M6: Investment Basics and Strategies Flashcards by Gabriella S

The return on investments after applicable income taxes are subtracted. An investment with a before-tax return of 8% would have an blank of 6.08% for an individual in the 24% bracket. This is calculated by multiplying .08 by 1 minus the tax bracket of .24: [.08 (1-.24)].

After-tax return

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A mutual fund that invests primarily in the stocks of companies that plow all or most of their earnings back into the company, producing little current income but growth in the value of the company and the stock.

Aggressive growth fund

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A mutual fund that invests in different types of assets to create a diversified portfolio of investments, including such items as foreign and U.S. stocks and bonds, real estate, precious metals, and currencies. The point of these funds is to minimize volatility in the overall portfolio while attaining favorable returns.

Asset allocation fund

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Pertains to investments. It is a strategy of diversification aimed at reducing variability of return from a portfolio of investments. The point of asset allocation is to invest in different types of assets that move in different ways from others in the portfolio.

Asset allocation strategy

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A mutual fund that combines different types of assets, such as stocks and bonds, within one fund. Types of these funds include balanced funds, lifestyle funds, and lifecycle funds.

Asset combination fund

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A mutual fund that invests in stocks, preferred stocks, and bonds. Investment objectives are security of principal, reasonable current income, and reasonable long-term capital appreciation.

Balanced mutual fund

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A measure of the volatility of an asset relative to the volatility of an index. blank measures only systematic risk.

Beta

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Stock that is issued by major, well-established companies. blanks have long records of earnings growth and dividend payments in both good and poor economic conditions.

Blue-chip stock

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A debt of the issuer that is a legal obligation to pay principal and interest when due.

Bond

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A mutual fund that invests in bonds. Funds of this type may invest in short-term, intermediate-term, or long-term maturity bonds. They may also specialize in bonds of a specific type of issuer; for example, they may invest only in corporate bonds, only in municipal bonds, or only in Treasury securities.

Bond mutual fund

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Investment risk that addresses the uncertainty of investment returns resulting from the nature of a business or the industry in which it operates. Examples include the uncertainty relating to future earnings, competition, and management of the business.

Business risk

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If a bond is callable, the issuer has the right to redeem the bond before maturity at a predetermined amount.

Callable bond

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Legal tender, including currency, coins, bank balances, money orders, and checks.

Cash

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Short-term investments with maturities of 90 days or less; they are considered liquid.

Cash equivalents

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A fixed-income investment available through banks and savings and loan associations. Interest rates and maturities are fixed at the time of purchase. Maturities vary from a few months to a few years, and early redemption may result in the payment of penalties. Because they are issued by banks and savings and loan associations, principal is insured through the FDIC or NCUSIF in most cases.

Certificate of deposit (CD)

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Short-term promissory notes issued by major, well-established corporations. Issued in large denominations.

Commercial paper

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A debt instrument issued by a business. Typical features include semiannual interest payments based on a stated coupon rate and payment of the face amount upon maturity.

Corporate bond

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The annual interest rate paid by a bond issuer.

Coupon rate

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The risk that a bond (or a preferred stock) will be downgraded due to excessive business risk and/or financial risk.

Credit risk

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The risk of diminishing both principal and return on a foreign investment because of unforeseen changes in the relative values of U.S. and foreign currencies. It is considered a type of nondiversifiable (i.e., systematic) risk.

Currency risk/Exchange rate risk

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When a firm cannot meet its obligations, it is in danger of defaulting. Tends to be highest among businesses without enough profitable sales, especially when they also have excessive debt.

Default risk

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A financial contract with a value that is based on an underlying asset. They have no value on their own. Their value is based on the anticipated price movements of the underlying asset.

Derivative

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A bond selling below its par value.

Discount bond

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An investment strategy that involves investing in many different securities to reduce risk; the opposite of concentration.

Diversification

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Represents ownership. As applied to stock, equity is stock ownership in a corporation. As it applies to real estate, it is the difference between the amount of any mortgage on the property and its market price.

Equity

A mutual fund that invests primarily in equity securities of companies that pay above-average dividends.

Equity income mutual funds

The possibility that a security will be affected by an unanticipated and damaging event.

Event risk

A fund's annual expenses divided by its average net assets.

Expense ratio

A public corporation that issues mortgage-backed securities collateralized by a pool of mortgages made by lenders.

Fannie Mae

Established in July of 2007, *blank* combined the regulatory functions of the National Association of Securities Dealers (NASD) and the regulation, enforcement, and arbitration operations of the New York Stock Exchange (NYSE). As such, it is the largest non-governmental regulator of U.S. securities firms.

Financial Industry Regulatory Authority (FINRA)

Use of borrowed funds to enhance gain on an investment.

Financial leverage

*blank* has to do with the amount of debt a firm has (shown on its balance sheet). A firm that is highly leveraged (large amounts of debt) has greater *blank* than a firm with little or no debt.

