'Give Your Road a Destination' - Chapter 37, Page 261

Question 1

What are interest rates?

Answer 1

The amount a lender charges a borrower and is a percentage of the principle–the amount loaned. It is also the amount that can be earned by lending money or depositing funds. The interest rate on a loan is annually dictated by the *annual percentage rate.

Question 2

What does annual percentage rate refer to?

Answer 2

The annual rate of interest charged to borrowers and paid to investors.

Question 3

What is a yield?

Answer 3

The return on an asset, typically expressed as a percentage per annum.

Question 4

What are taxable yields?

Answer 4

The return that a *taxable bond would need to equal the yield on a comparable tax-exempt bond, such as *municipal bond.

Question 5

What is a taxable bond?

Answer 5

A debt security (i.e., a bond) whose return to the investor is subject to taxes at the local, state, or federal level, or some combination thereof. A bond is debt issued by a company in the form of tradable security.

Question 6

What is a municipal bond?

Answer 6

A debt security issued by a state, municipality or county to finance its capital expenditures, including the construction of highways, bridges or schools.

Question 7

What are non-taxable yields?

Answer 7

Non-taxable bonds, or municipal bonds, are issued by state and local governments. Their interest is exempt from federal taxes, and if you buy bonds issued in your state, it is also exempt from state income taxes.

Question 8

What is the amortization of mortgages?

Answer 8

Any debt mechanism where the borrower repays a portion of the principal on every interest payment date, so that there is no large principal payment due at maturity. This means that choosing the period over which you should pay off your mortgage is a trade-off between lower monthly payments vs. lower overall cost.

Question 9

What does the balancing of a check book mean?

Answer 9

Making sure that the records you have kept for your financial transactions match those the bank lists on your statement.

Question 10

What is the balancing of a check book also known as?

Answer 10

Reconciling account.

Question 11

Where does the word ‘cent’ come from and what does it translate to? Give an example.

Answer 11

‘cent’ is an old European word with Italian origins meaning ‘hundred’. So, percent is translated directly to ‘per hundred’. If it snowed 13 times in the last 100 days, it snowed 13 percent of the time.

Question 12

How do you calculate a decimal into a percentage? Give an example.

Answer 12

To calculate decimal into a percentage means to times by 100. For example, to find the percentage of 0.87 you go 0.87 x 100 = 87%.

Question 13

How do you calculate a fraction into a percentage? Give an example.

Answer 13

To calculate fraction into a percentage means to divide the top number (numerator) by the bottom number (denominator). For example, to find the percentage of 13/100 you would divide 13 by 100 which equals 0.13. Then, multiply that number by 100 which equals 13%.

Question 14

How do you calculate the percentage of a specific number? Give an example.

Answer 14

To calculate the percentage of a specific number, you first convert the percentage to a decimal by dividing it by 100. Then you multiply it by the amount of a specific number. For example, to find 40% of $750 you have to convert 40% into a decimal by dividing by 100 (0.40), then you multiply 750 by 0.40 = $300.

Question 15

What does ROI stand for?

Answer 15

Return on Investment.

Question 16

What is calculating the return on investment (ROI) useful for?

Answer 16

It is a popular profitability metric used to evaluate how well an investment has performed.

Question 17

How do you calculate return on investment?

Answer 17

ROI is expressed as a percentage and is calculated by dividing an investment’s net profit (or loss) by its initial cost or outlay.

Question 18

What are the two methods to calculate return on investment?

Answer 18

1. Net Return on Investment / Cost of Investment x 100%

2. Final Value of Investment – Initial Value of Investment / Cost of Investment x 100%

Question 19

Why do stocks rise and fall?

Answer 19

There is no definitive answer or equation as to why stocks rise and fall and the pricing strategy for them. Stock prices are driven by a variety of factors, but ultimately the price at any given moment is due to the supply and demand at that point in time in the market. However, the forces that move a stock up and down can be categorised into three categories: *fundamental factors, *technical factors and *market sentiment.

Question 20

What are the fundamental factors (why stocks rise and fall)?

Answer 20

A combination of an earnings base (such as earning per share) and a valuation multiple (such as a price-to-earnings ratio). An owner of common stock has a claim on earnings, and earnings per share (EPS) is the owner’s return on their investment. When you buy a stock, you are purchasing a proportional share of an entire future stream of earnings. That’s the reason for the valuation multiple: It is the price you are willing to pay for the future stream of earnings.

Question 21

What are the technical factors (why stocks rise and fall)?

Answer 21

The mix of external conditions that alter the supply of and demand for a company’s stock. Some of these indirectly affect fundamentals. For example, economic growth indirectly contributes to earnings growth. Inflation, economic strength of market and peers, substitutes, incidental transactions, demographics, trends, and liquidity are examples of technical factors.

Question 22

What is market sentiment (why stocks rise and fall)?

