Personal Finance- Chapter 14- Investing in Stocks and Bonds

Speculative-grade bonds

Long-term, high-risk, high-interest rate corporate (or municipal) IOUs issued by companies (or municipalities) with poor or no credit ratings. Also called junk bonds or high-yield bonds

Cumulative preferred stock

Preferred stock for which dividends must be paid, including any skipped dividends, before dividends go to common stockholders

Countercyclical stocks have a beta

below 1.0

__ are sold on a discount basis with the gain at maturity representing the interest earned.

treasury bills

You can purchase__ directly from the issuer and avoid the transaction fees.

treasury securities

Which of the following is not true regarding U.S. government securities?

you receive certificates for the bonds purchased

Cash account

A brokerage account that requires an initial deposit (perhaps as little as $1000) and specifies that full settlement and is due to the brokerage firm within three business days after a buy or sell order has been given

Estimate of the required rate of return on an investment

A calculation that multiplies the beta value of an investment of an investment by the estimated market risk and adds the risk-free T-bill rate that suggests to investors the return required to put their money at risk

Earnings per share (EPS)

A firm's profit divided by the number of outstanding shares

Beta value (beta coefficient)

A measure of stock volatility; that is, how much the stock price varies relative to the rest of the market

Approximate compound yield (ACY)

A measure of the annualized compound growth of any long-term investment stated as a percentage

10-Q report

A report required by the SEC prepared by the company showing its financial results for the quarter, a discussion from management, a list of material events and other risk factors that have occurred, forecasts of the company's future, and notes of any significant changes or events in the quarter

Income stock

A stock that may not grow too quickly, but year after year pays a cash dividend higher than that offered by most companies

Value stock

A stock that tends to trade at a low price relative to its company fundamentals (dividends, earnings, sales, and so on) and thus is considered undervalued by a value investor

Bond premium

A sum of money paid in addition to a regular price

PEG ratio (price-earnings growth

A way to rationalize buying a stock that has high growth is to calculate by dividing the P/E ratio by the company's projected growth rate

Margin account

Account at a brokerage firm that requires a substantial deposit of cash or securities and permits the purchase of other securities using credit granted by the brokerage firm

Agency bonds

Bonds, notes, and certificates of debt issued by various federal agencies that are government-sponsored enterprises but stockholder owned, such as the Federal National Mortgage Association

Buying long

Buying a security (especially on margin) with the hope that the stock price will rise

Trailing P/E ratio

Calculated using recently reported earnings, usually from the previous four quarters

Convertible preferred stock

Can be exchanged at the option of the stockholder for a specified number of shares of common stock

Securities exchange (stock market)

Market where agents of buyers and sellers can find each other easily by providing an orderly, open plan to trade securities

Treasury Inflation-Protected Securities (TIPS)

Marketable Treasury bonds whose value increases with inflation. These inflation-indexed $1000 bonds are the only investment that guarantees that the investor's return will outpace inflation

Securities market index

Measures the average value of a number of securities chosen as a sample to reflect the behavior of a more general market

Technical analysis

Method of evaluating securities that uses statistics generated by market activity, such as past prices and volume, over time to determine when to buy or sell a stock

After-tax profit

Money left over after a firm has paid expenses, bondholder interest, and taxes

Retained earnings

Money left over after a firm has paid expenses, bondholder interest, taxes, preferred stockholder dividends, and common stockholder dividends

Profit

Money left over after a firm pays all expenses and interest to bond holders

Common stock

Most basic form of ownership of a corporation

Zero-coupon bonds (zeros or deep discount bonds)

Municipal, corporate, and Treasury bonds that are issued at a sharp discount from face value and pay no annual interest rate but are redeemed at full face value up maturity

Securities

Negotiable instruments of ownership or debt, including common stock, preferred stock, and bonds

Book value (shareholder's equity)

Net worth a company, determined by subtracting total liabilities from assets

An investor who expected an economic downturn would want to put his or her stock portfolio in__ stocks.

countercyclical

The inverse of the P/E ratio is the

earnings yield

Owners of a corporation who want to raise more capital by issuing new securities but who also want to retain control of their company could issue

either preferred stock or bonds.

