FINC 210 Quiz 3

Pataasin ang iyong marka sa homework at exams ngayon gamit ang Quizwiz!

Describe the process of valuing a bond.

A bond's value is the present value of the bond's cash flows discounted back to today using a discount rate that reflects the bond's risk. Bond cash flows are easy to determine since they are simply the periodic coupon payments (an annuity) and the maturity value of the bond which is typically $1,000. The discount rate can be found by looking up the coupon rate of similar risk bonds that are being issued now.

What is a bond's yield to maturity? How does the price paid for a bond affect its yield to maturity?

A bond's yield to maturity is the bond's annualized return if it is held to maturity. If the bond's selling price is the same as its par value or principal, then the yield to maturity will be equal to its coupon rate. If the selling price of the bond is greater than its par value, then the yield to maturity will be less than its coupon rate. If the bond's selling price is less than its principal, then the yield to maturity will be more than the coupon rate.

What is a call feature on a bond? How will a call feature affect investor interest in purchasing the bond?

A call feature allows the bond issuer to buy back the bond from the investor before maturity. When interest rates fall, issuers can call bonds for which they are paying high interest payments and issue new bonds with lower interest payments. Investors are only willing to purchase bonds with a call feature if the bonds offer a slightly higher return than bonds without a call feature. This additional interest compensates them for the possibility that the bonds may be called before maturity.

Why may the top managers of a firm be tempted to use misleading estimates of revenues and expenses? How may managers be able to boost the reported earnings of their firm?

A firm's top managers are commonly evaluated according to how the firm's value changes over time. These managers may receive shares of the firm's stock as part of their compensation. Therefore, their goal is to boost the value of the firm, so that they can sell their shares at a higher price and thus earn a higher level of compensation. Managers may be able to boost the reported earnings of their firm by using an accounting method that will either inflate their reported level of revenue or deflate their reported level of expenses; by boosting the reported level of earnings, they may be able to boost the value of the stock.

What is a flexible spending account? Why do some individuals allocate a minimal amount to this account?

A flexible spending account is an account established by the employer for the employee to use pretax income to pay for medical expenses. If you have unreimbursed medical or dental expenses, you can draw from this account to pay these expenses. By using this account, you are not taxed on the income to pay these health care expenses. One disadvantage of the flexible spending account is that the funds allocated to the account cannot roll over into the next year and there is an annual limit to the amount that can be contributed to the account. Thus, some individuals allocate a minimal amount to the account to ensure they use all the funds that are allocated to the account within the same year.

What is a junk bond? Why would an investor buy a junk bond?

A junk bond is a bond that is rated below investment grade by a bond rating agency. These bonds can be original issue junk and carry a high coupon rate, or they can be bonds issued earlier with higher ratings that have since been downgraded and now sell at a discount. In either case investors buy junk bonds to earn a higher return. However, the higher return comes with a higher possibility of default.

What are living benefits? When might a policyholder use this option?

A living benefits option, also known as an accelerated death benefit, allows policyholders to receive a portion of their death benefits while they are still alive. This option kicks in when special circumstances such as a terminal illness or long-term care needs arise.

How does the passive strategy for bond investment work? What is the main disadvantage of this strategy?

A passive strategy is an investment in a diversified portfolio of bonds that are held for a long period of time. The portfolio generates periodic income in the form of coupon payments. This is important for investors who want stable income over time and who do not want to incur costs associated with relying on portfolio managers or engaging in frequent buy and sell transactions. The portfolio has diversified maturities to reduce exposure to interest rate risk and has diversified risk levels. The main disadvantage to this strategy is that it does not capitalize on interest rate movements.

List and briefly discuss the factors that affect an individual's life insurance premium.

Amount of insurance: The larger the amount of life insurance needed, the higher the premium is. Cash value: Any policy that builds cash value will be more expensive than one that only provides insurance protection. Whole and universal life insurance policies are more expensive than term life insurance policies. Personal characteristics: Premiums charged on insurance are higher for individuals more likely to die during the term of the policy. For example, premiums are higher for older persons than younger ones, for males than for females, and for smokers than for nonsmokers.

