Personal Finance Chapter 12 Exam 3

what is the simplified formula for the approximate yield? (slide 12)

(Average annual current income + average capital gain) / average amount of investment

what is the formula for approximate expected return? (HW problem 3)

(Average current income + average capital gain) / average value of investment.

what is the formula for capital gains? (HW problem 4)

(Ending price - purchase price) * number of shares

what is the formula for average value of the investment? (HW problem 3)

(Projected future stock price + current stock price) / number of stock (basically average of stock prices)

what is the formula for average annual capital gains? (HW problem 3)

(Projected future stock price / current stock price) / period of time invested.

what is the formula for dividend tax owed? (HW problem 4)

(shares * dividend payout per share) * tax bracket percentage

what are the tax brackets for qualified dividends and long-term capital gains? (slide 18)

--0% for the 10%- 12% brackets --15% for the 22%-35% brackets; --20% for the 37% bracket.

what are general characteristics of bonds? (slide 33 & 35)

--are versatile investments --high quality bonds can be used for preservations and long-term accumulation of capital --are lower risk rate of return when compared to stocks

what are the type of common stocks? (slide 25)

--blue-chip --growth --tech stocks --income --speculative --cyclical --defensive --large, mid, and small caps.

what are the issuing characteristics of bonds? (slide 35)

--bondholder lend money to the issuer --issuer pays interest to the bondholder, usually paid every 6 months --coupon rate or stated rate is the annual interest rate paid by the issuer --maturity date of the bond issuer repays the principal to the bondholder.

what things should you keep in mind with stocks? (slide 20)

--book value --net profit margin --return on equity --earning per share --price earnings ratio/beta

when are stocks good in terms of book value? what does book value indicate? (slide 20)

--book value steadily increase --market value exceeds book value. --the amount of stock holder funds used to finance the firm.

what are the basic types of risk when investing? (slide 5)

--business risk --financial risk --market risk --purchasing power risk --interest rate risk --liquidity risk --event risk

what are the two forms of dividends? (slide 19)

--cash dividends --stock dividends

explain voting rights as a common stock holder. (slide 17)

--common stock holder usually receive open vote per share --most small shareholders assign their votes to a proxy

what are the two sources of return in investment vehicles? (slide 7)

--current income --capital gains

where does future current income come from? where does future capital appreciations come from? (HW problem 3)

--future current income: dividends --future capital appreciation: increase in stock price

what are factors that determine what makes a good investment? (slide 11)

--future returns --approximate yield --desired rate of return --minimum rate of return earned in compensation for the amount of risk assumed

what are the two main types of foreign stocks? (slide 29)

--international mutual funds --American depositary receipts (ADRs)

what are characteristics of agency bonds? (slide 41)

--issued by subdivisions of the government --not obligations of the US Treasury --Yield above treasuries

what are the advantages of investing in common stocks? (slide 30)

--potential returns --actively traded and highly liquid --information readily available.

what is the formula to finding the pricing for municipal bonds? how do find the annual coupon? what is the formula for current yield? (HW problem 10)

--quoted percentage * cost of bond. = market price --cost of bond * percentage of coupon. = annual coupon --annual coupon / market price

what are the disadvantages of investing in common stocks? (slide 30)

--risk --timing of sales and purchases --uncertainty of dividends

what does return on equity show about a firm? (slide 22)

--the amount of sucess the firm is having in managing its assists, operations, and capital structure. (Impacts profits, growth, and dividends of the firm).

provides protections against inflations. how is this done? (slide 40)

--treasury inflation-protected securities or TIPS --the princiap of a TIPS increase with inflations and decrease with deflations which is measured by the consumer price index.

what are the three types of call features? (slide 38)

1) freely callable (issuers can retire the bond prematurely at any time) 2) noncallable (issuer is prohibited from retiring the bond prior to maturity) 3) deferred call (issues cannot be called until after a certain length of time has passed from the date of issued)

denominated in dollars and are traded directly on U.S. markets (such as the NYSE). each represents a specific number of shares in a specific foreign company. There are more than 2,000 shares from more than 70 counties. (slide 29)

American depositary receipts or ADRs

what is the formula for approximate yield? (slide 12)

C = average annual current income (amount you expect to receive annually from dividends, interest, or rent) FP = expected future price of investment CP = current market price of investment N = investment period (length of time, in years, that you expect to hold the investment)

what is the formula for book value per share? (HW problem 5)

Common Shareholders' Equity / Common Shareholders' Equity

is the return earned by each share of common stock? how is this calculated? (slide 23)

Earnings per share (EPS) --(net profit after taxes - preferred dividends paid) / number of shares of common stock outstanding.

common stocks provide income in the form of dividends and/or capital gains. Thus, how are they taxed? (slide 18)

