FIN250; final
Components of your financial and retirement plan
(1) Build your estate through savings, investments, and insurance (2) Transfer your estate as you wish at death
trustor
(grantor) the creator of a trust
Short term Intermediate term Long term
(less than 3 years) (3-10 years) (greater than 10 years)
high yield bond funds
(often referred to as junk bonds) invest in high yield, high risk corporate bonds
Pricing - net asset value (NAV) =
(value of the fund's portfolio - liabilities) / number of shares outstanding
Aspects of legal estate planning:
- Birth certificates (yours, your spouse's, your children's) - Marriage Certificates: always important, but especially important if you or your spouse were married previously - and divorce papers - Legal name changes: judgment of court documents pertaining to any legal changes in the names that appear on birth certificates (especially important to adopt the protected children of a previous marriage or children who have been adopted through adoption agencies - Military service records: the standard DD-214 (Armed Forces of the United States Report of Transfer or Discharge) or any other official statement of your military service details, if appropriate
purchase options:
- Brokerage firm: - Retirement fund: - Investment firm:
flipping properties
- Buy an undervalued property - Update it, make necessary repairs, and modifications - Sell it for a profit
disadvantages of real estate
- Depreciation risks - Failure to receive rent payments - Unoccupied property
Federal Law Requires REITs to:
- Distribute at least 90% of their taxable annual earnings to shareholders. - Refrain from engaging in speculative, short-term holding of real estate to sell for quick profits. - Hire independent real estate professionals to carry out certain management activities. - Have at least 100 shareholders; no more than half the shares may be owned by 5 or fewer people. - Invest at least 75% of the total assets in real estate.
some facts...
- Dividends on preferred stock can be omitted by the board of directors. - The dollar amount of the dividend on preferred stock is known before the stock is purchased. - Preferred stocks are sometimes referred to as 'middle' investments because they represent an investment midway between common stock (an ownership position for the stockholder) & corporate bonds (a lender position for the bondholder.
myRA is a good option if you have not started savings for retirement because:
- Don't have a retirement savings plan at work, - Don't have other options available to start savings for retirement, - Feel the cost of opening & maintaining a retirement savings account is too high, or - Are concerned about complicated investment options & losing money.
other funds
- Funds of funds: invest in shares of other mutual funds; increased diversification & asset allocation; higher expenses & fees are common with these - Lifecycle funds (lifestyle or target date funds): popular with investors planning for retirement by a specific date; usually invest in more risk-oriented securities (stocks) & become increasingly conservative & income oriented (bonds & CDs) as the specified date approaches & investors are closer to retirement - Money market funds: invest in certificates of deposit, government securities, & other safe and highly liquid investments
taxes
- Income dividends and capital gain distributions can be automatically reinvested but may still be taxable. - Capital gain distributions taxed when received - The turnover ratio measures the percentage of the fund that has been replaced during a 12-month period; unless you are using these investments in a tax deferred retirement account, a high turnover ratio can result in higher income tax bills and higher fund expenses
Tax Benefits of a TSA:
- Investment earnings are tax-deferred. - Savings compound at a faster rate & provide you with a greater sum than an account without this advantage. - Ordinary income taxes will be due when you receive the income. - You can increase your take-home pay with a TSA.
A living trust has the following advantages:
- It ensures privacy. A will is a public record, a trust is not. - The property held in the trust avoids probate at your death. It eliminates probate costs & delays. - It enables you to review your trustee's performance & make changes if necessary - It can remove management responsibilities from your shoulders - It is less subject to dispute by disappointed heirs than a will is - It can guide your family & doctors if you become terminally ill or incompetent
some credible websites
- Market watch: current price information, news, corporate profiles, analyst estimates, & detailed analysis about individual corporate stock issues & other financial securities - Reuters: news site that provides detailed information about individual stocks, including overview, charts, key developments, financial statements, ratios, sales & earnings estimates, & recommendations, - Value line: many experienced investors rely on this research to provide information on a corporation's activities, performance, & investment outlook - Morningstar: detailed research that can be used to sort, screen, graph, & report on individual common stocks & mutual funds
Why buy bonds?
- Most bonds are sold through full-service brokerage firms, discount brokerage firms, or the internet. - Lower commissions for discount brokerage firms & internet. - Brokerage firms charge a mission when you buy a bond & when you sell a bond. - Commissions may be a combination of a stated dollar amount plus an additional commission (called a markup when buying or a markdown when selling.)
Ratings
- Provide more information about quality & risk associated with bond issues. - Moody's Investor Service Inc., Standard & Poor's Corporation, Fitch Ratings, and Mergent provide bond ratings - Bond ratings generally range from AAA to D for Standard Poor's and Aaa to C for Moody's
REIT (real estate investment trusts)
- Similar to a closed-end mutual fund; trades shares on stock exchanges - Types: equity REITs invest money directly in property; mortgage REITs invest in mortgage loans that finance properties, hybrid REITs do a bit of both - Investing in REITs - do your homework; read the prospectus; talk to a professional; traded on an exchange; be wary of scams
advantages of real estate
- Taxes - Passive income/passive activity (business or trade in which you do not materially participate, such as rental activity) - Asset appreciation - inflation hedge
marriage does not revoke a will if:
- The will indicates an intent that it not be revoked by a subsequent marriage, or - The will be drafted under circumstances indicating that it was in contemplation of marriage
Why issue bonds?
- To get funds for major purchases. - To fund ongoing business activities. - When it is difficult or impossible to sell stock. - Interest paid to bondholders is a tax-deductible business expense that can be used to reduce the federal & state taxes corporations must pay.
Typical expense ratios for an index fund are
0.50% or less.
Financial planners recommend that you choose a mutual fund with an expense rate of
1% or less.
These 4 specific conditions can affect bond prices.