What questions should you ask when considering an HMO or PPO?

An individual should ask: • Monthly premium • Deductible • Coinsurance/co-pay amounts • Limits of coverage • Maximum out-of-pocket expenses per year In addition, one should ask how many and who the doctors are in the plan and if they are accepting new patients. Know where the doctors are located and what services they provide and at what hospitals. Also question the out-of-network benefits.

How can investments in stock increase your wealth? How would you calculate the value of a stock investment of a single sum over time? How would you calculate the value of a stock investment of a specific amount over several periods?

As the value of your investment increases, and your liabilities do not increase, your wealth increases. The amount of wealth you accumulate partially depends on your stock investment decisions and on how much of the investment income you save. You may calculate the future value of a single sum investment by multiplying the investment amount by the FVIF for the correct interest rate and number of periods. To calculate the future value of a number of payments of a specific amount, multiply the periodic investment amount (i.e., the annuity amount) by the FVIFA for the correct interest rate and number of periods.

Why is the premium paid for whole life higher than the premium for term life? What alternative approach to purchasing life insurance might provide the same benefits as whole life?

Because whole life insurance provides both insurance protection and savings, the premiums are higher than the premiums for term life insurance. An alternative approach to purchasing life insurance that might provide the same benefits as whole life insurance would be to purchase term life insurance with lower premiums and invest the remainder in investments of one's own choice.

When an investor sells a bond in the secondary market before the bond reaches maturity, what determines the return on the bond? How do interest rate movements affect bond returns in general?

Bond prices change over time, and the return is dependent on the price paid for the bond and the price for which you are able to sell the bond. If you wish to sell a bond with a lower coupon rate than on new bonds, you will have to sell your bond at a discount to make it attractive. On the other hand, if coupon rates on new bonds fall below the coupon rate on your bond, you will be able to sell the bond at a premium. Thus, interest rate movements and bond prices are inversely related, which means that your return from investing in bonds will be more favorable if interest rates decline over the period you hold the bonds.

What are bonds? How do bonds provide a return to investors?

Bonds are long-term debt securities issued by government agencies or corporations. Bonds can offer a return to investors in the form of coupon payments and bond price appreciation. They pay periodic interest (coupon) payments and, therefore, can provide an investor with a fixed amount of interest income per year. A bond's price changes over time and therefore may provide investors with a capital gain, representing the difference between the price at which it was sold by an investor and the price at which it was purchased.

What is a bond? What is a bond's par value? What are coupon payments, and how often are they normally paid? What happens when investors buy a bond below par value? When should you consider investing in bonds?

Bonds represent long-term debt securities that are issued by government agencies and corporations. The par value of the bond is its face value, or the amount that will be returned to the investor at maturity. Coupon payments are the interest paid on the bonds based on the coupon rate, usually semiannually. If investors buy a bond below par value and hold it to maturity, they will earn a return that is the difference between the par value and the amount paid. This return is in addition to the coupon payments. You should consider buying bonds rather than stocks if you wish to have periodic income payments. Also, bonds are generally a less risky investment than stocks because their future cash flows are known. Thus, the return on bonds is normally less than the expected return on stocks.

What are dividends? Do all firms pay them?

Dividends are distributions of the firm's earnings to the stockholders. They normally are paid on a quarterly basis, although other periodic dividend payments are possible. Some firms do not pay dividends but instead reinvest all the earnings in the firm's operations.

What are federal agency bonds? Compare and contrast the three most common federal agency bonds.

Federal agency bonds are long-term debt securities issued by federal government agencies or government-sponsored entities (GSEs), which are federally chartered but owned by individual shareholders rather than the government. The Government National Mortgage Association (Ginnie Mae) is a federal agency that guarantees mortgage-backed securities originated by the Department of Veterans Affairs and the Federal Housing Association. Its securities are backed by the full faith and credit of the U.S. government and are subject to federal tax but exempt from state and local tax. The Federal Home Loan Mortgage Association (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) are GSEs. They issue bonds and use the funds to purchase conventional mortgages. Although the bonds of Freddie Mac and Fannie Mae are not backed by the full faith and credit of the federal government, they have low default risk. Income from Freddie Mac and Fannie Mae bonds is subject to local, state, and federal taxes.