Financial risk

An investment that promises a stated amount of income, either in the form of periodic payments (such as interest) or a stated ending payout (such as with deep discount bonds). Because payouts are fixed, these securities tend to be subject to interest rate risk and purchasing power risk.

Fixed-income security

A security sold by the *blank* (formerly the Federal Home Loan Mortgage Corporation or FHLMC), collaterized by pools of conventional residential mortgages. *blank* guarantees the payment of principal and interest on these securities.

Freddie Mac

A bond issued by a municipality for which interest payments are secured by the general taxing power of the municipality.

General obligation municipal bond (GO)

A security collateralized by a pool of primarily VA and FHA mortgages that are packaged according to interest and maturity by mortgage bankers, commercial banks, and other financial institutions. The payment of interest and principal on this security is guaranteed by *blank.*

Ginnie Mae

A fund that invests in both U.S. and foreign securities.

Global mutual fund/World mutual fund

A fund that primarily invests in large, established companies that are expected to show moderate growth in stock value and pay reliable, increasing dividends.

Growth and income mutual fund

A mutual fund that invests primarily in stock that is expected to grow in value. The primary objective is capital appreciation. A *blank* distributes a minimal dividend because the underlying companies tend to reinvest earnings back into the business rather than distribute them to shareholders.

Growth mutual fund

The stock of a company whose sales and earnings are expanding faster than those of most stocks and faster than the general economy. The company usually is aggressive, emphasizes research or innovation, and retains earnings for future expansion rather than paying them out to shareholders.

Growth stock

A fund that attempts to own securities that mimic an established index, such as the S&P 500, Dow Jones Industrial Average, or Wilshire 5000. Using stock indexes has been common, but now use of bond indexing is also increasing.

Index mutual fund

A general increase in the level of prices within the economy.

Inflation

U.S. government securities that increase in value with changes in inflation.

Inflation-indexed bond

A type of nondiversifiable (systematic) investment risk. This is the risk that a bond's price will fall if *blank*s rise.

Interest rate risk

A fund that invests only in foreign securities.

International mutual fund

The probability that actual investment returns will vary from expected returns.

Investment risk

The appropriateness of an investment for a specific investor, which is determined by considering the investor's risk tolerance, time frame, sophistication, individual circumstances and preferences, and financial resources.

Investor suitability

The ability to convert an investment to cash quickly, without loss of principal.

Liquidity

Related to the uncertainty of converting an investment to cash within a short period of time at, or near, the original principal invested. This is a type of unsystematic risk.

Liquidity risk

Pertains to mutual funds. A *blank* is a sales charge sometimes incurred by the investor for executing a mutual fund transaction.

Load

The variability of return caused by investors' reactions to tangible and intangible events. It is considered a type of nondiversifiable (systematic) risk.

Market risk

Investments: The ability to convert an investment to cash quickly without regard to loss of principal. Markets: The degree to which there is an active market in which an investment may be traded. For example, stocks that are actively traded on an exchange have higher levels of *blank* than real estate (under most conditions).

Marketability

The date when principal must be repaid to a bondholder.

Maturity date

An approach to strategic asset allocation that strives for the highest return for a given level of risk or the lowest risk for a given level of return.

Modern portfolio theory (MPT)

Available through savings and loan associations and banks. Earnings rates are determined by the institution, and they tend to be lower than rates for money market funds. *blank* are FDIC insured, up to $250,000 per ownership category. Check writing privileges are typically available, although they may be restricted.

Money market deposit account

A mutual fund consisting of short-term money market instruments, such as Treasury bills, negotiable certificates of deposit, and commercial paper. Some specialize in tax-free securities. Such funds are highly liquid and offer a high degree of safety of principal. Check writing privileges are typically available, although they may require checks to be of a minimum amount such as $250.

Money market mutual fund

Debt instruments secured by a pool of mortgages.

Mortgage-backed securities (MBS)

A bond issued by a municipality, usually to finance a new project such as a library, hospital, or airport. The advantage of *blank*s is that interest received by investors generally is free from federal taxation, and sometimes it is free of state and local income taxes as well. The two main types of *blank*s are general obligations (GOs) and revenue bonds.

Municipal bond

This fund pools the money of many investors, hires an investment adviser to manage the pool, and invests in various assets to achieve one or more financial objectives. It is a fund that continues to offer shares to the public (i.e., "open-end"). Shares are purchased and redeemed through the fund, with purchase prices based on net asset value of the shares and any sales charge assessed.

Mutual fund/Open-end investment company

Pertaining to mutual fund pricing, it is the fund's net assets divided by the number of shares outstanding.

Net asset value

Pertains to mutual funds. A *blank* fund does not have a "load" or "sales charge" assessed.