Taxes are due on any dividends and capital gains in the year in which the dividends are recieved or stock is actually sold. ordinary dividends and short-term capital gains are taxed as same as ordinary income tax rate.

give examples of investment vehicles and their relationship with expected rate of return and risk. Which investment vehicle has no risk? (slide 10)

U.S T-Bills is risk free.

is an obligation of a political subdivisions of the U.S. government? (slide 39)

agency bonds

what taxes are treasury notes and bonds exempt from? (Slide 40)

although interest income is subject to normal federal income tax, it is exempt from state and local taxes.

provide a measurement of the fully compounded rate of return from an investment. (slide 11)

approximate yield

how are dividends allocated? (slide 19)

as a fixed amount per share. (Share holds receive a dividend in proportion to their shareholding)

this is the term used to describe how to distribute your investment money into different investment vehicles. (HW problem 1)

assets allocation

why should you watch out for very high P/E ratio? (slide 23)

because it could indicate the stock is overpriced.

is an index of the price volatility for a share of common stock, a reflection of how the stock price responds to market forces. give an example of this term. (slide 24)

beta --S&P 500

what does a low or high beta? (slide 24)

beta < 1 then stocks less volatile beta > 1 then more volatile. (risker)

a stock generally issued by companies expected to provide an uninterrupted stream of dividends and good long-term growth prospect. These companies hold important if not leading positions in their industries, and they often determine the standards by which other firms are measured. (slide 25)

blue-chip stocks.

are a bond features the allows the issuer to retire the security prior to maturity. contains an agreement between the issuer and the buyer describing the schedule and price of retiring the bond before maturity (slide 38, HW problem 7)

call feature

where could cyclical and defensive stocks be used? (slide 27)

can be used in a portfolio that contain other types of stocks, their purpose would be to change the risk of portfolio.

occur when your; able to sell a security for more than you paid for it or when your security holding go up in value. (slide 7)

capital gains

what is the formula for capital gains tax? (HW problem 4)

capital gains * tax bracket percentage

are the most common form of dividend, they are determined by the board of directors and are typically paid on a quarterly basis in cash. (slide 19)

cash dividends

every shareholder is a part owner of the firm and is entitled to a piece of its profit. (slide 15)

common stock

what are the limitations of common stockholders? (slide 15)

common stock holders are residual owners of the company, meaning that they're entitled to dividends income and a prorated shared of the company's earning, but only after all the firms' other obligations have been met.

found only in the corporate market. although they are initially issued as (unsecured debts), they carry a provision that enables them to converted into a certain number of shares of the issuing company's common stock. (slide 39)

convertible bonds

is generally recieved with some degree of regularity over the course of the year. it may take the form of dividends on stocks, interest from bonds, or rent from real estate. (slide 7)

current income

stock prices move in same direction as business cycle, often found in basic industries, have a positive beta. (slide 27)

cyclical

stock prices are stable in economic downturns, provides basic needs, consumer goods, beta are low or negative, (slide 27)

defensive.

is the minimum rate of return an investor feels should be earned in compensation for the amount of risk assumed? what is an acceptable investment? (slide 11)

desired rate of return --only if it's expected to generate a rate of return that meets or (exceeds) your desired rate of return.

this a risk management technique that distributes money among different assets so that the gains in one asset can offset any losses in another assets class (HW problem 1)

diversification

Allowing stockholders to take their cash dividends in the form of more shares of the firm's stocks. what is the purpose of this term? (slide 31)

dividend reinvestment plan (DRP) --earn a fully compounded rate of return. which means keeping your money fully invested at all times.

annual dividend per share / market price. (slide 19)

dividend yield

are payments made by a corporation to its shareholders? it is portion of corporate profits paid out to stockholders. how often are these paid out? (slide 19)

dividends --they are usually paid out quarterly.

The risk that some major, unexpected event will occur that leads to a sudden and substantial change in the value of an investment. (slide 6)

event risk

a type of risk associated with the mix of debt and equity financing used by the issuing firm and its ability to meet its financial obligations. it's related with the financial decisions of the company you invest in. (slide 5)

financial risk.

the variability associated with a firm's cash flow and with its subsequent ability to meet its operating expenses. it's related with the business of the company you invest in. (slide 5)

financial risk.

are stocks issued by firms in other countries, can provide portfolio diversity. (slide 29)

foreign stocks

found by formulating expectations of future current income and future capital appreciation. (slide 11)

future returns

if you want greater returns, you will most likely have to accept what? what important principle does this show? (slide 9)

greater risk (the amount of risk is directly related to expected return)

are expected to have above average growth rates in operations and earning. Because the company emphasis is placed on growth, they usually pay low to no dividends. may experience more price volatility. (slide 25)

growth stocks.