What are some limitations of stock analysis?

Forecasting what will happen in the future is virtually impossible and future events can have significant impacts on a stock's price. Many investors may look for favorable conditions that are expected to bode well for a firm's future earnings but this information may already be reflected in a higher stock price as other investors anticipated the same impact. Overall, you are often much better off to buy a market index since active investing for many investors often generates inferior returns when compared to a market index.

What is group term life insurance? What are the advantages of group term life insurance?

Group term life insurance may be available to a group of people with a common bond, such as working for the same employer. Group term life insurance premiums are typically lower than term life premiums purchased by an individual. In addition, your employer may pay for all or part of the premiums.

How do individuals benefit from having health insurance? Why has health insurance received a lot of attention recently?

Health insurance limits the individual's potential liability and ensures that they will receive necessary medical care. Without health insurance, the high expenses of health care could quickly eliminate most of your wealth. Therefore, health insurance is a critical component of your financial planning. Health insurance has received much attention in recent years because it has become so expensive. The need for health insurance is greater for individuals who are older, and the average age of the population has increased in recent years. Since older individuals require more health care, the cost of providing health care is rising. The recent changes in the law (PPACA) have created pressures from all sides. The states have challenged the law, and still the politicians continue to use it as a campaign issues.

What is an IPO? What are the risks associated with buying IPOs?

IPOs, or initial public offerings, occur when a firm sells equity for the first time in the primary market. Most IPOs are offered to large institutional investors or investors with high net worth. Therefore most individual investors rarely get to buy an IPO but instead must purchase it in the secondary market when it begins trading on an organized stock exchange. Research has shown that this strategy generates poor returns compared with other investing strategies.

Compare and contrast private health care fee for service plans and managed health care plans.

Indemnity health care plans reimburse individuals for all or part of the health care expenses they incur from health car providers (such as doctors or hospitals). Individuals have the freedom to decide which health care providers they want to use. Generally, the individuals are billed by the health care provider and must then file a claim with the insurance company. Many indemnity plans have a coinsurance provision in which the insurance company pays a percentage of the bill. With an indemnity plan, you have the flexibility to choose your own health care provider, but there is a bureaucracy involved in getting reimbursed for bills. In addition, indemnity plans tend to be more expensive than managed care plans. Managed care plans allow individuals to receive health care services only from specific doctors or hospitals that are part of the plan. Individuals pay only the amount due after the insurance has paid. Managed health care plans carry lower premiums than indemnity plans but impose more restrictions on the specific health care provider that the individual can use. Managed health care plans are usually classified as health maintenance organizations (HMOs) or preferred provider plans (PPOs).

What is interest rate risk? How does a rise in interest rates affect a bond's price?

Interest rate risk is the risk that a bond's price will decline in response to an increase in interest rates. All bonds are subject to interest rate risk. Most bonds pay fixed coupon payments. Therefore, if interest rates rise, bonds with lower coupon payments become less attractive and must be sold at a discount to attract investors. Alternatively stated, if interest rates rise, investors will require a higher return on a bond. Thus, the discount rate applied to value the bond is increased, and the market price of the bond will decline.

Classify and describe the two types of investors. What are day traders?

Investors can be classified as institutional investors or individual investors. Institutional investors are professionals responsible for investing the money of a financial institution on behalf of the clients they serve. These investors are called portfolio managers, and about half of all trading in the financial markets comes from them. Individual investors invest a portion of their earned income. These investors see stocks as a way to grow their money over time by earning a reasonable return on their investment. Many individual investors hold their stock over one year, while others, called day traders, buy and sell stock the same day. They hope to make a profit on short-term movements in stock prices. Many day traders rely on their investing as a source of income. This type of investing is very risky, and most day traders will eventually lose all of their own invested money and very often lose more than the actual monies they invested.