1) Actions by the Federal Reserve to either stimulate the economy or control inflation can lead to an increase or decrease in the interest rates that corporations & government entities must pay when they issue new bonds. 2) An increase or decrease in the interest rates for new bond issues affects the amount of annual income you will receive if you purchase new bonds. 3) An interest rate increase or decrease for new bond issues can also cause the current market value of older bonds you already own to increase or decrease until they reach maturity. 4) The value of a bond may also be affected by the financial condition of the company or government entity issuing the bond, the factors of supply & demand, an upturn or downturn in the economy, & the proximity of the bond's maturity date.
Steps for Effective Investment Planning:
1) Establish your investment goals. 2) Determine the amount of money you need to obtain your goals. 3) Specify the amount of money you currently have available to fund your investments. 4) List different investments you want to evaluate. 5) Evaluate risk & potential return for each. 6) Reduce possible investments to a reasonable number. 7) Choose at least 2 different investments. 8) Continue to evaluate your investment program.
Shareholders receive a return in 3 ways:
1) Income dividends are the earnings a fund pays to shareholders from its dividends & interest income; taxed as regular income. 2) Capital gain distributions are the payments made from the fund to its shareholders that result from the sale of securities in the fund's portfolio; generally paid once a year; these are taxed as long-term capital gains regardless of how long you own shares in the mutual fund. 3) Capital gains occur when shares are sold at a price greater than you paid. When selling, the shares are taxed on a short-term or long-term basis depending on the length of time you own the shares in the fund.
When you change jobs, generally you have four choices about what to do with your 401(k) plan savings (source: GAO analysis, U.S. Government Accountability Office):
1) Leave funds in previous employer's plan. 2) Roll over funds to new employer's plan. 3) Roll over funds to an IRA. 4) Cash out, pay taxes, & possible penalties.
The corporation gains 3 advantages by issuing convertible bonds or notes:
1) The interest rate on a convertible bond or note is often 1-2% lower than nonconvertible bonds or notes. 2) The conversion feature attracts investors who are interested in a speculative gain that conversion to common stock may provide. 3) If the investor converts to common stock, the corporation no longer has to redeem the bond or note at maturity.
A corporation may use one of two methods to ensure that it has sufficient funds available to redeem a bond issue...
1) sinking funds 2) serial bonds
Maturity dates for bonds generally range from ___________ years after the date of issue.
1-30
To make money in a short transaction:
1. Arrange to borrow a certain number of shares of a particular stock from a brokerage firm. 2. Sell the borrowed stock, assuming it will drop in value in a reasonably short period of time. 3. Buy the stock at a lower price than the price it sold for in step 2. 4. Use the stock purchased in step 3 to replace the stock borrowed from the brokerage firm in step 1.
Investors can use 2 additional sources of information to evaluate potential bond investments:
1. Business periodicals can provide formation about the economy & interest rates & detailed financial information out a corporation or government entity that issues bonds. 2. A number of federal agencies provide information that may be useful bond investors on the internet or in printed form.
6 Steps to Manage your Money if you Predict a Downturn in the Economy:
1. Establish a larger than usual emergency fund. 2. Know what you owe. 3. Reduce spending. 4. Notify credit card companies & lenders if you are unable to make payments. 5. Monitor the value of your investment & retirement accounts. 6. Consider converting investments to cash to preserve value.
A mutual fund supermarket offers these 2 advantages:
1. Instead of dealing with numerous investment companies that sponsor mutual funds 2. You receive one statement from the brokerage firm instead of receiving a statement from each investment company you deal with
Investors purchase corporate bonds for 3 reasons:
1. Interest income 2. Possible increase in value 3. Repayment at maturity
Some critical reasons you need to financially plan for retirement:
1. You can expect to live in retirement for 16-30 years. At age 65, the average life expectancy is 17 years for a man and almost 20 years for a woman. 2. Social Security and a private pension, if you have one, are most often insufficient to cover the cost of living. 3. Inflation may diminish the purchasing power of your retirement savings. Even a 3% rate of inflation will cause prices to double every 24 years.
Financial Suggestions for Bond Investors...
1. asset allocation: Bonds are an excellent way to diversify your portfolio & lessen risk. 2. income for current financial needs: Generally, bonds pay interest (income) semi-annually (every 6 months). 3. long-term financial needs: Bonds can be purchased with staggered maturity dates that match future financial needs. 4. conservative investment in an economic downturn: Buy quality bonds to lock in higher income & avoid potential losses in other types of investments.
Almost half of U.S. households invest in mutual funds for 3 reasons:
1. easy way to invest 2. professional management 3. diversification
A vacation home is deemed a second home as long as you don't rent it for more than ____________ a year.
14 days
Partnership:
2+ people with formal contract; share profits and losses
Dow Jones Industrial Average (DJIA):
30 stocks; chosen to represent the market; reported since 1890
How to become eligible for social security:
40 quarters
Standard & Poor's 500 (S&P 500):
500 large- & mid-sized capitalized companies; representative of the stock market; expanded to 500 in 1957; used by most professionals as benchmark to judge overall U.S.market performance; lifetime return of 9-10% with dividends reinvested
Whether you have an employer pension plan or a personal retirement plan, you must start withdrawing at age __________ or the IRS will charge you a penalty
70.5
fidelity investments
A fund supermarket; investors have access to over 10,000 funds from both Fidelity & other mutual fund companies.
advance directives often include
A living will A health care proxy (durable power of attorney) A letter of last instruction (after-death wishes)
flipping real estate
Acquiring real estate at a discount (~20% below market value), fixing it up, and quickly selling it for a profit
Under the U.S. Civil Retirement System, your retirement income is not taxed until you have received the amount you have invested in the retirement fund.
After that, your retirement income is taxable.
The Vanguard Group
Always been known as a leader in low-cost investing & has almost 400 different funds. Many investors choose Vanguard because of its index funds & low expense ratios.