Answer 22

Refers to the psychology of market participants, individually and collectively. Market sentiment is often subjective, biased, and obstinate. For example, you can make a solid judgment about a stock’s future growth prospects, and the future may even confirm your projections, but in the meantime, the market may myopically dwell on a single piece of news that keeps the stock artificially high or low. And you can sometimes wait a long time in the hope that other investors will notice the fundamentals.

Question 23

What is a bank CD?

Answer 23

Stands for certificate of deposit, a product offered by banks and credit unions that provides an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined amount of time. It is like a traditional savings account but generally has a higher interest rate. However, most CDs will charge you a penalty if you need your money before the end of your term.

Question 24

Define liquid/liquidity.

Answer 24

Refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. It is a sufficiency of cash or cash equivalents (i.e. liquid assets) to pay bills and cover any surprises or emergencies.

Question 25

Why are CDs not a great idea?

Answer 25

The rate of CDs changes all the time but generally can be quite low which means your money is locked up with limited benefits. Most CDs lock up your funds which make your money not *liquid. There is also a risk of inflation with CDs carrying the danger that your money will lose its purchasing power over time as your interest gains are overtaken by inflation. Another downside for CD investors is the tax you’ll owe on the interest that accrues, which could eat into your earnings, making them virtually non-existent.

Question 26

What is an ‘option’ in regard to stocks?

Answer 26

A contract between two parties giving the taker (buyer) the right, but not the obligation, to buy or sell a security at a predetermined price on or before a predetermined date.

Question 27

How do stock options work?

Answer 27

Stock options are contracts for the right to buy or sell a certain amount of an asset (in this case, shares of stock) at a given price, known as the strike price. These contracts are valid until the expiration date.

Question 28

What are calls and puts (stock options)?

Answer 28

The calls options refer to the right to buy a reference asset at a particular strike price in exchange for payment of a premium. The puts options refer to the right to sell a reference asset at a particular strike price in exchange for payment of a premium.

Question 29

Why does insurance exist?

Answer 29

The key role of insurance is to help people financially protect themselves against life’s uncertainties, such as natural disasters, a car accident or an illness while on holidays. They exist because they (are supposed to) make it cheaper to recover from a disaster (health-related, car-related, house-related, etc.) through a pooled account of money rather than from your single pocket.

Question 30

What does a mutual fund consist of?

Answer 30

It a portfolio of stocks, bonds, or other securities.

Question 31

How does a mutual fund work?

Answer 31

Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price. They are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek. Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can affect their overall returns. The overwhelming majority of money in employer-sponsored retirement plans goes into mutual funds.

Question 32

When you buy shares of a mutual fund, you’re purchasing a _____ ?

Answer 32

right to a portion of the returns earned by the fund’s portfolio of stocks, bonds and other assets.

Question 33

Who manages mutuals funds and what can these people do with the profits?

Answer 33

Fund managers manage mutual funds and can choose to reinvest the profits or distribute them to their investors, depending on their strategy and overall market conditions. When the managers generate capital gains (or losses) by selling assets, they’re also passed on to investors.

Question 34

What are bonds?

Answer 34

Bonds are long-term lending agreements between a borrower and a lender. For example, when a *municipality needs to build new roads or a hospital, it issues bonds to finance the project. Corporations generally issue bonds to raise money for capital expenditures, operations, and acquisitions.

Question 35

True or false: bonds are short-term lending agreements?

Answer 35

False. Bonds are long-term.

Question 36

How do bonds rise and fall?

Answer 36

When the demand for a particular bond increase, all else equal, its price will rise, and its yield will fall. The supply of a bond depends on how much the issuer of a bond needs to borrow from the market, such as a government financing its expenditure. If the supply of a particular bond increases, all else equal its price will fall, and its *yield will increase.

Question 37

What is global currency?

Answer 37

Is the physical money in an economy, comprising of the coins and paper notes in circulation. Currency makes up just a small amount of the overall money supply, much of which exists as credit money or electronic entries in financial *ledgers. While early currency derived its value from the content of precious metal inside of it, today’s *fiat money is backed entirely by social agreement and faith in the issuer. For traders, currencies are the units of account of various nation states, whose exchange rates fluctuate between one another.

Question 38

What is a financial ledger?

Answer 38

A book or other collection of financial accounts in which account transactions are recorded.

Question 39

What is fiat money?

Answer 39

A government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U.S. dollar, are fiat currencies.

Question 40

What is an example of global currency?

Answer 40

Imagine you make shoes for a living and need to buy bread to feed your family. You approach the baker and offer a pair of shoes for a specific number of loaves. But as it turns out, he doesn’t need shoes at the moment. You’re out of luck unless you can find another baker—one who happens to be short on footwear—nearby. According to mainstream economics, money alleviates this problem. It provides a universal store of value that can be readily used by other members of society.

Question 41

Finish the sentence: Global currency provides a…

Answer 41

universal store of value that can be readily used by other members of society.