What is a short sale? When would this strategy be used?

Investors may opt to "short" a stock when they believe the price of the stock will fall. The investor "borrows" a stock he or she does not own from another investor and sells the stock with the expectation that the stock is overvalued and will soon fall in price. When the price falls the investor can now purchase the stock and replace the shares borrowed prior to the sale.

Describe a typical stock transaction at the New York Stock Exchange (NYSE). What are floor traders? What are specialists? What other exchanges trade stocks in a similar manner to the NYSE?

Investors who trade stock have accounts at a brokerage firm. To buy or sell a stock listed on the NYSE, the investor contacts the brokerage firm, which electronically sends the request to buy or sell to the NYSE. There a computer matches up buy and sell orders and communicates the executed order to the brokerage firm. In the traditional method, which is still used for some transactions, the brokerage firm submits a message to one of its floor traders who negotiates a price with another trader who is trying to sell or buy the stock. Once the trade is complete, the floor trader sends a confirmation to the brokerage, which forwards it to the investor. Floor traders execute trades on the floor for themselves or someone else. When executing a trade for someone else, the commission is the difference between the bid and ask price (i.e., the bid-ask spread). Specialists help make a market in one or more stocks by taking the position opposite of orders placed by clients. Other exchanges that conduct trading in a manner similar to the NYSE are the NYSE MKT LLC and regional exchanges in large U.S. cities. The NYSE MKT LLC lists stocks that are generally smaller and are less actively traded than those on the NYSE. The regional exchanges tend to have less stringent listing requirements and therefore list stocks from smaller firms that may be well-known in that specific region.

What is the purpose of life insurance? Do you think everyone needs life insurance? Explain.

Life insurance provides a payment to a specified beneficiary when the policyholder dies. It allows individuals to eliminate or substantially reduce the financial consequences of their death on their dependents. Life insurance is especially important to protect a family's financial situation in the event that the breadwinner dies; expenses such as burial expenses or medical expenses may be covered by life insurance. If no one relies on an individual's income, life insurance may not be necessary. For example, if you are single and are not providing financial support to anyone, life insurance is typically not needed. However, many individuals still want to leave money to their heirs.

What is the purpose of long-term care insurance? What factors influence long-term care insurance premiums? What factors should be considered when purchasing long-term care insurance?

Long-term care insurance can cover expenses associated with long-term health illnesses that cause individuals to need help with everyday tasks. Many people who are elderly or have long-term illnesses need some assistance with everyday tasks such as eating or dressing. Long-term care insurance premiums are influenced by age, health condition, desired amount of coverage, the maximum period to receive benefits for, and the existence of a continued coverage option. When purchasing long-term care insurance, you should consider the premium to be paid and the credit rating of the insurance company.

What is Medicaid? How do individuals qualify for Medicaid?

Medicaid provides health care insurance for individuals with low incomes and in need of public assistance. Medicaid is intended to provide coverage for those who are blind, disabled, and needy families with dependent children. Individuals who receive Medicaid must meet federal guidelines, but the program is administered on a state-by-state basis. Individuals who qualify for Medicare may also be eligible for Medicaid if they need public assistance; in this case, they will receive more health benefits.

What is Medicare? Describe Parts A and B of Medicare.

Medicare provides health insurance to individuals who are 65 or older and qualify for Social Security benefits or who are disabled. Medicare provides payments to health care providers in case of illness. Part A of Medicare is used to cover expenses associated with inpatient care, such as hospitals or nursing facilities. There is no extra premium required for Part A coverage for individuals who qualify because they paid sufficient Medicare taxes while working. Part B represents optional medical insurance and covers some expenses not covered by Part A, such as outpatient hospital care, physical therapy, and some home health services.

What is mortgage life insurance? Is mortgage life insurance a good buy? Why or why not?

Mortgage life insurance is a special form of decreasing-term life insurance that pays off the mortgage if the insured dies. Individuals can achieve the same goal by purchasing term insurance with benefits large enough to pay off the mortgage. This option is often cheaper than mortgage life insurance.