Withdrawal Calculation
Amount you receive = investment growth X percentage of growth withdrawn
Some Major Differences between Stocks & Bonds:
BONDS: - Bonds are debt financing, and must be repaid at maturity. - Interest payments for bonds are required. - Bondholders have a priority claim compared to stockholders in case of bankruptcy. - Since bondholders usually do not have a right to vote, many corporate executives prefer to issue bonds to raise capital because they can retain control of the corporation. STOCKS: - Stocks are equity financing and the corporation doesn't have to repurchase stock or repay stockholders. - Dividends for stocks are not required & are paid out at the discretion of the board of directors. - Stockholders are paid after bondholders & other creditors in case of bankruptcy. - Stockholders do have a right to vote on many corporate issues, including the right to elect the board of directors.
Shared ownership...
Because of liability issues, diversity of skills, and lack of capital, you may want to add other people to your real estate investments
American Funds/ Capital Group
Because this company believes in the value of professional advice, American funds are often sold through account executives & financial advisors and may also charge higher fees.
collectibles
Can be a hedge against inflation and a safe haven during political or economic upheavals; be cautious on storage options
Safety & Risk; Investing
Choosing higher risk investments, investors expect higher returns. The potential return on any investment should be directly related to the risk the investor assumes.
3 types of funds
Closed-end funds Exchange-traded funds Open-end funds
EPS example:
Company has after-tax earnings of $6,345m and $1,346 outstanding shares of common stock. Yields an earnings per share of $4.71, as illustrated: EPS = after tax income/ number of shares outstanding = $6,345m / $1,346m => $4.71
To reduce anxiety when making stock decisions:
Evaluate each investment Analyze the firm's finances Track the firm's product lines Monitor economic developments Be patient
Many financial planners suggest that you subtract your age from 100, and the difference is the percentage of your assets & should be invested in growth investments.
Example: If you are 40 years old, 100-40 = 60. Therefore, 60% of your assets should be invested in growth-oriented investments, while the remaining 40% should be kept in safer, more conservative investments.
3 levels of government issue bonds
Federal: no state income tax on the interest - Treasury Bills (T-Bills); - Treasury Notes (T-Notes); - TIPS (Treasury Inflation-Protected Securities): State: municipal bonds (called a mum) - Debt security issued by a state or local government, such as cities, counties, school districts, universities; use funds for ongoing costs and major projects such as schools, airports, and bridges - Classified as general obligation bond or revenue bond: general obligation bond is backed by the state or local government that issued it and revenue bond is repaid from income generated by the project the funds finance. Local
metals
Gold - higher prices result from fear of war, political instability, inflation, and lower interest rates; can purchase gold bullion coins, stocks, certificates Silver, platinum, palladium, and rhodium - hedge against inflation; silver prices have fluctuated from 24.25 cents per ounce in 1932 to over $50 an ounce in 1980 to $25 an ounce in 2021; platinum, palladium and rhodium are used as industrial catalysts, particularly in automobile production Other collectibles
Formats of Wills:
Holographic will: a handwritten will Formal will: a will that is usually prepared with an attorney's assistance Statutory will: a formal will on a preprinted form
rental property
Houses, apartments, farm land, commercial property - You buy the real estate & lease or rent it out to a tenant - Need to estimate the return on investment (ROI) - To start investing in real estate, you could buy a duplex & rent out half & live in the other half. - Can provide tax benefits.
Types of Annuities:
Immediate annuities: generally purchased by people of retirement age; such annuities provide income payments at once; they are usually purchased with a lump-sum payment Deferred Annuities: income payments start at some future date, interest builds up on the money you deposit Single-Premium Deferred Annuity: a deferred annuity purchased with a lump sum; tax-free build up during an accumulation period
Investments with higher returns are not guaranteed;
In order to obtain higher returns, you must be willing to accept more risk & sacrifice some safety.
purchase tab
Indicates this fund is open to new investors; indicates the minimum initial investment
The following expenses are also likely to increase:
Insurance (Medicare may offset this) Medical expenses Expenses for leisure activities Gifts & contributions
risk return trade off
Investors often choose investments because they provide a predictable source of income. With many investments, it can decrease in value.
Social Security benefits increase automatically every ________________ if the cost of living increased during the preceding year.
January
Investment Pyramid
Level 4: Speculation (higher risk) > Speculative stocks, options, commodities, & other high-risk investments. Level 3: Growth > Growth stocks, growth-oriented mutual funds, & rental property. Level 2: Safety & Income > U.S. securities, selected corporate & municipal bonds, income stocks, & conservative mutual funds. Level 1: Financial Security (lowest risk) > Cash, CDs, money-market mutual funds, & U.S. government bonds.
fees & charges
Load fund: a mutual fund in which investors pay a commission (as high as 8.5%) every time they purchase shares No load funds: a mutual fund for which the individual investor pays no sales charge (they have no salespeople) Contingent deferred sales load: a 1-5% charge that shareholders pay when they withdraw their investment from a mutual fund
managed funds vs. indexed funds
Majority of managed funds have failed to outperform the S&P 500 stock index over a long period of time; index funds have a lower expense ratio than managed funds; research is the key to determine the best investment.
expense ratio
Management fees: fixed percentage of the fund's asset value 12b-1 fees: a fee that an investment company levies to defray the costs of distribution & marketing a mutual fund & commissions paid to brokers who sell shares in the mutual fund; charged on an annual basis
Defined contribution plans include the following:
Money-purchase pension plans Stock bonus plans Profit sharing plans: your employer's contribution depends on the company's profits Salary reduction or 401(k) plans ***(Sometimes your employer matches a portion of the funds contributed to you. If your employer is a tax-exempt institution such as a hospital, university, or museum, the salary reduction plan is called a Section 403(b) plan. Or, if you are a government employee, you may have a Section 457 plan. (these options are often referred to as tax-sheltered annuity (TSA) plans.)
