Module 4 Test

How much total interest will I earn on a $10,000 corporate bond with a 14% interest rate and a maturity date of 6 years?

$10,000 x .14 x 6 = $8,400

On $500 earning 5 percent APY, calculate the ending balance after two years if interest is compounded semiannually.

$500 principal x (1 + .05 annual interest / 2 times a year)2 times a year x 2 years = $551.91

List two investing practices that experts recommend.

- develop an investing strategy - start now/early

List two strategies that a new investor should avoid when investing.

- flipping stock - blind trust in sources of information

List two reasons to save money in a bank or credit union savings account rather than hiding it in an envelope in your room.

- safety because the savings account is insured - interest is earned on the amount saved

Risk

1- Collectable 2- Stock 3- Mutual Fund 4- Corporate bond 5- Saving bond

Potential for Return

1- Start-up Stock 2- balanced mutual fund 3- US savings bond 4- Certificate of Deposit 5- Money market deposit account

What is the historical long-term annual average rate of inflation?

3%

401(k) vs IRA

401(k) is employer-sponsored IRA is not employer-sponsored

Time Value of Money (TVM) - what does it mean?

A dollar today is worth more than a dollar tomorrow.

Who gets paid first? Stockholders or Bondholders?

Bondholders get paid first

Give two examples of a collectible.

Coins, Comic Books

What factors may affect a stock's price?

Company's current and expected sales/profits Changes in the economy Changes in government regulations

3 major types of bonds & who issues them

Government, Municipal, Corporate

Income vs Growth Investments

Income investment - provides regular earnings; an investment that provides steady, mostly predictable earnings (i.e. monthly interest, quarterly dividends, rent payments) Growth investment - provides delayed gratification; an investment in an asset that has the potential to increase in value over time (i.e. real estate, business, crops)

Investing vs saving

Investing - buying something with the expectation that it will make money for you saving - setting aside money you don't spend now so it can be used later

Do all investments involve some degree of risk?

Yes

Can minors buy stocks and bonds? If no, why not? If yes, how?

Yes, they can through the use of custodial accounts

Savings options -- which will typically earn you more in interest? Does it matter how often interest is compounded?

a CD YES--the more often interest is compounded, the more money you will earn because the principal is increasing

bid

a buyers offer to purchase

inflation

a general increase in prices

entreprenuer

a person who takes the risk of starting and running a company

ask

a sellers offer to sell

custodial account

an account set up by a parent or guardian when you are not yet an adult and therefore cant legally hold stocks, bonds, or other investments

interest

an amount paid to use someones money, usually a percentage of the principal

diversification

an important risk-reducing strategy in which you have a variety of diverse

asset

an item value that can be converted into cash; something you own

security

any type of investment bought and sold through financial markets

investing

buying something with the expectation that it will make money for you

time value of money

concept which means that a dollar today is worth more than a dollar tomorrow

risk tolerance

how comfortable you are with the ups and downs of investing

dollar cost averaging

investing a set amount of money each month or at other regular intervals

Types of investments

lower vs higher risk potential for return

growth investments

provides delayed gratification; an investment in an asset that has the potential to increase in value over time

income investment

provides regular earnings; an investment that provides steady mostly predictable earnings

savings

setting aside money you dont spend now so it can be used later

liability

something owed to another person

stock exchanges

systems established to trade shares of stock

annual percentage yield

the actual return on an investment when compound interest is taken into account

rate of return

the degree to which an asset gains or loses value over a given period of time

What are the basic rules of a risk-to-return relationship?

the lower the risk, the lower the return rate the higher the risk, the higher the return rate

principal

the original amount invested

risk

the uncertainty of achieving a desired result

windfalls

unexpected increases in cash

Do investment experts recommend investing in multiple assets? Multiple industries?

yes