Personal Finance Review

Which of the following bond issuer may provide you with high-yield bonds?

"Junk" companies

DIVIDENDS

1. A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders 2. Mandatory distributions of income and realized capital gains made to mutual fund investors

DIP IN THE MARKET

3-5% decline

CORRECTION IN THE MARKET

5-10% decline from the top

POLICY

A contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured

PENSION or DEFINED BENEFIT PLAN

A defined (retirement) benefit paid to a retired employee based on length of service and salary provided by a company, labor union or government entity. A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. The company administers portfolio management and investment risk for the plan. There are also restrictions on when and by what method an employee can withdraw funds without penalties.

DEFINED CONTRIBUTION

A defined-contribution plan is retirement plan that's typically tax-deferred, like a 401(k) or a 403(b), in which employees contribute a fixed amount or a percentage of their paychecks in an account that is intended to fund their retirements. The sponsor company will generally match a portion of employee contributions as an added benefit to help retain and attract top talent.

FEES AND PENALTIES

A fee is a fixed price charged for a specific service. Fees are applied in a variety of ways such as costs, charges, commissions, and penalties. For example, hidden or undisclosed fees, which may be a one-time charge and may appear in fine print on a contract. These are charged by a variety of companies such as banks, or credit cards. A prepayment penalty is a clause in a mortgage contract stating that a penalty will be assessed if the mortgage is paid down or paid off within a certain time period. The penalty is based on a percentage of the remaining mortgage balance or a certain number of months' worth of interest.

YIELD DIVIDEND PER SHARE/SHARE PRICE

A financial ratio that shows how much a company pays out in dividends each year relative to its share price/ the stock price or the value of a company is the present value of its future cash flows.

FLEXIBLE EXPENSES

A flexible expense is an expense that is easily altered or avoided by the person bearing the cost. Flexible expenses are costs that may be manipulated in amount or eliminated by not engaging in the activity that incurred the expense.

REALIZED CAPITAL GAINS

A gain resulting from selling an asset at a price higher than the original purchase price.

MORTGAGE

A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments.

PAYMENT

A payment is the transfer of one form of good, service or financial asset in exchange for another form of good, service or financial asset in proportions that have been previously agreed upon by all parties involved. Payment can be made in the form of funds, assets or services.

TICKER

A record of the transactions occurring on an exchange on a given trading day, updated in real time or with only a slight delay.

SHARPE RATIO

A risk-adjusted measure developed by William F. Sharpe, calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance

TICKER SYMBOL

A series of letters, often an abbreviation, that represents a stock, option, mutual fund, or other security that trades on an exchange. A ticker symbol allows securities to be listed on an exchange's overhead board conveniently and provides a useful reference for traders and investors.

What does a share of stock represent?

A small piece of a company

STANDARD DEVIATION

A statistical measure of the historical volatility of a mutual fund or portfolio, usually computed using 36 monthly returns. More generally, a measure of the extent to which numbers are spread around their average

TAX BRACKETS

A tax bracket refers to a range of incomes subject to a certain income tax rate. Tax brackets result in a progressive tax system, in which taxation progressively increases as an individual's income grows: Low incomes fall into tax brackets with relatively low-income tax rates, while higher earnings fall into brackets with higher rates.

TAX CREDITS

A tax credit is an amount of money that taxpayers can subtract from taxes owed to their government. The value of a tax credit depends on the nature of the credit; certain types of tax credits are granted to individuals or businesses in specific locations, classifications or industries. Unlike deductions and exemptions, which reduce the amount of taxable income, tax credits reduce the actual amount of tax owed.

STOCKS

A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. Also, shares, common stock, equities. Holds voting rights in the company.

WITHHOLDING

A withholding is the portion of an employee's wages that is not included in a paycheck, but is instead remitted directly to the federal, state or local tax authorities. Withholding reduces the amount of tax employees must pay when they submit their annual tax returns. The amount withheld is based on the employee's income, marital status, number of dependents, and number of jobs.

AMORTIZED LOAN

An amortized loan is a loan with scheduled periodic payments that are applied to both principal and interest.

OUTSTANDING BALANCE

An average outstanding balance is the unpaid, interest-bearing balance of a loan or loan portfolio averaged over a period of time, usually one month. The average outstanding balance refers to any term, installment, revolving or credit card debt on which interest is charged.