No-load

Bonds: The value that will be paid to investors when the bond is redeemed at maturity. Preferred Stocks: The stated value of the stock and the price at which the stock was initially sold. Common Stocks: The dollar amount assigned to the stock upon issue.

Par value

An equity investment in which dividends are fixed at the stock's issue. However, a corporation can pass on dividends (not pay them) without becoming insolvent. *blank*holders have a higher claim on the corporation than common stockholders, but a lesser claim than bondholders.

Preferred stock

A bond selling above par value.

Premium bond

The official booklet that describes that describes a security and offers the sale of its shares. Its purpose is to provide full and fair disclosure of relevant investment information.

Prospectus

A systematic risk, it is the impact of inflation or deflation upon the value of an investment's returns. For example, when an individual purchases a bond, they may reasonably expect to receive the face amount of the bond at maturity, which is usually $1,000. Given the impact of inflation, however, the purchasing power of $1,000 will have been significantly reduced over time. Fixed-income investments tend to be highly subject to *blank*.

Purchasing power-risk

The risk that interest rates have decreased at the time payments from an investment are received so that reinvestment of those payments is at a lower rate than that previously earned.

Reinvestment risk/Reinvestment rate risk

A bond used to finance municipal projects in which principal and interest are payable solely from revenues produced by the project.

Revenue municipal bond

The possibility of loss or the possibility that the actual result will vary from the expected result.

Risk

An investment principle that increased levels of risk must be assumed if the investor hopes to earn higher return. Likewise, lower risk assumption generally leads to lower returns.

Risk-return trade-off

The level of risk that an individual is willing to assume in investing, based upon their emotional temperament, investment experience, and financial constraints.

Risk tolerance

Bonds issued by the U.S. government through its TreasuryDirect.gov website that earn a fixed rate of interest semiannually (EE bonds) or earn a fixed rate plus a rate tied to inflation (I bonds).

Savings bonds

Fund investing in the stocks of one industry or specializing in a theme, such as leisure.

Sector mutual fund

A registered savings bond that is a U.S. government obligation. These bonds are issued at face value and earned a fixed rate over its lifetime. They make no current interest payments.

Series EE bond

A registered savings bond that is issued at face value, the principal of which increases with inflation.

Series I bond

A measure of risk that indicates the degree to which an investment's returns deviate from its average return over a period of time. The greater the *blank* of an investment, the greater the risk. *blank* measures total risk (both systematic and unsystematic risk).

Standard deviation

An informational brochure on a mutual fund, which is available upon request. The statement contains information that is classified as useful but nonessential by the Securities and Exchange Commission and therefore typically is not included in the prospectus.

Statement of additional information

A fund in which the underlying investments are stocks.

Stock mutual fund

An approach to asset allocation that focuses on long-range objectives to set a portfolio's asset mix.

Strategic asset allocation

An abbreviated mutual fund prospectus that contains some of the most important information about a fund, such as investment objective, investment strategies, risks, performance, fees and expenses, and fund management.

Summary prospectus

The variability of return that is caused by factors affecting all comparable investments; also referred to as nondiversifiable risk.

Systematic risk

A method of an analyzing securities or market movement based on supply and demand factors reflected in volume and/or price behavior.

Technical analysis

The sum of an investment's current income (dividends or interest) and its capital gains or losses.

Total return

A short-term obligation of the U.S. government that is issued at a discount and redeemed at face value upon maturity. Income, which is received upon maturity, is not taxed at a state or local level.

Treasury bill

A long-term obligation of the U.S. government that is issued at or near par. Interest is paid semiannually and is not taxed at a state or local level.

Treasury bond

A U.S. government obligation issued at or near par, with maturities of 5, 10, and 30 years whose principal increases with inflation. Interest is paid at a fixed rate of principal semiannually and is not taxed at a state or local level.

Treasury inflation-protected securities (TIPS)

An intermediate-term obligation of the U.S. government that is issued at or near par. Interest is paid semiannually and is not taxed at a state or local level.

Treasury note

The variability of return that is caused by factors that are unique to a given company, industry, or property. It is risk that can be reduced through diversification.

Unsystematic risk

A return earned form an investment, typically expressed as a percentage. There are several methods of measuring yield, such as nominal yield, current yield, and yield to maturity.

Yield

A measure of yield that factors in both interest income and any change between the price at the purchase date and the call price at the earliest date the bond can be called.

Yield to call

A measure of yield that considers both current income generated and any change in bond's value between the purchase price and the maturity value. It assumes reinvestment of income streams received at the same rate of return.

Yield to maturity

An original issue discount bond that matures at par value, the difference being interest earned. While interest is earned over the life of the bond, there are no cash interest payments made. However, the investor is taxed upon accrued interest annually. The bond increases in value as interest is earned, and therefore interest is received when the bond is sold or matures.

Zero coupon bond