level of Estate's Liabilities = Estate's Net Worth
Ingrid is single with no dependents. She has been in the hospital in a coma for the last 2 weeks. Her bills are piling up and her rent on her apartment is due. Who is legally empowered to take care of her banking and bill paying while she is incapacitated?
Whoever is named in her durable power of attorney
What advantage does the Roth IRA have over the traditional IRA?
With a Roth you take care of taxes ahead of time and end up with more money to spend at retirement.
Why does a tax-deferred retirement account accumulate more money than a taxable account, assuming the same amount is contributed every year and the accounts earn the same return every year?
With tax-deferred accounts, there are no income or capital gains tax liabilities on account activity.
XYZ company issued callable bonds three years ago with a 7% coupon rate. Today, the market rate of interest was lowered to 4%. What most likely will happen next?
XYZ company will call their bonds in
stock splits
a company's board of directors decide to increase the number of shares outstanding by issuing more shares to current shareholders
preferred stock
a hybrid security with features of both common stock and bonds - no fixed maturity date, no paying dividends, won't bring bankruptcy - dividends are fixed, paid before common stock, no voting rights
will
a legal document that describes how you want your property to be transferred others
trusts
a legal entity that holds and manages an asset for another person - Created by a grantor to transfer property to a trustee for the benefit of one or more beneficiaries - Any asset can be placed in a trust
stock market index
a measure of performance of a group of stocks that represent the market or a sector of the market
no-load fund
a mutual fund that has no commission fee
living trust
allows you to place assets in trust while alive with the ability to withdraw them later if you wish.
living will
allows you to state your wishes regarding medical treatment in the event of illness or injury
junk bonds
also high-yield bonds, risky, low-rated BB or below
beneficiary
an individual who is willed property
When you purchase an asset that generates a return, it is generally considered to be
an investment
income return
any payments you receive directly from the company or organization in which you've invested
Dividends:
are paid but can vary from quarter to quarter
speculation
asset value depends solely on supply and demand - supply can change price rapidly - emend can change price rapidly - little intrinsic value
investments
assets that have the potential to generate returns
Suppose that you purchased a machine several years ago for your company. You recently sold the machine for more than you paid. This is an example of a
capital gain
__________ can be blue-chip, growth, income, speculative, defensive, large- to small-cap stocks.
common stocks
over time ______ out perform all other stocks
common stocks
Historical rates of return for the last 82 years place ________ at the highest end of the spectrum for risk and ________ at the lowest end for risk.
common stocks; T-Bills
book value
company "net worth"
stock repurchases
company asks stockholders to tender their shares for repurchase by the company
The ________ rate is the interest to be paid annually on a bond as a percentage of its par value.
coupon interest
Greg Jewell read about several companies that were performing relatively well despite the current recession. Stocks like these, that in some cases actually perform better during downturns in the economy, are called ________ stocks
defensive
volatility
degree of variation in investment returns - risk = volatility - influenced by asset class or type and holding period - shorter time period = more risk
durable health care powers of Attorney
designates someone to make health care decisions for you
real estate investment categories
direct- buy a property indirect- Real Estate Investment Trusts
stocks reduce risk through
diversification
neither ______ nor _______ are guaranteed with common stock
dividend, capital appreciation
________ are a company's distribution of its profits in the form of cash or stock to its owners.
dividends
We may prepare a ________ to appoint someone to legally act on our behalf in the event we become mentally incapacitated and a ________ to state our wishes in the event of a terminal illness or injury.
durable power of attorney; living will
bear market
falling prices
Mutual fund shareholders directly own the fund's securities.
false
Mutual funds eliminate systematic risk through diversification.
false
Many people never consider or think of the sources of risk that affect their investments. Which of the following is a risk associated with investing?
financial risk inflation risk business risk interest rate risk
class A shares
front-end sales load
capital gain/loss
gain (or loss) on the sale of a capital asset
The individual you name who will care for your minor aged children is known as their
guardian
Which of the following benefits is not provided by Social Security?
health
investment returns
increase or decrease in value of an investment over time
You are considered to be engaging in ________ when you purchase an asset whose value depends solely on supply and demand.
speculation
Social Security is a mandatory insurance program that provides a base level of protection for all of the following occurrences except one. Choose that one.
