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Finance 3300 > Chapter 13 > Flashcards

Chapter 13 Flashcards

1
Q

When performing a financial checkup, you should establish an emergency fund with at least how much?

A

$1,000

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2
Q

When performing a financial checkup, you should establish an emergency fund that lasts how long?

A

3-6 months

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3
Q

When performing a financial checkup, what are two options for sources of cash in emergencies?

A

line of credit (an approved short-term loan); cash advance on credit card (last resort)

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4
Q

Give two examples of elective savings programs.

A

payroll deduction; electronic transfer

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5
Q

What are the three main variables in investing?

A

contributions; time and compounding frequency; rate of return

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6
Q

Safety in any investment means

A

minimal risk of loss

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7
Q

Define risk.

A

A measure of uncertainty about an outcome

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8
Q

Describe the relationship between safety and risk in investments. (2)

A

potential return on any investment should be directly related to the risk the investor assumes; maximize return per unit risk

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9
Q

Define treasury securities in the context of investing.

A

proxies for risk-free investing

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10
Q

(T/F) Speculative investments are low risk.

A

False, they are high risk.

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11
Q

Give three examples of Level 4 - Speculation risk investments.

A

speculative stocks; options; commodities

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12
Q

Give three examples of Level 3 - Growth risk investments.

A

growth stocks; growth-oriented mutual funds; rental property

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13
Q

Give four examples of Level 2 - Safety and Income risk investments.

A

U.S. securities; selected corporate and municipal bonds; income stocks; conservative mutual funds

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14
Q

Give five examples of Level 1 - Financial Secruity risk investments.

A

cash; CDs; money-market mutual funds; U.S. government bonds; U.S. treasury bills

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15
Q

What is the formula for rate of return? Write out an example.

A

write out Chapter 13 Notes, Slide 13

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16
Q

What are the five components of the risk factor?

A

inflation risk; interest rate risk; business failure risk; market risk; global investment risk

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17
Q

What is inflation risk?

A

during periods of high inflation, your investment returns may not keep pace with inflation rate

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18
Q

What is interest rate risk?

A

you may invest in a bond paying 6%, but then the rates later go up to 8% — 60/0.08 = 750+/-

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19
Q

What is business failure risk?

A

bad management or products affect stocks, municipal or corporate bonds and mutual funds that invest in stock

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20
Q

What is market risk? (3)

A

prices and values fluctuate because of behavior of investors; changing economic conditions; systematic vs. unsystematic risk

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21
Q

What is global investment risk?

A

currency risk and government risk affect the returns on your global investments

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22
Q

The safest investments yield what kind of income?

A

predictable income

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23
Q

Describe investment growth.

A

common stock; appreciation of stock price

24
Q

Growth companies pay

A

little or no dividends, but reinvest in the company

25
Which types of entities offer growth potential? (3)
mutual funds, government/corporate bonds, real estate
26
What is investment liquidity?
ability to buy or sell an investment quickly without substantially affecting the investment's value
27
Is real estate a liquid investment?
No
28
Define asset allocation.
process of placing your assets among several types of investments, which lessens your investment risk
29
Define time factor.
the longer that you are invested, the better your opportunity for increasing returns
30
What is the percentage stock exposure Rule of Thumb?
110 - your age (i.e. for a 60 year old, 50% of your portfolio should be stocks)
31
Equity capital is provided by
stockholders who buy shares of a company's stock
32
Who are stockholders?
owners and share in the success of a company
33
(T/F) A corporation is required to repay the money obtained from the sale of stock.
False, a corporation is NOT required to repay the money obtained from the sale of stock
34
Is a corporation under legal obligation to pay dividends to stockholders?
No, there is no legal obligation — the stockholders may instead retain all or part of the earnings
35
What are the two basic types of stock?
common stock (voting rights); preferred stock (accumulation of skipped dividends)
36
What is a bond?
loan to a corporation, the federal or state government, or a municipality from the bondholder
37
Bondholders receive periodic interest payments called
coupons
38
The principal in bonds is repaid at
maturity (1-30 years), therefore an interest-only loan
39
(Face value x coupon rate) / 2 =
semi annual $coupon
40
Bondholders can keep the bond until
maturity, or they can sell it to another investor before maturity
41
What is a mutual fund?
investors' money is pooled and invested by a professional fund manager
42
In a mutual fund, what does the professional fund manager do?
buys stocks, bonds and securities
43
What is an advantage of mutual funds?
provides diversification to reduce risk
44
What are two things to be aware of with mutual funds?
be aware of fees, depending on the type of fund you choose; cannot control timing of cap gains
45
What is the goal of real estate investment?
to buy a property, collect rents and sell it at a profit
46
What is the year-on-year average appreciation increase?
3 percent appreciation price a year
47
Define speculative investment.
high-risk investment made in the hope of earning a relatively large profit in a short time
48
Give 6 examples of speculative investments.
antiques/collectibles; call and put options; derivatives; commodities; coins and stamps; precious metals and gems
49
Buy call if
you expect stock price to rise
50
Buy put if
you expect stock price to fall
51
What is the capital gains tax?
tax on earnings from selling stock at a profit
52
What is the ordinary income tax?
tax on wages and interest income
53
What is the formula for current yield?
(annual income)/(market value) — see Chapter 13, Slide 26
54
What is the formula for total return?
(total yield) + (change in price over holding period) — see Chapter 13, Slide 26
55
What is the formula for annualized holding period return?
(total return) / (holding period in years * original investment — see Chapter 13, Slide 26

Finance 3300 (15 decks)

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