10.1 section review.

Question 1

What are the steps you should take to prepare for and survive a financial crisis?

Answer 1

1. Establish a larger than usual mutual fund
2. Know what you owe
3. Reduce spending
4. Pay off credit cards
5. Apply for a line of credit at your bank, credit union or financial institution
6. Notify credit card companies and lenders if you are unable to make payments
7. Monitor the value of your investment and retirement accounts.

Question 2

What could happen in a financial crisis with an employer-sponsored retirement fund?

Answer 2

It can cause employers to temporarily reduce or eliminate matching provisions in their employee retirement plans to reduce costs

Question 3

What are two things that you can fund if you choose an elective, or optional, savings program?

Answer 3

Fund a traditional IRA or Roth IRA account

Question 4

What do financial planners recommend as a special savings effort?

Answer 4

That you cut back to the basics for one of two months each year.

Question 5

Why do even small amounts of money add up when investing?

Answer 5

because the time value of money.

Question 6

What is a rate of return?

Answer 6

The percentage of increase in the value of your savings due to earned interest.

Question 7

What are examples of Level 1 (Financial Security) investments?

Answer 7

Cash, CDs, savings accounts, money market accounts, US Gov, bonds

Question 8

What are examples of Level 2 (Safety and Income) investments?

Answer 8

U.S Treasury Securities, conservative corporate bonds, state and municipal government bonds, income and utility stocks.

Question 9

What are examples of Level 3 (Growth) investments?

Answer 9

Income and growth stocks, mutual funds, real estate, convertible bonds

Question 10

What are examples of Level 4 (Speculation) investments?

Answer 10

Options, commodities, precious metals and gems, speculative stocks, junk bonds, collectibles.

Question 11

What is a speculative investment?

Answer 11

It’s considered a high risk investment that might earn a large profit in a short time.

Question 12

What is he disadvantage of a speculative investment?

Answer 12

The possibility that you could lose most or all of the money that you invest.

Question 13

What basic rule sums up the relationship between the factors of safety and risk?

Answer 13

The potential return on any investment should be directly related to the risk you, the investor, takes.

Question 14

How does circumstance determine your willingness (attitude) towards taking risks (explain)?

Answer 14

When you are young, you may be more willing to take risks because you have long term investment goals. when you are older and close to retirement, you may decide to shift your investments from speculative to conservative investments to be sure that you will not lose your life savings

Question 15

What are the five different components of risk

Answer 15

Inflation risk, interest rate risk, business failure risk, financial market risk, global investment risk.

Question 16

What three (3) things happen during periods of rapid inflation?

Answer 16

The return from your investments might not keep up with the inflation rates, you lose buying power, and your money will buy less.

Question 17

What are the steps to calculate the effect of inflation on your investments?

Answer 17

First, subtract your rate of interest from the inflation rate, then multiply that percentage by the original amount of your investment.

Question 18

What happens if you invest in something that gives you a fixed rate of return?

Answer 18

The value rate of your investment will go down if interest rates go up.

Question 19

How would I determine the market price of my bonds when the interest rate goes up?

Answer 19

Divide one year of interest at a fixed rate of 8% by the new higher interest rate of 10%

Question 20

What does business failure risk apply to?

Answer 20

Common stock, preferred stock, and corporate bonds.

Question 21

What are dividends?

Answer 21

Distributions of money, stock, or other property that a corporation pays to stockholders

Question 22

What happens if a company that you have invested in declares bankruptcy?

Answer 22

Your investment may become worthless.

Question 23

Even if a company is financially healthy, the value of the stock may

Answer 23

decrease

Question 24

What are two conditions that impact financial markets?

Answer 24

Social and political conditions.

Question 25

What are the safest investments?

Answer 25

Savings accounts, certificates of deposits (CDs), U.S savings bonds, and U.S Treasury Bills.

Question 26

What should you do before investing in stocks or corporate bonds of a company?

Answer 26

Obtain information about the company’s overall profits,its history of dividend payments, and its outlook for the future.

Question 27

Where does the best opportunities for growth in an investment come from?

Answer 27

Common stocks and growth stocks.

Question 28

What is a growth stock?

Answer 28

A common stock issued by a corporation.

Question 29

What do growth companies usually do with their profits?

Answer 29

They usually reinvest their profits rather than pay dividends.

Question 30

What are retained earnings?

Answer 30

Profits that a company reinvests, usually for an expansion or to conduct research and development

Question 31

What does growth financed by retained earning do to the company stock?

Answer 31

Usually contributes to increasing the stock’s value.

Question 32

What is investment liquidity?

Answer 32

The ability to buy or sell an investment quickly without substantially reducing its value.

Question 33

What is an example of a high-liquid investment?

Answer 33

Savings account.

Question 34

What is an example of a low-liquid investment?

Answer 34

An investment in real estate.

Question 35

Why is real estate considered a low-liquid investment?

Answer 35

Because finding a buyer takes time.