Why stock split?
Mostly, a firm's management has a theoretical ideal price range for the firm's stock. If the price of the stock rises above the ideal range, a stock split brings the price back in line. No guarantees it will go up after a split!!
research
Mutual fund prospectus & annual report. Personal research - internet Professional research - advisory services
What if you start saving 'too late'?
Only too late if you don't start at all. Save everything you can into your tax-sheltered retirement plans & personal savings. Try to put away at least 20% of your income. Reduce savings; put the expenses into your nest egg. Take a 2nd job or work extra hours. Make investments part of your solution, not your problem. Retire later. Refine your goal. Delay taking Social Security, so that benefits will be higher when you do take them. Make use of your home and rent out a room to someone, move into a less expensive home, save profits. Sell assets that are not producing much income or growth, such as underdeveloped land or a vacation home, and invest in income-producing assets.
Real Estate Investment Trusts (REITs):
Pooled funds that invest in real estate, Many REITs invest in commercial property
savings & investing
Protect base, then build. Need for an emergency fund, 3-6 months of expenses. Develop Investment Goals (When?, How much?, Risk?)
Balanced budget
Receive all retirement income you are entitled to Develop spending plan Tax advantages
estimating retirement revenues:
Social Security Retirement Account(s): db/dc plan, iras Personal savings/investments Impact of family decisions
other important additional documents
Social security documents Verteran's documents Insurance policies Transfer records of joint bank accounts Safe-deposit box records Registration of automobiles Title to stock & bond certificates
types of mutual funds
Stock funds Bond funds Other funds
typical asset classes include:
Stocks issued by large corporations (large cap) Stocks issued by mid-size companies (midcap) Stocks issued by small companies (small cap) Foreign stocks Bonds Cash * Note: Mutual funds can also be included as an asset class, but the typical mutual fund will invest in the above securities or a combination of the above securities.
Being a landlord...
Tenant screening; budgeting expenses; maintenance and repairs; insurance; advertising; communication; don't discriminate; get it in writing
How to Evaluate Bonds When Making an Investment:
The internet Financial coverage for bond transactions Annual reports Bond ratings Bond yield calculations
Before you get a reverse mortgage of any kind, consider the following:
There are origination fees, closing costs, servicing fees, & mortgage insurance premiums. Interest rates may change over the life of the mortgage. Interest on reverse mortgages is not deductible on your income tax return until the loan is paid off. You are still responsible for property taxes, insurance, utilities, maintenance, & other expenses. If your spouse has not signed the loan agreement, your spouse may not get any money from the reverse mortgage. You may leave fewer or no assets for your heirs.
What do facebook, amazon, & netflix all have in common?
These 3 companies are growth stocks; because of each firm's potential to increase value! Often the greatest opportunity for growth is an investment in common stock. Companies with better than average earnings potential, sales revenue that are increasing, and managers who can solve the problems associated with rapid expansion are often considered to be growth companies. (These same companies generally pay little or no dividends; investors will then often sacrifice immediate cash dividends in return for greater dollar value in the future.
During retirement, the following expenses may be lowered or eliminated:
Work expenses Clothing expenses Housing expenses Federal income taxes
If you run out of money:
Working during retirement Investing during retirement Dipping into your nest egg
Avoiding Retirement Housing Traps
Write or call the local number of commerce to get an economic profile & details on area property taxes. Contact the state's tax department to find out state income, sales, & inherent taxes & special exemptions for retirees. If your pension will be taxed by the state you're leaving, check whether the new state will give your credit for those taxes. Subscribe to the Sunday edition of the local newspaper. Call a local CPA to find out which taxes are rising. Check with local utilities to estimate your energy costs. Visit the area in as many seasons as possible. Talk to retirees & other local residents about costs of healthcare, auto insurance, food, & clothing. Rent for a while instead of buying immediately.
myRA
a Roth IRA that invests in a new U.S. Treasury retirement savings bond; developed by the U.S. Department of Treasury
General Obligation Bond:
a bond backed by the full faith, credit, & unlimited taxing power of the government that issued it
debentures
a bond or debt instrument that is backed only by the reputation of the issuing corporation - If the corporation fails to make either interest payments or repayment at maturity, investors who own debentures become general creditors.
Revenue Bond:
a bond repaid from e income generated by the project it is designed to finance
bearer bond
a bond that is not registered in the investor's name - ANYONE (actual owner or thief) can collect interest payments & the face value at maturity if he or she has physical possession of the bearer bond.
registered bond
a bond that is registered in the owner's name by the issuing company
Passive activity:
a business or trade in which the investor does not materially participate
corporate bond
a corporation's written pledge to repay a specified amount of money, along with interest
municipal bond
a debt security issued by a state or local government - The interest may be exempt from federal taxes, but may have to pay federal & state taxes on capital gains when you sell before maturity & at a profit.
ethical will
a document that dispenses emotional & spiritual wealth to heirs
living will
a document that enables an individual, while well, to express the intention that life be allowed to end if he or she becomes terminally ill
codicil
a document that modifies provisions in an existing will
gift tax
a federal & state tax on gifts to others
estate tax
a federal tax on the right of a deceased person to transfer property & life insurance at death
investment bank
a financial firm that assists corporations in raising funds, usually by helping to sell new security issues
Real Estate Investment Trusts (REITs):
a firm that pools investor funds & invests them in real estate or uses them to make construction or mortgage loans
sinking funds
a fund to which annual or semiannual deposits are made for the purpose of redeeming a bond issue; if the terms of a sinking fund provision are not met, the trustee or bondholders may take legal action against the company
closed-end funds
a fund whose shares are issued by an investment company only when the fund is organized; prices determined by the factors of supply & demand, by the value of stocks & other investments contained in the fund's portfolio, & by investor expectations (traded at any time throughout the day)
family of funds
a group of mutual funds managed by one investment company; each fund has a different financial objective
speculative investments
a high-risk investment made in the hope of earning a relatively large profit in a short time (speculative stocks, certain bonds, some mutual funds, some real estate, commodities, options, & collectables are high-risk investments)
Vond Indentiture:
a legal document that details all of the conditions relating to a bond issue
proxy
a legal form that lists the issues to be decided at a stockholder's meeting & requests that stockholders transfer their voting rights to some individual or individuals - While paying lower taxes on long-term investments doesn't seem like a big deal, those tax savings can be used to buy long-term stock investments that can provide additional dividend income & appreciate in value.