When a bond indenture requires that money be set aside annually to repay the bond, the bond

has a sinking fund

Bonds pay the face value to the investor when they are

held until maturity

Investors who have to depend current income from their investments to supplement their living expenses should invest in__ stocks.

income and blue-chip

The legal document detailing the debtor's responsibilities regarding the bond issue is called the

indenture

__ is (are) tax deductible for businesses

interest paid to bondholders

Which of the following serve as the intermediaries between companies and investors when new issues of stocks or bonds are offered?

investment banking firms

A stock or mutual fund with a __ beta means the security goes up when the market as a whole goes up average when the market is rising; a__ beta indicates the opposite.

positive; negative

The types of companies that are available to any investor who wises to have stocks in their portfolios are

public corporations

The interest rate printed on the bond certificate

remains the same until maturity

The after-tax earnings of a corporation that are not paid out to stockholders are called

retained earnings

Negotiable instruments of ownership or debt such as stocks and bonds are examples of

securities

Which of the following types of investments can potentially provide tax-exempt interest if the principal and interest are used to pay a child's college education?

series EE U.S government bonds

A__ stock is one that has little or no track record but has a potential for substantial earnings at some time in the future.

speculative

New companies sell new issues of stock to obtain

start-up capital

A company gives an employee the right and opportunity to exercise the option of an ESO by buying the stock sometime in the future at a__ price established when the option was given.

striking

When a bond is purchased at its face value, yield to maturity will be__ the coupon rate printed on the certificate.

the same as

Stockbroker (account executive)

Professional who is licensed to buy and sell securities on behalf of the brokerage firm's clients

Voting rights

Proportionate authority to express an opinion or choice in matters affecting the company

Principal

Face amount of a bond

Registered bond

Bondholder's name is recorded so that electronic funds transfers for payment of interest can be safely forwarded when due

Bond rating

An impartial outsider's opinion of the quality-or creditworthiness- of the issuing organization

Portfolio tracking

Automatically updates the value of your portfolio after you enter the symbols of the stocks you own and the number of shares held

Projected P/E ratio (forward price/earnings ratio)

Because investors need to look to the future rather than the past, this measure divides price by projected earnings over the coming four quarters. Also known as forward price/earnings ratio

Sinking fund

Bond feature through which money is set aside with a trustee each year for repayment of the principal portion of the debt at maturity

Dividend yield

Cash dividend to an investor expressed as a percentage of the current market price of a security

Cash dividends

Cash profits that a firm distributes to stockholders

Discount brokers

Charge commissions to execute trades that are often 30 to 80 percent less than the fees charged by full-service brokers, but also offer fewer services

Residual claim

Common stockholders have a right to share in the income and assets of a corporation after higher-priority claims are satisfied

Market interest rates

Current long- and short-term interest rates paid on various types of corporate and government debts that carry similar levels of risk

Price-to-book ratio (P/B ratio)

Current stock price divided by the per-share net value of firm's plant, equipment, and other assets (book value)

Maturity date

Date upon which the principal is returned to the bondholder

Potential return

Determined by adding anticipated income (from dividends, interest, rents, or other sources) to the future value of investment and then subtracting the investment's original cost

Discount yield

Difference between the original purchase price of a T-bill and what the Treasury pays you at maturity

Dividend payout ratio

Dividends per share divided by earnings per share (EPS); helps judge the likelihood of future dividends

Shareholder (stockholder)

Each person who owns a share of a company's stock holds a proportionate interest in firm ownership and, therefore, in the assets and income of the corporation

Countercyclical Stock

The stock of a company whose profits are greatly influenced by changes in the economic business cycle

Stock-screening tools

Enable you to quickly sift through vast databases of hundreds of companies to find those that best suit your investment objectives

Current yield

Equals the bond's fixed annual interest payment divided by its bond price

Treasury note (bond)

Fixed-principal, fixed interest rate government security issued for an intermediate term of long term. Notes mature in ten years or less; bonds mature in more than ten years

Prospectus

Highly legalistic information presented by a firm to the SEC and to the public, with any new issue of stock

Corporate bonds

Interest-bearing certificates of long-term debt issued by a corporation

Selling short

Investors selling securities they do not own (borrowing them from a broker) and later buying the same number of shares of the security at a lower price (returning them to the broker)

Treasury bills

Known as T-bills, U.S. government securities with maturities of less than one year

Treasury securities (Treasuries)

Known as Treasuries, securities issued by the U.S. government, including bills, notes, and bonds

Annual report

Legally required yearly report about financial performance, activities, and prospects sent to major stockholders and made available to the general public