what does the net profit margin indicate? (slide 21)

how well the company is controlling its cost structure. stable or increasing net profit margins are a good sign.

fairly stable earnings stream, have high paying dividends, attractive to those seeking current income that is relatively safe. (slide 26)

income stocks

a type of risk, resulting from changing market interest rates, that mainly affect fixed-income securities (when interest rates goes up, the bond price will go down). interest risk changes often affect stock market returns as well. (slide 5)

interest rate risk

what is the basic trading rule in the bond market? (slide 33)

interest rates and bond prices move in the opposite directions. when interest rates fall bond prices increase.

reinvesting the current income and realized capital gains into other investment product. basically, compounds the interest earned. (slide 7)

interest-on-interest

market caps of more than $10 billion. (slide 28)

large cap

a type of risk associated with the inability to liquidate an investment conveniently and at a reasonable price. (slide 5)

liquidity risk

how stock market caps found? (slide 28)

market price * number of share outstanding.

reflect in the price volatility of a security and its association with factors such as changes in political, economic, and social conditions and in investors tastes and preferences (slide 5)

market risk

market caps of $2 to $10 billion. These securities offer a nice alternative to large stocks without all the drawback and uncertain of small-caps. (slide 28)

mid-caps.

are claims on the cash flows generated by mortgages loans. They are bond back by mortgage as collaterals. what are the two biggest issuers of such securities? (slide 41)

mortgage-backed securities --Fannie Mae and Freddie Mac.

are issued by state and local government and provide interest income to investor that is not subject to federal income tax. (slide 42)

municipal bonds

is issued by state or local governments, interest income is usually exempt from federal taxes. (slide 39)

municipal bonds

one of most widely used measures of corporate performance. it shows the rate of return the company is earning on its sales. (slide 21)

net profit margin.

how are common stocks classified? (slide 25)

on the basis of their dividends or their rate of growth in EPS

is the principal amount that is repaid to the bondholder at maturity. Bonds are usually sold in increments of $1,000, regardless of the purchase price. (slide 36)

par value

is a measure of investors' confidence in a given security (basically an indicator of inventor confidence and expectations) how is this calculated? (slide 23, HW problem 5)

price/earning ration (PE ratio) --price per share (market) / earning per ratio.

written statement used to assign a stockholder's voting rights to another person. (slide 17)

proxy

a type of risk resulting from possible changes in price levels, that can significantly affect investment returns. (slide 5)

purchasing power risk

this refers to the process of redistributing the portion of assets in your portfolio as defined in your investment plan (HW problem 1)

rebalancing

the amount of profit that the firm is generating relative to the firm's equity base, and it reflects the overall profitability of the firm. (slide 22)

return on equity

bond that is backed by legal claim on some specific property of the issuers, which is called collateral. These are senior bonds. Give an example. (slide 37)

secured bonds. --Example: mortgages, which are secured by real property, equipment trust certificates, which are by back equipment and are used by airlines and railroads

what is the result if you trade in a bond early? (slide 36)

selling before maturity may generate capital gains or losses

How do you calculate dividends? (HW problem 4)

shares * dividend payout per share

is a bond provisions specifying the annual repayment schedule to be used in paying off the issue? usually a pool of funds. (slide 38, HW problem 7)

sinking funds

stocks with market caps of less than $2 billion. because of their size spurts of growth can dramatically affect their earnings and stock prices. These stocks may hold the potential of higher return, but investors should be aware of the high-risk exposure associated with them. (slide 28)

small caps

rather than basing their investment decisions on a proven record of earnings, investor gamble that some new information, discovery, or production technique will favorably affect the firm's growth and inflate its stock price. (slide 26)

speculative stock is a high-risk security.

pay existing shareholders new shares of stocks. however, the shareholder's proportion of ownership and investment value remains the same. (slide 19)

stock dividendss

companies in the technology sector of the market. strongest dominate sector. (slide 25)

tech stocks

what is the difference between tax dues on dividends and capital gains? (slide 18)

there is no tax liabilities on any capital gains until the stock is actually sold.

what is the formula for book value? (slide 20)

total assets - (liabilities + preferred stock)

are issued by and backed by the full faither and credit of the US government. (slide 39)

treasury bonds

what are the years of maturity for treasury bonds and notes? (slide 40)

treasury bonds: 20- or 30-years maturities treasury notes: 2,3,5, and 10 years maturities

still legally binding debt obligations of the company, they are not backed by property. They are back only by the promise of the issuer to pay interest and principals on a timely basis. (slide 37)

unsecured bonds

what is the formula for fully taxable equivalents yield? (slide 42)

yield on municipal bonds / (1- tax rate)

what happens when TIPS matures? (slide 40)

you are paid the adjusted principal or original principal whichever is greater. TIPS pay interest twice a year. at a fixed rate. rates are applied to the just principal.