secondary market
a market for existing financial securities that are currently traded amongst investors - When you purchase stock in the secondary market, the transaction is completed on a securities exchange or through the over the counter market.
primary market
a market in which an investor purchases financial securities, via an investment bank or other representative, from the issuer of those securities
securities exchange
a marketplace where member brokers who represent investors meet to buy and sell securities
reverse annuity mortgage
a mortgage in which the lender uses the borrower's use as collateral to buy an annuity for the borrower from a life insurance company, also called an equity conversion
over the counter (OTC) market
a network of dealers who buy & sell the stocks of corporations that are not listed on the securities exchange
defined benefit plan
a pension plan that specifies he benefits the employee will receive at the normal retirement age - The plan itself does not specify how much the employer must contribute annually. The plan's actuary determines the annual employer contribution required so that the plan fund will be sufficient to pay the promised benefits as each participant retires - If the fund is inadequate, the employer must make additional contributions.
Keogh Plans:
a qualified pension plan in which tax-deductible contributions fund the retirement of self-employed people & their employees; also called a self-employed retirement plan
Defined Contribution Plan:
a retirement savings plan - profit sharing, money purchase, Keogh, or 401(k) that provides an individual account for each participant, also called an individual account plan
blue chip stock
a safe investment that generally attracts conservative investors
reinvestment plan
a service provided by an investment company in which income dividends & capital gain distributions are automatically reinvested to purchase additional shares of the fund
pourover will
a simple document stating that anything you may have neglected to place in your trust during your lifetime should be placed in it at your death
stock market bubble
a situation in which stocks are trading at prices above their actual worth
ex-dividend
a situation when a stock trades 'without dividend', and the seller, not the buyer, is entitled to a declared dividend payment
Individual Retirement Accounts (IRA)
a special account in which the employee sets aside a portion of his or her income; taxes are not paid on the principal or interest until money is withdrawn from the account
margin
a speculative technique whereby an investor borrows part of the money needed to buy a particular stock
micro cap stock
a stock issued by a company that has a market capitalization cost of $300 million or less
small cap stock
a stock issued by a company that has a market capitalization of between $300 million and $2 billion
mid cap stock
a stock issued by a corporation that has market capitalization of between $2 and $10 billion
large cap stock
a stock issued by a corporation that has market capitalization, in excess of $10 billion
growth stock
a stock issued by a corporation that has the potential of earning profits above the average profits of all firms in the economy
cyclical stock
a stock that follows a business cycle of advances & declines in the economy
defensive stock
a stock that provides consistent dividends & stable earnings during declines in the economy
penny stock
a stock that sells for $5 or less per share
bond ladder
a strategy to buy bonds with different maturities to balance risk & return
inheritance tax
a tax levied on the right of an heir to receive an estate
syndicate
a temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital; may be organized as a corporation, a trust, or a limited partnership
Rollover IRA:
a traditional IRA that accepts rollovers of all or a portion of your taxable distribution from a retirement plan or from another IRA
disclaimer trust
a trust designed for a couple who do not yet have enough assets to need a credit shelter trust but may need one in the future
Testamentary Trust:
a trust established by the creator's will that becomes effective upon his or her death
credit shelter trust
a trust that allows married couples to leave everything to each other tax free
living trust
a trust that is created & provides benefits during the trustor's lifetime
exemption trust will
a will in which everything passes to the spouse except for the 'exemption'
traditional marital share will
a will in which the grantor leaves one-half of the adjusted gross estate to the spouse
stated dollar amount will
a will that allows you to pass on to your spouse any amount that satisfies your family objectives
simple will
a will that leaves everything to the spouse; also called an 'I love you' will
Yield to maturity:
a yield calculation that takes into account the relationship among a bond's maturity value, the time to maturity, the current price, the dollar amount of interest
Annualized holding period yield
a yield calculation that takes into account the total return, the original investment, & the time the investment is held Annualized holding period yield = total return/original investment X 1/N (# of years investment is held)
call feature
allows the corporation to all in, or buy, outstanding bonds from current bondholders before the maturity date; hard to find a good bond with a similar interest rate - In most cases, corporations issuing callable bonds agree not to call them for the first 5-10 years. - When a call feature is used, the corporation may have to pay the bondholders a premium ($10 or $25 is most common.)