What are municipal bonds? Why are they issued? Are all municipal bonds free from default risk? What characteristic makes municipal bonds especially attractive to high-income investors?

Municipal bonds are long-term debt securities issued by state and local government agencies. They are funded with proceeds from municipal projects such as parks or sewage plants, as well as tax revenues. Municipal bonds are not free from default risk as a state or local government agency may default on payments. However, most municipal bonds have a very low level of default risk. Municipal bonds are attractive to high-income investors because the bonds are not subject to federal income taxes and may also be exempt from local and state taxes if the investor resides in the same state as the municipality that issued the bond.

How do mutual funds operate? Who manages mutual funds? How are coupon or dividend payments handled by the mutual fund? Can investors incur capital losses with mutual funds?

Mutual funds sell shares to individuals and invest the proceeds in a portfolio of investments such as bonds or stocks. They are managed by portfolio managers for the individual investor. Coupon or dividend payments generated by a mutual fund's portfolio are passed on to the individual investor. The price of a mutual fund's shares may decline over time, which would result in a capital loss for individual investors.

Why is it necessary to analyze a firm? What is an annual report? What information does it contain to aid the analysis?

One firm may perform better than another because its managers make better decisions about how to finance the business, market its products, and manage its employees. Thus, an analysis of the firm is important. Publicly traded firms provide annual reports that report standardized financial information. It contains a letter from the CEO summarizing recent performance and expected performance. The annual report also contains the financial statements. Most investors focus on the balance sheet and the income statement. The balance sheet indicates the firm's source of funds and how they were invested. The income statement measures the revenues and expenses for a period of time.

Describe common investment mistakes made by individuals.

One of the most common mistakes made by individuals is to let their unrealistic goals dictate their investment decisions. These goals may force investors to take more risk than they should and can result in major losses. Another common mistake is to invest money that could have been used to pay off an existing loan; this can cause individuals to get too greedy and persuade them to take more risk than they should. Another mistake is that individuals try to take excessive risks to recover their losses; this can lead to additional losses and may even push individuals toward bankruptcy.

Why should young people have investments in stocks as part of their portfolio?

Over the long-term stocks have consistently outperformed other asset classes such as bonds or money market securities. Young people have longer time horizons and should consider stocks as a primary component of their investment portfolio in order to maximize returns over time.

What is private health insurance? Briefly describe some types of private health insurance coverage.

Private health insurance refers to health insurance that can be purchased from private insurance companies to provide coverage for health care expenses. Private health insurance plans contain hospital insurance, physician insurance, and surgical insurance. Hospital insurance provides coverage for individuals who require care from a hospital up to a specified limit. Physician insurance provides coverage for various forms of physician's medical care, such as office consultations. Surgical insurance provides coverage for specific operations.

What is the risk to investors on bonds that have a call feature?

Risk on bonds with a call feature is call risk or prepayment risk. If interest rates fall below the coupon rate of the bonds with a call feature, the issuer will often buy the bonds back and issue new bonds at a lower interest rate. Investors must sell the called bonds back. Because interest rates have fallen, it will be difficult for the investors to earn the same rate of return they were getting on the higher interest bonds.

How do shareholders earn returns from investing in stocks? How is the market value of a firm determined? What determines the market price of a stock?

Shareholders can earn a return through dividends or through selling their stock at a price higher than the price they paid. A firm's market value is determined by multiplying the number of shares outstanding by the market price of the stock. The market price of the stock depends on the number of investors willing to buy a stock versus the number of investors willing to sell. As a firm's performance increases, its stock becomes more desirable, and the stock price will go up. There is no limit to how high it can go. On the other hand, if a firm performs poorly, it is less desirable, and the stock price will fall. A firm's performance depends on its management.

Why are prices of some bonds more sensitive to economic conditions than others?