W-4

An employee completes an IRS W-4 form, or an Employee's Withholding Allowance Certificate, to indicate his tax situation to the employer. The W-4 form tells the employer the correct amount of tax to withhold from an employee's paycheck based on the employee's marital status, number of exemptions and dependents and other factors.

BUDGET

An estimate of income and expenses for a specified period.

STOCK EXCHANGES

An exchange is a marketplace where securities, commodities, derivatives and other financial instruments are traded.

CAPITAL GAIN

An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. Also, a profit that results when the price of a security held by a mutual fund rises above its purchase price and the security is sold.

INDICES

An index reports changes up or down, usually expressed as points and as a percentage, in a specific financial market, in a number of related markets, or in an economy as a whole.

Which of the following are not holdings of a mutual fund?

Bank savings accounts

BETA

Beta is an estimate of the marginal effect of a unit change in the return on a market index on the return of the chose security.

SALARY VS CONTRACT WORK

Contract work or hourly employees must be paid time and a half for any hours beyond 40 worked during a week. Salaried employees received a fixed wage, but they must keep up with their responsibilities and complete necessary tasks—even if that means working extra hours. A salary also comes with an inherent sense of security. Employers can cut hours easily, but renegotiating a salary is more complicated.

DEDUCTIBLE

Deductibles are the tax-deductible expenses subtracted from adjusted gross income. Deductibles reduce taxable income and thereby reduce the tax liability. A deductible is also the amount paid out-of-pocket for covered expenses before an insurance company will pay the remaining costs.

CHECKING ACCOUNT

Demand deposit account, funds are available demand

CREDIT AGENCY

Equifax, Experian and TransUnion

TYPES OF TAXES PAID

Federal Income Tax, State and or Local Income Tax, Payroll Tax, Unemployment Tax, Sales Tax, Foreign Tax, and Value-Added Tax

FILING STATUS

Filing status is a category that defines the type of tax return form a taxpayer must use when filing his or her taxes. Filing status is closely tied to marital status.

FIXED EXPENSES

Fixed costs are incurred regularly, and they tend to show little fluctuation from period to period. Examples of fixed costs include insurance, interest expense, property taxes, utilities expenses and depreciation of assets.

1040

Form 1040 is the standard Internal Revenue Service (IRS) form that taxpayers use to file their annual income tax returns. The form contains sections that require taxpayers to disclose their taxable income for the year in order to ascertain whether additional taxes are owed or whether the filer is due a tax refund.

TYPES OF INSURANCE

Health, Disability, Dental Rental Insurance Homeowners Insurance Auto Life Insurance

ROTH IRA

Individual Retirement Account funded with after tax income; dividends, income and realized capital gains are tax free.

IRA

Individual Retirement Account; a tax deferred, retirement account an employed person can set up with annual deposit; growth is taxable upon withdrawal.

COVERAGE

Insurance coverage is the amount of risk or liability that is covered for an individual or entity by way of insurance services. Insurance coverage, such as auto insurance, life insurance.

INTEREST RATE (Credits and Loans)

Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include cash, consumer goods, and large assets such as a vehicle or building.

ITEMIZED DEDUCTIONS

Itemized deductions permit taxpayers who qualify to deduct more from their adjusted gross income (AGI) than they could by using the standard deduction. Complicated rules govern which goods and services, contributions and other expenses qualify as legitimate. The specific deductions that are allowed are outlined by the Internal Revenue Service (IRS) and include such expenses as mortgage interest, charitable gifts and medical expenses.

LIQUIDITY

Liquidity describes the degree to which an asset or security can be converted to cash or bought or sold in the market without affecting the asset's price; how fast it can be converted to cash

MARGIN

Margin is the minimum amount of collateral -- in either cash or securities -- you must have in your brokerage margin account to buy on margin, sell short, or invest in certain derivatives.

RISK

Mean Investors have varying degrees of risk tolerance, yet they will always seek the maximum rate of return available on their investment. Mean is also commonly referred to as expected return, and is what an investor hopes to maximize for any given measure of risk. From Schwab.com

Which of the following can cause a stock price to fall?

More sellers than buyers

Which of the following explains how compound interest works:

Over time, you earn interest on your interest, such that you earn money at an exponential rate

SECURITIES

Ownership position in a publicly traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value.