Durable power of attorney
also known as a health care proxy; legal document authorizing someone to act on your behalf; if you are unable to make decisions regarding your health care, this authorizes someone to do it for you
NASDAQ
an electronic marketplace for buying & selling securities & global stocks - Account executive (stockbroker): a licensed individual who buys or sells securities for clients; not usually liable for losses resulted from their recommendations
participation certificates (PCs)
an equity investment in a pool of mortgages that have been purchased by a government agency
Simplified Employee Pension-IRA (SEP-IRA):
an individual retirement account funded by the employer; simplest type of retirement plan if you are partially or fully self-employed
Fundamental analysis:
an investment practice based on the assumption that a stock's intrinsic or real value is determined by the company's future earnings
Technical analysis:
an investment practice based on the assumption that a stock's market value is determined by the forces of supply and demand in the stock market as a whole
income stock
an investment that pays higher-than-average dividends
Efficient market hypothesis (EMH):
an investment theory based on the assumption that stock price movements are purely random
Subordinated Debenture:
an unsecured bond that gives bondholders a claim secondary to that of other designated bondholders with respect to interest payments, repayment, & assets Higher risk = increased interest rates
dividend payout
annual dividend amount / earnings per share
dividend yield
annual dividend payment / price per share
A retirement credit is allowed for some sources of income, such as
annuities.
community property
any property that has been acquired by either spouse during the marriage, but not by gift, bequest, or inheritance
socially responsible funds
avoid investing in companies that may cause harm to people, animals, & the environment (typically do not invest in companies that produce tobacco, nuclear energy, or weapons, or in companies with a history of discrimination)
business failure risk
bad management, unsuccessful products, competition and/or the economy may cause the business to be less profitable
Corporations can call in, or buy back, outstanding bonds from current bondholders
before the maturity date. - Most agree not to call bonds for the first 5-10 years after they are issued; Bonds are typically called if their interest rate is much higher than the overall interest rate in the economy.
Many __________________ investors believe real estate values increase by 10 or 15% a year, but realistically the nationwide annual average is about a 3-5% increase over a period of time.
beginning
registered coupon bond
bond registered for principal only & not only for interest - Only the registered owner can collect principal at maturity, interest payments can be made to anyone who presents one of the detachable coupons to the issuing corporation or the paying agent.
Convertible Bond:
bond that can be exchanged, at the owner's option for a specified number of areas of the corporation's common stock - Convertible Corporate Note: legal debt convertible to shares of common stock at the investor's option * Allows investors to enjoy the lower risk of the corporate bond or note, but also take advantage of the speculative nature of common stock; generally, the interest rate on a convertible bond is 1-2% lower than that on traditional bonds because of the conversion factor.
serial bonds
bonds of a single issue that mature on different dates; for example, a company uses a 20-year $100 million bond issue to finance its expansion. None of the bonds mature during the first 10 years. Thereafter, 10% of the bond matures each year until all the bonds are retired at the end of the 20-year period. A call provision can also be used to buy back erial bonds before the maturity date.
long-term techniques
buy & hold, dollar cost averaging, direct investment and dividend reinvestment plans
Capital gains distributions that result from the fund selling securities in its portfolio at a profit are reported on your federal tax return;
capital gain distributions are taxed as long-term capital gains regardless of how long you own shares in the mutual fund
Land does not usually produce any
cash flow.
corporate dividends
cash, additional stock, or company products - If the board of directors declares a cash dividend, each common stockholder receives an equal amount per share. - Most corporations pay dividends on a quarterly basis.
beta
compares volatility associated with a specific stock with the volatility of an index such as S&P 500
estate
consists of everything you own, including bank accounts, stocks, bonds, real estate and personal property
lease
contract that stipulates use & possession of property for a specified time & fixed payments
Roth IRA
contributions are not tax deductible, but earnings accumulate tax free - You can make contributions even after age 70 ½. Five years after you establish your Roth IRA, you can take tax-free, penalty-free distributions if you are at least 59 ½ or will use the funds for first-time home buyer expenses. - If you use your Roth IRA as collateral for a loan, the part you pledge as collateral will be taxed as a withdrawal.
Mortgage (secured) Bond:
corporate bond secured by various assets of the issuing firm - Safer than debenture.
high yield bonds
corporate bonds that pay higher interest but also have a higher risk of default (junk bonds) - Sold by companies with a poor earnings history, a questionable credit record, lower ratings by major rating services, or by newer companies with an unproven ability to increase sales & earn profits.
A __________________ is under no legal obligation to pay dividends to stockholders.
corporation
earnings per share
corporation's after-tax income divided by the number of outstanding shares of common stock; an increase in earnings is generally a healthy sign
Interest rate sometimes referred to as
coupon rate.
short-term techniques
day trading, buying stock on margin (borrowing money), selling short (borrowing stock), trading in options (predetermined price)
Many corporate bonds are
debentures.
estate planning
definite plan for the administration and disposition of one's property during one's lifetime and at one's death
By taking a more conservative approach for short-term investments, you reduce the possibility of having to sell your investments at a loss because of
depressed market value or a staggering economy.
ratings & risk tab
describes the current Morningstar ratings for performance, risk, & overall rating
management tab
describes the current fund manager (or team managers) and how long this manager has managed the fund
book value
determined by deducting all liabilities from the corporation's assets & dividing the number by the number of outstanding shares of common stock
Current yield:
determined by dividing the annual dollar amount of income generated by an investment by the investment's current market value (the higher, the better)
dividends
distribution of money, stock, or other property that a corporation pays to stockholders; usually between 30 and 70% of their earnings distributed - More financially secure corporations may distribute up to 70-90%.
Making money from common stock:
dividend income & dollar appreciation
total return
dividends + capital gains
Approximate market value =
dollar amount of annual interest/ comparable interest rate
approximate market value =
dollar amount of annual interest/comparable interest rate
inflation risk
during periods of high inflation, the financial return on any investment may not keep pace with the inflation rate; lose purchasing power
Inverse relationship between a bond's price & overall interest rates in the
economy.
For a corporation,
equity capital is provided by stockholders, who buy shares of stock. Since all stockholders are owners, they share in the success of the corporation.
federal & state estate taxes
estate planning includes tax avoidance strategies
dollar amount of interest =
face value of the bond X interest rate.