Municipal government bonds (munis)

Long-term debts (bonds) issued by local governments (cities, states, and various districts and political subdivisions) and their agencies

I bonds

Nonmarketable savings bonds backed by the U.S. to government that pay an earnings rate that combines two rates, a fixed interest rate set when the investor buys the bond and a semiannual variable interest rate tied to inflation that protects the investor's purchasing power

U.S. government savings bonds

Nonmarketable, interest-bearing bonds issued by the U.S. Treasury

Series EE/E savings bonds

Nonmarketable, interest-bearing bonds issued by the federal government that are issued at a sharp discount from face value and pay no annual interest, and that may be redeemed at full value upon maturity

Day trading

Occurs when an investors buys and sells stocks quickly throughout a day with the hope that prices will move enough to cover transaction costs and earn some profits

General (full-service) brokerage firms

Offer a full range of services to customers, including investment advice and research

Investment-grade bonds

Offer investors of reasonable certainty of regularly receiving periodic income (interest) and retrieving the amount originally invested (principal)

Secured bond

Pledges specific assets as collateral in indenture or has the principal and interest guaranteed by another corporation or government agency

Book value per share

Reflects the book value of a company divided by the number of shares of common stock outstanding

Pre-emptive right

Right of common stockholders to purchase additional shares before a firm offers new shares to the public

Interest rate risk

Risk that interest rates will rise and bond prices will fall, thereby lowering the prices on older bond issues

Fundamental analysis

School of thought in market analysis that assumes each stock has an intrinsic (or true) value based on its expected stream of future earnings

Security's street name

Securities certificates kept in the brokerage firm's name instead of the name of the individual investor

Margin rate

Set by the Fed, percentage of the value (or equity) in an investment that is not borrowed--recently 25 to 50 percent

Stocks

Shares of ownership in a business corporation's assets and earnings

Call option

Stipulation in some indentures that allow issuer to repurchase the bond at par value or by paying a premium, often one year's worth of interest

Blue-chip stocks

Stocks that have been around for a long time, have a well-regarded reputation, dominate its industry, and are known for being solid, relatively safe investments

Online discount brokers

Such brokers, also called Internet or electronic discount brokers, have reduced the cost of executing a trade to perhaps $20 of even $10 because their primary business is online trading

Price/sales ratio (P/S ratio)

Tells the number of dollars it takes to buy a dollar's worth of a company's annual revenues; calculated by dividing company's total market capitalization by its sales for the past four quarters

Price/earnings (P/E ratio) (or multiple)

The current market price of a stock divided by earnings per share (EPS) over the past four quarters; used as the primary means of valuing a stock

Market price

The current price of a share of stock that a buyer is willing to pay a willing seller

Earnings yield

The earnings per share of a stock divided by its price; an inversion of the pricelearnings ratio; helps investors more clearly investment expectations

Dow Jones Industrial Average (DJIA)

The most widely reported of all stock market indexes that tracks prices of only 30 actively traded blue-chip stocks, including well-known companies such as American Express and AT&T

Corporate earnings

The profits a company makes during a specific time period that indicate to many analysts whether to buy or sell a stock

Growth stock

The stock of a company that offers the promise of much higher profits tomorrow and has a consistent record of relatively rapid growth in earnings in all economic conditions

Yield to maturity (YTM)

Total annual effective rate of returned by a bondholder on a bond if the security is held to maturity-takes into consideration both the price at which the bond sold and the coupon interest rate to arrive at effective rate of return

Over-the-counter (OTC) (off-exchange trading)

Trading is done directly between two parties, without any supervision of an exchange

Dividends per share

Translates the total cash dividends paid out by a company to common stockholders into a per-share figure

Preferred stock

Type of fixed-income ownership security in a corporation that pays fixed dividends

Typically the lowest rate of interest would be paid on

U.S. treasury bills

Default risk (credit risk)

Uncertainty associated with not receiving the promised periodic interest payments and the principal amount when it becomes due at maturity

Margin buying

Using a margin account to buy securities; allows the investor to apply leverage that magnifies returns-or losses

When a bond is first issued, it is sold atWhen a bond is first issued, it is sold at

any of these (discount, premium, and face value)

Indenture

Written, legal agreement between bondholders and debtor that describes terms of the debt by setting forth the maturity date, interest rate, and other details