PREMIUMS

Premiums are paid for many types of insurance, including health insurance, homeowners and rental insurance. A common example of an insurance premium comes from auto insurance. A vehicle owner can insure the value of his or her vehicle against loss resulting from accident, theft, fire and other potential problems. The owner usually pays a fixed premium amount in exchange for the insurance company's guarantee to cover any economic losses incurred under the scope of the agreement.

SHORT TERM BUDGETING

Regular monthly expenses such as cable or cell phone bills. After you determine your monthly expenses and pro-rate annual expenses, subtract them from your monthly income in order to figure out how much income you have left to contribute toward your long-term goals.

SOCIAL SECURITY

Retirement income benefits funded by the Social Security Tax, a federal tax created in 1935 that is shared equally by employers and employees.

REASONS TO SAVE

Saving money is incredibly important. It gives you peace of mind, expands your options for decisions that have a major effect on your quality of life and eventually gives you the option to retire. Most people who are wealthy got there through a combination of their own hard work and smart savings and investment decisions.

50/30/20 BUDGETING

Senator Elizabeth Warren popularized the 50/20/30 budget rule in her book "All Your Worth: The Ultimate Lifetime Money Plan." The basic rule is to divide after-tax income, spending 50% on needs and 30% on wants while allocating 20% to savings.

TREYNOR RATIO

Similar to Sharpe Ratio, Treynor Ratio is a measurement of efficiency utilizing the relationship between annualized risk-adjusted return and risk. Unlike Sharpe Ratio, Treynor Ratio utilizes "market" risk (beta) instead of total risk (standard deviation). Good performance efficiency is measured by a high ratio.

What are different types of tax deductions?

Standard deduction, itemized deduction, tax credits, social security, medicare, state disability

SHARES

Stocks. A unit of ownership interest in a corporation or financial asset.

When you look at the tax tables to find your taxes due, you use your:

Taxable Income

DJIA INDEX

The Dow Jones Industrial Average (DJIA), sometimes referred to as the Dow, is the best-known and most widely followed market indicator in the world. It tracks the performance of 30 blue chip US stocks.

FDIC INSURANCE

The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency insuring deposits in U.S. banks and thrifts in the event of bank failures. The FDIC was created in 1933 to maintain public confidence and encourage stability in the financial system through the promotion of sound banking practices. As of 2018, the FDIC insures deposits up to $250,000 per depositor as long as the institution is a member firm. It is critical for consumers to confirm if their institution is FDIC insured.

standard deduction

The Internal Revenue Service (IRS) standard deduction is the portion of income that is not subject to tax that can be used to reduce your tax bill. You can only take the standard deduction if you do not itemize your deductions using Schedule A of Form 1040 to calculate taxable income. The amount of your standard deduction is based on your filing status, age and whether you are disabled or claimed as a dependent on someone else's tax return.

NEW YORK STOCK EXCHANGE

The New York Stock Exchange (NYSE) is a stock exchange located in New York City that is considered the largest equities-based exchange in the world, based on the total market capitalization of its listed securities.

W-2

The W-2 form is the form that an employer must send to an employee and the Internal Revenue Service (IRS) at the end of the year. The W-2 form reports an employee's annual wages and the amount of taxes withheld from his or her paycheck.

S&P 500 INDEX

The benchmark Standard & Poor's 500 Index, widely referred to as the S&P 500, tracks the performance of 500 widely held, large-cap US stocks in the industrial, transportation, utility, and financial sectors.

COMMISSION

The fee levied by a broker to undertake a trade on behalf of a customer.

What is risky about a bond?

The issuer of the bond may not be able to repay the bond The interest rate or coupon the bond pays may become low compared to future interest rates Default risk and interest rate risk

FICO SCORE

The most common used scoring model named for Fair Isaac Corp. Five factors determine your score are: on time payment, how much you owe, you credit history, credit mix and new credit applications. Scores range from 300-850. Also called credit score.

DIVIDEND PER SHARE

The sum of declared dividends for every ordinary share issued.

NASDAQ

The world's largest electronic stock market, with trades executed through a computer and telecommunications network connecting market makers, electronic communications networks, and order-entry firms. NASDAQ trading commenced in 1971, when the National Association of Securities Dealers owned the system.