Capital gains or losses that result from you selling shares in a mutual fund are reported on your
federal tax return
When investing in foreclosures, any outstanding foreclosure liens & fees will become your
financial responsibility.
trustee
financially independent firm that acts as a bondholder's representative
If you are eligible for both your own retirement benefits & for benefits as a spouse, Social Security pays your own benefit ________. If your benefit as a spouse is higher than your retirement benefit, you'll get a combination of benefits equal to the ___________ spouse benefit.
first; higher
exchange traded funds
fund that generally invests in the stocks or other securities contained in a specific stock or securities index (traded at any time throughout the day) - Advantages: There is no minimum investment amount, because shares are traded on an exchange & not purchased from an investment company, which often requires a minimum investment of $500, $1,000, or more You can use limit orders & the more speculative techniques of selling short & margin, to buy & sell ETF shares.
open end funds
fund whose shares are issued & redeemed by the investment company at the request of investors
safe, conservative investments
government bonds, certificates of deposit, certain stocks, mutual funds, & corporate bonds (real estate sometimes falls into this category too)
stock split
happens when the shares owned by the existing shareholders are divided into a larger number of shares
Investors may be able to sell the bond at a higher price if the interest rate on the bond is _____________ than the interest rate of new bonds.
higher
After purchasing a bond, investors may
hold to maturity or sell at any time to another investor.
intestate
if you die without a will, state law determines distribution of your estate
When a plan participant retires or otherwise becomes eligible for benefits, the benefit is the total amount in the participant's account,
including past investment earnings on amounts put into the account.
Income dividends are reported on your federal tax return & are taxed as
income.
The Economic Growth & Tax Relief Reconciliation Act (the EGTRRA) was passed by Congress in 2001:
increased the employee contribution limit for 401(k) and other employer-sponsored retirement plans
correction
indexes have decreased 10%
intermediate U.S. bond funds
invest in U.S. Treasury securities with maturities between 3 & 10 years
Long term (U.S.) bond funds
invest in U.S. Treasury securities with maturities in excess of 10 years
Short term U.S. government bond funds:
invest in U.S. treasury securities with maturities less than 3 years
world bond funds
invest in bonds & other debt securities offered by foreign companies & governments
balanced funds
invest in both stocks & bonds with the primary objectives of conserving principal providing income, and long term growth
growth funds
invest in companies expecting higher than average revenue & earning growth; tend to invest in larger, well-established companies
sector funds
invest in companies within the same industry (ex: health & biotechnology, science & technology, and natural resources)
international funds
invest in foreign stocks sold in securities markets throughout the world
long-term corporate bond funds
invest in investment grade corporate bond issues with maturities in excess of 10 years
short term corporate bond funds
invest in investment grade corporate bond issues with maturities less than 3 years
intermediate corporate bond funds
invest in investment-grade corporate debt with maturities between 3 & 10 years
municipal bond funds
invest in municipal bonds that provide investors with tax-free interest income
equity income funds
invest in stocks issued by companies with a long history of paying dividends
growth stock funds
invest in stocks of companies throughout the world, including the United States
index funds
invest in the same companies included in the index like the S&P 500 or NASDAQ
Indirect investment:
investment in which a trustee holds legal title to property on behalf of the investors
Direct investment:
investment in which the investor holds legal title to property
A corporation _______________________ to repay the money obtained from the sale of stock or to repurchase the stock at a later date.
is not required
face value
is the dollar amount that the bondholder will receive at the bond's maturity date, usually $1,000.
If a business is a sole proprietorship or a partnership,
it acquires equity capital when the owners invest their own money in the business.
commercial property
land & buildings that produce lease or rental income
Real estate is
land & permanent buildings on the land; home, rental property, land.
trust
legal arrangement through which a trustee holds your assets for your benefit or that of your beneficiaries
will
legal declaration of a person's mind as to the disposition of his or her property after death; transfers property according to your wishes
probate
legal procedure providing a valid or invalid will
Spousal IRA
lets you contribute up to the amounts shown above on behalf of your non working spouse if you file a joint tax return (whether or not this contribution is tax-deductible depends on your income & on whether you or your spouse participates in an employer-provided retirement plan
life insurance and employee benefits
life insurance proceeds are free from probate and income tax; assignment of ownership to your beneficiary can remove a life insurance policy from your estate
If your spouse takes benefits before age 65, the amount of the spouse's benefits is reduced to a
low of 37.5% at age 62. However, a spouse who is taking care of a child who is under 16 or has a disability gets full (50%) benefits regardless of age.
You will probably pay taxes at a lower rate because your taxable income will be
lower.
People in the best 'position' to save are
middle-aged.
Uncirculated bullion coins:
minted for investment purposes & sold to a select number of authorized buyer based on the current market price (the spot price) for the precious metal plus a small premium charged by the Mint
equity financing
money received from the sale of shares of ownership in a business
equity capital
money that a business obtains from its owners
preferred stock
not traded on open market - Priority in dividend payments - Dollar amount of dividend is known before the stock is purchased - Safer than common stocks (because when a company goes bankrupt, you have a higher priority)
Initial Public Offering (IPO)
occurs when a corporation sells stock to the general public for the first time
initial public offering (IPO)
occurs when a corporation sells stock to the general public for the first time
Many mutual funds are referred to as growth funds or aggressive growth funds because
of the growth potential of the individual securities included in the fund.