job loss
stocks are
liquid
Large-caps, mid-caps, and small-caps refer to the size of the firm issuing the stock, more specifically, to its
market value
categories of mutual funds
money market, stock, bond, sector, growth, index, international, balanced, asset allocation, life-cycle)
Growth is determined by
more than interest rates (bonds and cash investments)
If you were considering the purchase of a bond issued by a state, county, or city you would be considering the purchase of a ________ bond.
municipal
load funds
mutual funds that always charge a "load" or sales charge upon purchase
Taxable Equivalent Yield
on municipal bonds Municipal Bond Yield / (1-tax rate) tax free yield on the municipal bond / (1 - investors marginal tax bracket)
The ________ is the face value of a bond, and the amount that is returned to the bondholder at maturity.
par value
annuity
payment received every year
executor
personal representative who will carry out the will's provisions
estate planning
planning for what happens to your assets and your dependents after you die - Distribution process
Systematic Risk
portion of a security's risk or variability that cannot be eliminated through diversification - i.e. 2008 stock market crash
For someone who dies intestate, or without a valid will, ________ and the applicable state laws allow for the orderly distribution of the estate.
probate
investing goals should be to
protect and make money
durable Powers of Attorney for finance
provides for someone to act in your place should you become mentally incapacitated
when you buy common stock you
purchase part of the company
current yield
ratio of annual interest payment to the bond's market price annual interest payments / market price of bond ((coupon rate x par value) / current price))
The nominal rate of return minus the inflation rate is called the
real rate of return
As compared to growth stocks, income stocks pay ________ dividends with ________ growth in earnings.
relatively high; low
bull market
rising prices
Beta measures
risk
investment is all about
risk and return
unsystematic risk
risk or variability that can be eliminated with diversification - i.e. asset allocation
A bond rating is really a measure of a bond's
riskiness
You have just purchased shares of stock from a stockbroker. These shares were previously traded on the NYSE. This trade took place in the
secondary market
yield to maturity
shows your return if you hold the bond to its maturity
According to your textbook, when you are investing in gold, silver, gems, and collectibles you are actually
speculating
_________ such as the Dow and S&P 500 show health of stock market.
stock indexes
A ________ is a measure of the performance of a group of stocks that represent the market or a sector of the market.
stock market index
round lot
stocks - 100 shares
odd lot
stocks - any number of shares between 1-100 - Less critical today with computers
market orders
stocks - buy or sell immediately at the best price available (most of individual trades)
stop orders
stocks - sell if price drops below a specified level or buy if the price climbs above a specified level
limit orders
stocks - trade only at a certain price or better -"Buy if price goes as high as $XXX"
Alice recently bought dozens of collectable Barbie dolls. What ultimately will determine the investment value of Alice's Barbies when she goes to resell them?
supply and demand
taxable equivalent yield
takes into account your return on a muni bond given your tax bracket
income tax
tax on ability to earn money
gift tax
tax on privilege of giving assets while living
estate tax
tax on privilege of passing assets at death
For several years you have been using charts and computer programs to project trends in the stock market. You are engaging in what type of analysis?
technical
coupon interest rate
the bond's stated rate of interest
dividend
the company's distribution of profits to stockholders - paid at the board's discretion
Risk
the greater the risk, the greater the return - you can reduce unsystematic risk by diversifying
capital appreciation
the increase in the selling price of a share of stock - capital appreciation takes place when the company does well
Mutual funds provide an inexpensive way for investors to diversify and gain access to professional management.
true
yield to maturity
true yield or return that the bondholder receives if a bond is held to maturity - measure of expected return solves for interest rate in TVM N= years to maturity PV = negative current price FV = par value PMT = coupon rate x par value I/Y = ?
Life cycle funds
try to tailor their holding to the investor's individual age, and risk tolerance
That portion of a stock's risk or variability that can be eliminated through investor diversification is called ________ risk.
unsystematic
Frank is considering a new job. However he is concerned about his pension fund. He knows that ________ which is the requirement that he must work for his firm for a specified period of time prior to gaining ownership of the retirement contributions made by his employer has to be met first.
vesting
maturity
when the bond's issuer returns the the par value to the investor & terminates the bond
secondary markets
where stocks (or other items) are re-traded after their initial public offering (i.e. eBay)
guardian
who will care for children under the age of 18
The bond that you own does not pay any interest. Instead, it is sold at a "discount" from its maturity value. This is a ________ bond.
zero coupon