Some bonds are much more sensitive to economic conditions because the corporations that issued these bonds are sensitive to the economy. For example, a producer of expensive products might generate high sales in a strong economy but weak sales in a weak economy. It may have trouble repaying its debt in a weak economy. Therefore, the value of its bonds may change substantially in response to changing economic conditions. Conversely, a producer of household products such as laundry detergent may experience about the same level of sales regardless of the economy and, therefore, should be more able to repay its debt regardless of the economic conditions. Therefore, the value of its bonds may not change in response to changing economic conditions.

What are stock exchanges? How do they facilitate the trading of stocks?

Stock exchanges are facilities that allow investors to purchase or sell existing stocks. Stock exchanges facilitate the trading of stocks in the secondary market by providing a physical location for trading. Also, because listed stock must meet specific requirements to be traded on the exchange (such as minimum size and minimum number of shares outstanding), an active market for the stock is assured.

What are stocks? How are stocks beneficial to corporations? Why do investors invest in stocks?

Stocks are financial instruments representing partial ownership in a corporation. Corporations sell stock (or ownership) in order to raise funds for expansion of their business operations. By expanding, corporations hope to generate income that may be reinvested in the firm. Stocks are a common investment for investors who believe that they will get a higher return from stocks than from other investments and have the knowledge to know they cannot reach their financial goals without equity investing in most cases.

What is technical analysis? What is fundamental analysis?

Technical analysis is the process of valuing a stock using historical price data. Technical analysts, or chartists, attempt to identify repetitive price patterns and buy or sell stock accordingly. In contrast, fundamental analysis involves attempting to value a stock based on fundamental characteristics such as earnings, revenue growth and numerous other factors.

What is term insurance? What factors determine the premium for term insurance? What is decreasing-term insurance?

Term insurance is life insurance provided over a specified time period. Term insurance does not grow in cash value, but provides protection over the specified period; consequently, the policy does not serve as an investment. The premium paid for term insurance depends on your health, your age, your gender, and the length of time covered. Premiums are lower for females, younger individuals, and shorter time periods. With decreasing-term insurance, the amount of benefits to the beneficiary is reduced over time, but the premium paid for the insurance remains constant over the term. This type of insurance is popular with families because it provides a relatively high level of insurance in the earlier years when it is most needed.

What is the OTC? What is the role of a market maker?

The OTC, or over-the-counter market, is an electronic communications network that allows investors to buy and sell stock. Each stock will have several market-makers or dealers charged with maintaining a market for certain stocks. These market-makers ensure that investors have liquidity and they make commissions based on the bid-ask spread, or the difference between what they are willing to pay for a stock and the price they are willing to sell the stock for.

What is a beneficiary? Why is it important to periodically review your beneficiaries?

The beneficiary is the person or persons named to receive the life insurance proceeds in the event the policyholder dies. Any change in family status such as marriage, divorce, or death of a beneficiary needs to trigger a review of the beneficiaries listed in your life insurance policy.

Describe the maturity matching strategy of investing in bonds. Give an example. Why is this strategy considered conservative?

The matching strategy involves selecting bonds that will generate payments to match future expenses. An example is purchasing a bond to provide payments for periodic expenses during retirement. This approach is considered conservative because it is designed to cover future expenses rather than to outperform the bond market in general.

How can you limit your risk through diversification?

The most effective way to diversify your investments is to diversify among various types of investments that are not equally sensitive to economic conditions. This type of diversification limits your exposure to an investment in a given class and to each investment class. For example, even if you diversify your investments among various stock investments, you are still exposed to general economic conditions; diversifying among different investment types, which are not equally sensitive to economic conditions, reduces your exposure.

Describe the nonforfeiture and loan clauses of whole life insurance policies.

The nonforfeiture clause allows you to receive the savings you accumulated if you terminate your whole life policy. If the policyholder withdraws the cash value, the amount by which the cash value exceeds the premiums that were paid is subject to taxes. The nonforfeiture clause may also offer the alternative of using the cash value to pay for an insurance policy that has a reduced death benefit. The loan clause specifies that you can borrow against the cash value that has accumulated at an interest rate specified in the policy. This loan rate is usually lower than rates offered on personal loans by financial institutions.

