10.1 section review. Flashcards
What are the steps you should take to prepare for and survive a financial crisis?
- Establish a larger than usual mutual fund
- Know what you owe
- Reduce spending
- Pay off credit cards
- Apply for a line of credit at your bank, credit union or financial institution
- Notify credit card companies and lenders if you are unable to make payments
- Monitor the value of your investment and retirement accounts.
What could happen in a financial crisis with an employer-sponsored retirement fund?
It can cause employers to temporarily reduce or eliminate matching provisions in their employee retirement plans to reduce costs
What are two things that you can fund if you choose an elective, or optional, savings program?
Fund a traditional IRA or Roth IRA account
What do financial planners recommend as a special savings effort?
That you cut back to the basics for one of two months each year.
Why do even small amounts of money add up when investing?
because the time value of money.
What is a rate of return?
The percentage of increase in the value of your savings due to earned interest.
What are examples of Level 1 (Financial Security) investments?
Cash, CDs, savings accounts, money market accounts, US Gov, bonds
What are examples of Level 2 (Safety and Income) investments?
U.S Treasury Securities, conservative corporate bonds, state and municipal government bonds, income and utility stocks.
What are examples of Level 3 (Growth) investments?
Income and growth stocks, mutual funds, real estate, convertible bonds
What are examples of Level 4 (Speculation) investments?
Options, commodities, precious metals and gems, speculative stocks, junk bonds, collectibles.
What is a speculative investment?
It’s considered a high risk investment that might earn a large profit in a short time.
What is he disadvantage of a speculative investment?
The possibility that you could lose most or all of the money that you invest.
What basic rule sums up the relationship between the factors of safety and risk?
The potential return on any investment should be directly related to the risk you, the investor, takes.
How does circumstance determine your willingness (attitude) towards taking risks (explain)?
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
What are the five different components of risk
Inflation risk, interest rate risk, business failure risk, financial market risk, global investment risk.
What three (3) things happen during periods of rapid inflation?
The return from your investments might not keep up with the inflation rates, you lose buying power, and your money will buy less.
What are the steps to calculate the effect of inflation on your investments?
First, subtract your rate of interest from the inflation rate, then multiply that percentage by the original amount of your investment.
What happens if you invest in something that gives you a fixed rate of return?
The value rate of your investment will go down if interest rates go up.
How would I determine the market price of my bonds when the interest rate goes up?
Divide one year of interest at a fixed rate of 8% by the new higher interest rate of 10%
What does business failure risk apply to?
Common stock, preferred stock, and corporate bonds.
What are dividends?
Distributions of money, stock, or other property that a corporation pays to stockholders
What happens if a company that you have invested in declares bankruptcy?
Your investment may become worthless.
Even if a company is financially healthy, the value of the stock may
decrease
What are two conditions that impact financial markets?
Social and political conditions.