1099

There are many different 1099 forms - 16, to be precise, as of 2014. They all serve the same general purpose, which is to provide information to the Internal Revenue Service (IRS) about certain types of income from non-employment-related sources. The payers of these types of income must send one copy of form 1099 to the IRS and another copy to the recipient of these payments (in other words, the taxpayer). They should also send a copy to the recipient's state tax agency and keep a copy for their own records.

True or false? A mutual fund collects money from investors and purchases different types of securities, enabling investors to diversify their investments more broadly than they could on their own.

True

True or false? Exchange-traded funds (ETFs) are almost identical to stock index mutual funds, the only difference is ETFs are priced throughout the trading day, while mutual funds are priced only at the end of the trading day..

True

True or false? There is no proven investment strategy that will always be successful.

True

SAVINGS ACCOUNT

a deposit account held at a bank or other financial institution that provides principal security and a modest interest rate

ALPHA

a measure of fund performance on a risk-adjusted basis. Alpha compares the risk-adjusted performance of a fund to a benchmark index (such as the S&P 500). The excess return of the fund relative to the return of the benchmark index is a fund's alpha. A positive alpha means the fund has outperformed the index on a risk-adjusted basis

401k

a plan where an employee may choose, as an alternative to receiving taxable cash as compensation or bonus, to contribute pretax dollars to a qualified tax-deferred retirement plan; employers may match employee contributed funds, from 10%-100%; employees control how the funds are invested among an assortment of investment vehicles provided by the employer

CREDIT REPORT

a report of your financial history compiled by credit agencies or credit bureaus. When you apply for credit or loan, the agencies provide the lender a detailed record of your bill paying habits

INFORMATION RATIO

a risk-adjusted performance measure. The information ratio is a special version of the Sharpe Ratio in that the benchmark doesn't have to be the risk-free rate.

KEOGH PLAN

a tax-deferred pension account designated for employees of unincorporated businesses or for persons who are self employed

PREFERRED STOCK

a type of security that does not have voting rights but has a higher claim on assets and earnings than common shares.

LONG-TERM GOALS

can be considered anything longer than five years, into the future. This includes buying a home, sending the kids to college or planning for retirement. Your long-term goals should come with a solid estimate of their costs. Start by writing down several long-term goals along with your best guess on how long it will be before money would be needed.

BANKRUPT

inability to pay your debts

EQUITY COMPENSATION

is a non-cash pay that represents ownership in the firm. This type of compensation can take many forms, including options, restricted stock and performance shares. Equity compensation allows the employees of the firm to share in the profits via appreciation and can encourage retention, particularly if there are vesting requirements.

CD, OR CERTIFICATE OF DEPOSIT

is a term investment in a bank account. The yield, term, renewal and any penalties for early withdrawal are spelled out in the deposit agreement. CDs sometimes have options attached to them, such as being able to add funds to the account or the ability to increase the yield if interest rates head higher (also known as a step-up provision). CDs also may be callable.

R-SQUARED

is an estimate of how much beta and alpha together help to explain the return on a security, versus how much is random variation.

DIVIDEND PER SHARE (DPS)

is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued. DPS can be calculated by using the following formula: D - Sum of dividends over a period (usually 1 year) SD - Special, one-time dividends S - Shares outstanding for the period

MONEY MARKET ACCOUNT

limitations on the type and frequency of withdrawal and transfer activity you can make each month. The account has no defined term and the interest rate will fluctuate based on market conditions and the bank's management.

What sections of Maslow's Hierarchy of Needs costs money?

physiological needs and safety & security

UNREALIZED CAPITAL GAINS

profitable position that has yet to be cashed in, such as a winning stock position that remains open.

RULES OF THUMB

save 10% of earnings, buildup 3-6 months of expenses

403(b)

similar to 401(k) provided to educational and non-profit organizations

CAPITALIZATION

stock price times the shares outstanding; the market valuation of the company

BEAR MARKETS

sustained period of falling prices in anticipation of falling economic activity, down 20% from the market top

BULL MARKETS

sustained rise in the price of stocks anticipating growing economic and business activity and profits

INTEREST RATE

the amount earned on a savings account expressed as a percentage of principal

Vesting

the process where an employee gradually acquires the right to employer-contributed benefits. If an employee has "vested" the benefit cannot be taken away.

STOCK PRICE

the value of a share of stock trading on the markets

STOCK OPTION

widely used form of employee incentive and compensation, usually for the executives of a corporation. The employee is given an option to purchase its shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years.