Gold certificates:
offer you a method of holding gold without taking physical delivery
A spouse's social security benefits (full) is considered _____________ of the retired worker's full benefit.
one half
the safest investments
passbook savings accounts, certificates of deposit, & securities issued by the U.S. government - are also the most predictable sources of income. With these investments, you know exactly how much income will be paid on a specific date.
bull market
period in which stock prices in general are consistently rising
bear market
period in which stock prices on multiple broad market indexes have decreased 20% or more over at least a 2-month period
executor
person who follows your instructions related to the will
mutual funds
pools the money from many investors - its shareholders - to invest in a variety of securities
market risk
prices fluctuate because of investor behavior
asset allocation
process of spreading assets among several different types of investments to lessen risk Time Factor: the longer you are invested, the better your opportunity for increasing returns Age: type of investment should change with your age Other Options: stock or equity financing; corporate & government bonds; mutual funds; real estate; alternatives
indexes
provide an overall summary of a specific market or sector of a market - used to notice trends; used as a benchmark to compare the performance of other stocks or mutual funds (S&P 500); mentioned in the news daily (DJIA & NASDAQ)
performance tab
provides detailed information about how this fund has performed over selected time periods and also compares the fund's performance with selected benchmarks, including other large-growth funds and the S&P 500 Index
Living will and advance directives
provides for your wishes if you become physically or mentally disabled; not a substitute for a traditional will; discuss your living will with those close to you and your family doctor
funds analysis tab
provides in-depth information reported by professional analysts
expense tab
provides information about fees & the expense ratio for this fund
portfolio tab
provides information about the type of securities included in the fund
Limited liability company (LLC):
provides limited liability; passes income & losses to shareholders via personal taxes
S corporation:
provides limited liability; passes income & losses to shareholders via personal taxes
Real property equity investments usually (but not always) provide protection against
purchasing power risk.
Gold stocks:
purchasing the common stocks of gold mining companies
price earnings
ratio is the price per share divided by the earnings per share
Fees and expenses paid by your retirement plan may substantially ___________ the growth in your account (then your account balance.)
reduce
limit order
request to buy or sell a stock at a specified price or better
market order
request to buy or sell stock at the current market value
stop-loss order
request to sell a stock at the next available opportunity after its market price reaches a specified amount
If you marry after you have made a will, the will is
revoked automatically unless certain conditions are met
Investors often consider government & corporate bonds a ___________ investment when compared to stocks, mutual funds that invest in stocks, or other investments because bonds represent a debt that must be repaid at maturity.
safer
aggressive growth funds
seek rapid growth by purchasing stocks whose prices are expected to increase dramatically in a short period of time
regional funds
seek to invest in stocks traded within one specific region of the world, such as the European region, the Latin American region, or the Pacific region
selling short
selling stock that has been borrowed from a brokerage firm & must be replaced at a later date
line of credit
short term loan that is approved before you actually need the money
Bondholders receive interest payments usually every _____ months at the stated interest rate; the dollar amount of annual interest is computed by multiplying the interest rate by the face value of the bond.
six
plan portability & protection
some pension plans allow portability ; this feature enables you to carry earned benefits from one employer's pension plan to the other when you change jobs
fiscal policy
sometimes used by the government to offset the effects of a recession; to alter the tax structure & levels of government spending - specific actions designed to influence the amount that businesses & citizens save, invest, & spend
Taxable equivalent yield =
tax exempt return/ 1.0 - your tax rate
investment liquidity
the ability to buy or sell an investment quickly without substantially affecting the investment's value
market to book ratio
the current price of one share of stock divided by the book value for one share of stock
maturity date
the date on which a corporation, government, or municipality will repay the borrowed money
record date
the date on which a stockholder must be registered on the corporation's books in order to receive dividend payments - According to the SEC, dividends remain with the stock until one business day before the record date.
yield
the expected rate of return earned by an investor who holds the bond for a stated period of time (usually 12 months)
adjusted gross estate
the gross estate minus debts & costs
business cycle
the increase & decrease in a nation's economic activity
Mutual fund turnover ratio:
the percentage of a fund's holdings that have changed or 'been replaced' during a 12-month period
economics
the study of how wealth is created & distributed
Passive loss:
the total amount of losses from a passive activity minus the total income from the passive activity
rate of return calculation
the total income you received on an investment over a specified period of time divided by the original amount invested. Note: If an investment decreases in value, the formula used to calculate the rate of return is the same, but the answer is a negative number! - Also, if based on projections for the value of the stock and future dividends, the rate of return you calculate is only as good as the projection used in the calculations.
option trading
the trading of instruments that give you the right to buy or sell a specific security on a specific date at a specific price
government bond
the written pledge of a government or a municipality to repay a specified sum of money, along with interest, used to finance costs of the government
If you can leave your investments alone & let them work for 5-10 years or more,
then you can invest in stocks & mutual funds.
monetary policy
to determine the size of the supply of money in the nation & the level of interest rates that both consumers & businesses pay to borrow money
Kiplinger article:
to provide suggestions for high-quality no-load funds run by managers who take a long-term view & have proved that they are able to weather an economic storm
common stock
traded on open market - A form of equity - Dividends not mandatory - Voting rights & control of the company
Salary reduction or 401(k) plans:
under a 401(k) plan, your employer makes nontaxable contributions to the plan for your benefit & reduces your salary by the same amount.
interest rate risk
value of an investment with a fixed interest rate or return decreases when overall interest rates in the economy increases (government or corporate bonds)
Proof bullion coins:
which are especially minted for collectors & usually sold in a protective display case directly by Mint
Social Security is the most ___________ used source of retirement income, it covers __________ of U.S. workers.
widely; 97%
If an investment is a primary objective,
you can also choose municipal bonds, corporate bonds, preferred stocks, or selected common stock issues.
Education IRA (Coverdell Education Savings Account):
you can give $2,000 a year to each child- up to $500- for the Education IRA; contributions must be made in cash & they are not deductible, these accounts grow tax-free & can be invested any way you choose - Coverdells can now be used for elementary & secondary costs, including books, tuition, & tutoring.
Revocable or irrevocable trust
you retain the right to end the trust or change its terms during your lifetime or you cannot change the terms or end the trust
If you need your investment money in 2 years,
you should probably invest in short-term government bonds, highly rated corporate bonds, or certificates of deposit.
Money-purchase pension plans:
your employer promises to set aside a certain amount for you each year, generally a percentage of your earnings
stock bonus plans:
your employer's contribution is used to buy stock in your company for you; the stock is usually held in trust until you retire, at which time you can receive your shares or sell them at their FMV