19.3 bonds and mutual funds

Question 1

What affects the value of a bond?

Answer 1

• changing interet rates and the credit rating of the borrowing organization
• if the bond’s stated interest rate is lower than interest rates on similar bonds then investors will want to buy the bond for less than its face value
• if the bond’s stated interest rate is higher than interest rates on similar bonds than the seller of the bond will want to receive more than its face value

Question 2

Why do governments and corporation sell bonds?

Answer 2

to raise money for current operations or future expansions

Question 3

value of each share in a mutual fund

Answer 3

net asset value (NAV)

Question 4

the price of a mutual fund share is most affected by

• current tax rates
• the value of investments
• current foreign rates
• the value of housing

Answer 4

the value of investments

Question 5

bonds represent ____

Answer 5

debt

Question 6

What is a safe investment for people with small amounts of money to invest?

Answer 6

US savings bonds

Question 7

bonds represent ____ of a company and stocks represent ____ in a company

Answer 7

bonds represent debt of a company and stocks represent ownership in a company

Question 8

bonds issued by local and state governments

Answer 8

municipal bonds

aka munis

Question 9

true or false

a bondholder is part owner of a company

Answer 9

false

a stockholder is part owner of a company

Question 10

What is the different between investing in bonds and investing in stocks?

Answer 10

• when you invest in stock you become an owner in the company
• when you buy a bond you are lending money to the company

Question 11

gotham city wants to pave a new street, batman boulevard. how can it fund the project?

• sell stock
• encourage local citizens to purchase municpal bonds
• purchase a bond fund
• do a hostile takeover of another city

Answer 11

encourage local citizens to purchase municipal bonds

Question 12

describe mutual funds

Answer 12

• is managed by a professional who uses the investors’ money to buy and sell a wide variety of stocks or bonds
• the value and income of the investments made determine the value of the mutual fund shares

Question 13

place where bonds are bought and sold

Answer 13

Bond Market

Question 14

Each bond has a ____ value, also called the maturity value

Answer 14

each bond has a face value, also called the maturity value

Question 15

interest is paid to a bondholder based on the bond’s

• maturity (face) value and stated interest rate
• stated interest rate and market value
• maturity date and maturity (face) value

Answer 15

maturity (face) value and stated interest rate

Question 16

What are the 6 main types of mutual funds?

Answer 16

1. Aggressive growth stock funds - seek quick growth, but also have higher risk
2. Income funds - specialize in stocks that pay regular dividends
3. International funds - invest in stock of companies from around the world
4. Sector funds - buy stocks of companies in the same industry such as health care, energy or telecommunications
5. Bond funds - specialize in corporate bonds
6. Balanced funds - invest in both stock and bonds

Question 17

Which of the following is NOT true about a mutual fund?

• it is less risky than purchasing individual stocks
• it is managed by a professional fund manager
• a fee is charged to manage the fund
• it will not help you diversify your portfoloio

Answer 17

it will not help you diversify your portfolio

Question 18

an investment fund set up and managed by a company that receives money from many investors

Answer 18

mutual fund

Question 19

more than 60,000 different ____ funds are available to investors around the world

Answer 19

more than 60,000 different mutual funds are available to investors around the world

Question 20

What are some different objectives of mutual funds?

Answer 20

• some emphasize growth stocks
• some emphasize stocks that pay high dividends
• some emphasize international stocks

Question 21

Describe Series EE savings bonds.

Answer 21

• can buy from $50-$10,000 range
• is bought at half its face value (so you pay $25 for a $50 bond)
• length of time bond is held determines the amount of interest
• interest is exempt from state and local taxes

Question 22

Describe a corporate bond.

Answer 22

• each bond has a face value
• interest is paid to the investor periodically (usually 2 times per year)
• the interest paid is based on the face value and the stated interest rate
• on the bond’s maturity date, the face value is repaid to the investor

Question 23

true or false

interest rates in an economy affect the value of a bond

Answer 23

true

Question 24

Describe the I Savings bond.

Answer 24

• pay an interest rate that changes with inflation
• purchased at face value (you pay $50 for a $50 bond)

Question 25

A ____ buys stocks of companies in the same industry such as healthcare, food or finance * aggressive-growth stocks fund * sector fund * bond fund * income fund

Answer 25

sector fund

Question 26

a series EE savings bond purchased for $50 would have a face value of: * $50 * $100 * $150 * $200

Answer 26

$100

Question 27

bonds issued by corporations

Answer 27

corporate bonds

Question 28

What do you become when you buy a bond?

Answer 28

creditor

Question 29

municpal bonds are issued by * corporations * federal govt * international companies * state and local govts

Answer 29

state and local governments

Question 30

a certificate representing a promise to pay a definite amount of money at a stated interest rate on a specified due date

Answer 30

bond

Question 31

When you buy a \_\_\_\_, you are lending money to the organization selling the \_\_\_\_.

Answer 31

when you buy a _bond_, you are lending money to the organization selling the _bond_

Question 32

What is an advantage of municipal bonds?

Answer 32

the interest earned on these bonds is usually tax exempt from federal and state income taxes

Question 33

Most municipal bonds are considered ____ investments than corporate bonds

Answer 33

most municipal bonds are considered _safer_ investments than corporate bonds

Question 34

What is the difference between treasure bills (t-bills) and treasure notes (t-notes)?

Answer 34

t-bills are for short term (91 days to 1 year) t-notes are longer term (1-10 years)

Question 35

the due date of a bond

Answer 35

maturity date

Question 36

What are 3 types of government bonds?

Answer 36

* municipal bonds * US savings bonds * Treasure bills

Question 37

What are t-bonds?

Answer 37

* treasure bonds * involve long term borrowing with a maturity of up to 30 years

Question 38

which of the follwoing is not one of the types of US savings bonds discussed in your book and / or class? * I * EE * ZZ

Answer 38

ZZ