Personal Finance Unit 4

What does the term saving refer to?

The term saving refers to disposable income minus consumption.

What are mutual funds?

a professionally managed group of investments bought using a pool of money from many investors.

What are dividends

a share of a company's net profits paid to stockholders.

What are advantages of government bonds?

are that they are very safe, because for example a corporation could fail and the government will always have money.

What are emerging stocks?

are young, small companies that have high risk.

Describe the relationship between risk and return

because investors are averse to risk, high-risk investment options must offer higher potential returns that low-risk options.

Why do banks pay you interest

because they use the money to lend to others and to attract deposits.

What is a coupon bond?

bond that pays interest at regular intervals with a final payment that includes the original principal when the bond matures.

Name three types of depository institutions.

commercial banks, savings and loans, and credit unions.

What are cyclical stocks?

do well when the company is growing and poorly when it is not.

What is a general obligation bond?

is backed by the power of the government to levy taxes to pay back the debt.

What are three ways to earn money on bonds?

is by earning interest each day you own the bond, can redeem the bond at maturity for the amount you paid for it, and selling a bond before maturity, if interest rates are dropping you can usually sell it for more than you paid for it.

What are benefits?

monetary or non-monetary gains you receive when you make a choice.

Explain common stock.

pays a dividend depended upon how the company does. It also gives the holder voting rights.

Explain preferred stock.

pays a fixed dividend regardless of how the company is doing. It does not give any voting rights. If the company fails preferred gets paid before common. (Less risk = less return)

Why do direct deposits and automatic deductions make saving easier?

A direct deposit makes it easier to save money because the paycheck is directly into your account, making it easier to save your money if you never see the money. Automatic deductions make saving easier because it is money that you have authorized your bank to move from one account to another on a regular basis, meaning that you never see the money because the bank has it, making it not as tempting to save the money eventually leading to make saving easier.

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

One advantage of a money market account over a regular savings account is that it offers a more competitive interest rate than a regular savings account.

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

One advantage of a regular savings account is that it has high liquidity, meaning that you can get your money out easier. One disadvantage of a regular savings account is that it has low interest rates.

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

The difference between a corporate bond and municipal bond is that a corporate bond is debt obligations of corporations and a municipal bond is a debt obligation of state or local governments.

What are four factors that influence stock price?

The four factors that influence stock price are the company, interest rates, the market, and earnings per share.

Explain the two different types of money market accounts

The two types of money market accounts are the money market deposit account and the money market fund. The money market deposit account similar to a regular savings account, but offers a higher rate of interest in exchange for a 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 than the deposit accounts, but tare riskier

List and describe three sources of financial information

Three sources of financial information are newspapers, financial magazines, and financial advisors. You can use newspapers, like the Wall street journal. You may also use financial magazines, such as Business Week, Forbes, and Money. Lastly, you may talk to financial advisors, they will give investment advice based on your goal, age, and lifestyle.

What is a zero coupon bond

a bond that pays all interest and principal at the bond's maturity. An investor's income from a zero-coupon bond comes solely from the bond's appreciation in value.

What is a prospectus?

a legal document that offers securities or mutual funds shares for sale. By law it must contain the terms, a summary of the fund's portfolio of investments, its objectives, and financial statements showing past performance.

What are income stocks?

consistent history of paying high dividends.

List and describe three low risk/ low return investments.

corporate and municipal bonds, U.S. government saving bonds, and treasury securities. Treasury Securities consist of T-Bills, T-Notes, and Treasury Bonds. T-bills mature within a year. T-Notes mature within 10 years (higher interest than T-bills. Treasury Bonds mature in 30 years (highest interest rate which is paid every 6 months.

List and describe the types of corporate bonds

debentures, secured bonds (mortgage bonds), and convertible bonds. A debenture is a corporate bond that is based on the general creditworthiness of the company. A secured bond (mortgage bond) is backed by specific assets which serve as security to assure repayment of the debt. A convertible bond is a corporate bond that can be converted to shares of common stock.

List and describe three high risk/high return investments.

futures, options, and penny stocks.

What does liquidity mean?

how quickly you can turn your savings into cash

What are blue chip stocks?

large, well-established companies and have safe, stable moderate returns.

What is yield

means that you want to be able to earn as much interest as possible while still liquidity, safety, and convenience.

What are four advantages of mutual funds?

professional management, liquidity, diversification, and small initial and ongoing purchases

What is a revenue bond?

raises money for things like airports, hospitals, and public housing facilities.

What are growth stocks?

reinvesting profits in the company, and paying little to no dividends although the stock will be worth more in the future.

What are defensive stocks?

remain stable and pay dividends during an economic decline.

What does a professional mutual fund manager do?

researches individual stock bonds, interpret marker conditions, financial statements, industry trends, and other market date, buy and sell individual stocks, bonds, and other financial instruments, and match good investments to meet their investors' objectives.

What is the difference between compound and simple interest?

simple interest is calculated only on the amount of the deposit and compound is not, it will also make your money grow faster.

List and describe three medium risk/ medium return investments.

stocks, mutual funds, and annuities.

Explain the rule of 72.

you divide the compound interest rate into 72 to find out how many years it will take your savings to double.

What does safety of principle mean?

you want to make sure you will not lose your initial deposit.

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

One advantage of a certificate of deposit is that it earns a fixed interest rate for a specified length of time. One disadvantage of a certificate of deposit is that it has a higher interest rate than as savings account, but you must wait until the maturity date to get the money.