MATH
How can you invest directly?
A person can invest directly, which means buying individual investments on her own (often through a broker)
How can a person invest indirectly in a mutual fund?
A person can invest indirectly by purchasing shares in a mutual fund, through which a professional fund manager invests the money along with the money of others participating in the fund
Explain why the term APR/n appears in the compound interest formula for interest paid n times a year
APR represents the annual percentage rate (as a decimal). To account for the interest paid n times a year, this annual (yearly) rate needs to be divided by the number of compounding periods per year, n.
Liquidity
An investment's liquidity is how easily money can be withdrawn from an investment
Return
An investment's return is the total or annual amount of money that is expected to be earned on an investment.
Risk
An investment's risk is the chance of losing the principal invested.
How are risk and return related?
Balancing risk and return is of the most difficult tasks of investing. Risking too much might lose someone money, and risking too little may result in little to no return.
Bonds
Bonds represent a promise of future cash. They are issued by either a government or corporation. The issuer pays simple interest and promises to pay back the initial investment plus interest at some later date.
Cash
Cash investments include money deposited into bank accounts, certificates of deposit (CD), and U.S. Treasury bills. Cash investments generally earn interest.
what does it men to buy a bond at a premium?
Paying a price that is greater than the bond's face value.
What does it mean to buy a bond at a discount?
Paying a price that is less than the bond's face value.
Stocks
Stock gives a person a share of ownership in a company. To get money out of the stock, it must be sold. The sale may yield either a gain or a loss depending on how the stock changed with time.
How can you calculate the current yield of a bond?
The amount of interest a bond pays each year divided by the bond's current price
Define maturity date of a bond
The date on which the issuer promises to repay the money.
Define face value
The price that must be paid to the issuer to buy it at the time it is issued
define coupon rate
The simple interest rate that the issuer promises to pay.
The bank that pays the highest annual percentage rate (APR) is always the best deal.
The statement does not make sense because, depending on how often the interest is compounded, a lower APR could result in a higher annual percentage yield.
'm already retired, so I need low-risk investments. That's why I put most of my money in U.S. Treasury bills, notes, and bonds
This makes sense because the safest investments are federally insured bank accounts and U.S. Treasury bills; there's virtually no risk of losing the principal invested.
Both banks were paying the same annual percentage rate (APR), but one had a higher annual percentage yield than the other (APY).
This statement makes sense because the banks can have a different number of compounding periods, which results in different annual percentage yields
What is continuous compounding? How does the APY for continuous compounding compare to the APY for, say, daily compounding? Explain the formula for continuous compounding.
Compounding infinitely many times per year is called continuous compounding. The APY for continuous compounding is only slightly larger than the APY for daily compounding. The formula for continuous compounding is a special form of the compound interest formula.
Difference between simple and compound interest? Why do you end up with more money with compound?
Simple interest is interest paid only on the original investment whereas compound interest is interest paid both on the original investment and on all interest that has been added to the original investment. Since compound interest is calculated based on a larger amount than simple interest, it results in a larger amount of money over time.
