Personal Finance Test 1/29/13

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What is the difference between a bull market and a bear market?

- Bull Market: when prices of stocks are rising; a consensus of a heap going up; "bullish" (bull's horn's go up) - Bear Market: when the prices of stock are falling; viewed that they will continue to fall and the economy will slow down, inflation, unemployment rate go up; "bearish" (Bears claw down at prey)

What costs are associated with buying a home?

- Closing costs - Down payment - Purchasing price - Mortgage

Describe the role of housing in the financial crisis of 2007 - 2009.

- Credit markets froze (harder to get money) - Housing prices fell rapidly - Well known financial institutions ended up collapsing - Investors who invested in mortgage-backed securities suffered massive losses

Explain why corporations issue preferred stock.

- Few companies issue preferred stock. - Want to attract more conservative investors.

Explain why corporations issue common stock

- Funds don't have to be repaid (form of equity for corporation); generates capital (money) o IPO (Initial Public Offering): the public doesn't buy the shares; the shares are sold in large blocks to investment bankers → where company gets money o Secondary Market: NYSE; owner of shares gets the money - Dividends are not mandatory. - In return for money, management gives stock holders voting rights, and that gives them a certain amount of control in company.

What are the three main advantages of renting your residence?

- Greater mobility - Fewer responsibilities - Lower initial costs

Describe the disadvantages of renting your residence.

- Offers few financial benefits - May contribute to a more restricted lifestyle - Involves various legal concerns

What are some of the ways you can get started investing?

- Pay yourself first (retirement, savings, etc.). - Participate in an employer sponsored retirement plan. (Ex: 401K Plan; Employee (EE) Retirement = 3; ER (Employer) Match = 3% → 6% total each year and stay in job until fully vested and you could leave with the money they gave you for retirement. - Participate in Direct Deposit (direct money into savings) - Make a special savings effort once or twice a year (Raise or bonus, tax refund, extra two checks/year go to savings). - Receive gifts or inheritances.

Discuss the activities associated with selling a home.

- Preparing home for selling (fixing house's problems like lights, roof, etc.) - Determining selling price (Sellers can set price of home by paying for an appraisal) - Listing with a real estate agent (if wanted) - Sell by themselves (sale by owner)

Why would an investor purchase preferred stock?

- The yield is generally higher than common stock (Yield refers to the rate of return - return of investment - as a percentage) - Preferred stock is usually safer than common stock, but not as safe as corporate bonds - People who prefer a steady stream of income buy preferred stock because the dividends are fixed.

Why do investors purchase common stock?

- They might receive income from dividends. - Over time, the value of common stock goes up (appreciation in value goes up) - You can earn profits through stock splits.

What is an emergency fund?

- Useful for an unexpected event. - Should be easily accessible for an immediate need. - USE WITH CAUTION because it's good to have access to other sources of cash because they are for seriously emergencies only.

What are the costs of renting your residence?

- Where you are living - How much space you need

What is a stock split?

1 share of stock at $300; management decides they want to split and do a "two for one stock split." → for every one stock you own, you get two shares at $150.

What is a financial planner and when is one needed?

A specialist who is trained to offer specific help and advice from a financial stand point; someone who makes less than $40,000 and that person is wiling to make their own financial decisions, don't need financial planner.

Describe how amortization works over the life of a mortgage.

Amortization is the elimination of a debt over time with periodic payments. For example, assume you make mortgage payments every month. A portion of that payment covers the interest you owe, and a portion of the payment pays down your principal. → does not go up over time, goes down. Majority of interest is paid right up front (paying more interest, interest greater than principal).

When might buying be a better choice than renting?

Buying might be a better choice than renting when you want a certain amount of stability in your life and privacy.

What are the differences between common and preferred stock?

Common Stock: provides most basic for of ownership of a corporation; 1 share = 1 vote (voting rights); dividends are based on level of profits → the more profits the more dividends (can fluctuate); dividends are paid after preferred stock. Preferred Stock: no voting rights; dividends are fixed; preferred stock holders receive their dividends first

What is a corporate bond? What is a government bond?

Corporate Bond: method of financing, however, the corporation as to pay you back your initial investment plus interest; not a form of equity buy liability. Government Bond: government entity (savings bonds) or municipality (round-a-bouts, Palladium in Carmel)

What is equity?

Current market price ($250,000) + loan balance ($150) = equity ($100,000)

What are the differences between a prime and subprime loan?

Down Payment P. Payment = 20% → mortgage = 80% of purchase price SP. Payment = 0% → mortgage = 100% of purchase price Interest Rate P. Fixed SP. Adjustable; "teaser rate"→resets to higher interest rate Documentation P. Have to show good credit, steady stream of income, records of car loans and credit card bills SP. No need for documentation; mortgage brokers will accept "self-reported" information

What is an IPO?

IPO (Initial Public Offering): the public doesn't buy the shares; the shares are sold in large blocks to investment bankers → where the company gets their money.

What is a mutual fund?

Mutual Fund: stocks, bonds, or other types of securities; investors pool their money together and the fund manager picks the stocks to buy

Summarize the Securities Act of 1933 and The Securities Exchange Act of 1934.

Securities Act of 1993: "The Truth and Securities Law"; - Requires that investors receive financial and significant information for securities that are offered for sale to the public - Prohibits deceit and misinterpretations and other fraud in the sale of securities - Companies must be registered Securities Exchange Act of 1934: Created the SEC (Securities and Exchange Commission created by Congress- gave authority over all aspects of security industry) - Have power to regulate exchanges (NYSE, NASDAQ), brokers, transfer agents, clearing houses. - Filings: SEC requires companies that have more than $10 million in assets whose securities are held by more than 500 shareholders (owner) to file annual reports. - Proxy Solicitations: sent out by all shareholders and solicit (get your vote); where they elect directors or make change or other corporate actions. - Insider Trading: acting on knowledge that has not been made public

Describe the home buying process.

Step 1: Determine your home ownership needs. Step 2: Find and evaluate a property to purchase. Step 3: Price the property. Step 4: Obtain Financing. Step 5: Close the Purchase Transaction. (Ownership transfers from seller to buyer - mortgage, get keys, etc.)

What is the difference between tax-exempt income, tax-deferred income and taxable income?

Tax-Exempt: not taxed (ex: state and municipal bond not taxed) Tax-Deferred: income is taxed at a later date (ex: 401K, IRA) Tax Deductible: interest from things like money market accounts, capital gains (when basis price is lower than purchase price, you get capital gains)

What happens to the price of gold when the economy is healthy?

The price of gold goes down; inverse relationship between gold and economy.

What should you consider when you evaluate available housing alternatives?

You should consider your lifestyle and your finances.


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