Distinguish between the primary and secondary stock markets. Why does the price of a stock change each day in the secondary market?

The primary stock market is a market in which newly issued securities are traded; firms raise funds by issuing new stock in the primary market. A secondary stock market facilitates the trading of existing securities. Thus, even if a firm is not issuing new shares of stock, investors can easily obtain shares of that firm's stock by purchasing them in the secondary market. The price of a stock changes each day in response to changes in the supply of and demand for the stock in the secondary market.

What is universal life insurance? How does it differ from term life and whole life?

Universal life provides insurance over a specified term like term life, but it also has a savings component like whole life insurance. It is therefore a combination of term insurance and a savings plan and is classified as a cash-value life insurance policy. Universal life insurance differs from term life and whole life insurance in that it allows policyholders to alter their payments over time. It specifies the premium needed to cover the term life insurance portion, and payments above that amount are invested in savings on which the policyholders earn interest. Unlike whole life insurance, the insured (rather than the insurance company) chooses how the difference is invested in a given a set of investment alternatives. Universal life insurance also allows policyholders to skip premium payments, and the amount needed to cover the term insurance portion or any administrative expenses will be withdrawn from their savings plan.

Describe how the interest rate strategy for bond investment works. What are some of the potential problems with this strategy?

Using the interest rate strategy, you select bonds on the basis of interest rate expectations. If investors expect interest rates to decline, they would invest heavily in long-term bonds whose prices would increase the most in response to lower interest rates. On the other hand, if investors expect interest rates to increase, they would shift most of their money into bonds with short-term maturities to minimize the impact of higher interest rates. There are some potential problems with this strategy. Investors who use interest rate strategy may experience poor returns if they are incorrect about the direction that interest rates will move. Also, this strategy requires frequent trading to capitalize on shifts in interest rate expectations, resulting in high transaction costs and unfavorable tax consequences. Another potential problem with the interest rate strategy is that the high turnover of bonds may generate more short-term capital gains, which are taxed at the ordinary federal income tax rate.

What is variable life insurance? What are the advantages and disadvantages of variable life policies? How can individuals avoid the high fees of variable life insurance?

Variable life insurance is related to universal life insurance; it allows the policyholder to invest the residual funds after the term premium payment in a variety of investments, including mutual funds. An advantage of variable life insurance over whole life and universal life insurance is that policyholders have flexibility in making their own investments. The disadvantage is that fees on these policies can be high. Individuals can avoid high fees by purchasing term insurance and investing other money in vehicles that would not require high fees, such as no-load mutual funds.

What information must you provide when placing an order to buy or sell stock? What is a ticker symbol, and why is it important?

When placing an order to buy or sell stock you must provide: the name of the stock, whether the order is to buy or sell the stock, the number of shares of stock, and whether it is a market order or a limit order. The ticker symbol is the abbreviated term that is used to identify the stock for trading purposes (e.g., MSFT for Microsoft). The use of the symbol is more convenient than using firm names, and it also serves to distinguish firms with similar names.

What is whole life insurance? What benefit does it provide that term life insurance does not?

Whole life insurance provides insurance as long as premiums are paid. Furthermore, the policy accumulates savings for the policyholder. Policyholders may terminate their whole life policy and withdraw the cash-value savings that have accumulated. Consequently, whole life insurance is also called cash-value life insurance. The cash value is typically specified in a schedule.


Kaugnay na mga set ng pag-aaral

LIFSCI 7B XL - Animation: Carbon cycle

View Set

C743 Data Mining 1 - Terminology

View Set

Individ Health Assess. Midterm Questions

View Set

Chapter 2 - Insurance & Health Care Agencies

View Set

NMNC 1110 EAQ 10: Safety and Infection Control (Mastery)

View Set

Pharm Exam I (Ch. 1-6) Questions

View Set

Chapter 35 Assessment of Immune Function

View Set

Dance 100 Chapter 5 Quiz (100% Right)

View Set

review for fundementals of nursing chapters, hygine, saftey, activity.

View Set