BUSINESS FINAL EXAM Flashcards
What is a Net Asset Value (NAV) ?
Net Asset Value is the net value of an investment fund’s assets less its liabilities, divided by the number of shares outstanding.
What is a mutual fund?
an investment that raises money from investors, pools the money, and invests it in stocks, bonds, and other investments.
What is Diversification?
It is the spreading of your investments both among and within different asset classes.
What are some advantages of investing in Mutual Funds?
Diversification- spreadin of investments
Professional Management -by money managers
Minimal transaction costs
Liquidity
flexibility
Service
Avoidance of bad brokers
What are the Disadvantages of investing in Mutual Funds?
Lower-than-market-performance
Costs
Risks
You cant diversify away a market crash
Taxes
In simple terms, how does the pooled investments work in a Mutual Fund?
Investors pool their funds and give them to a professional investment manager, who invests those funds in a diversified portfolio.
What is a systematic risk and a unsystematic risk and what are their differences?
Systematic risk refers to the risk inherent to the entire market and unpredictable. Unsystematic risk refers to the risk inherent to a particular company or industry, rather than from the broader economy and financial markets.
Their difference is that, Unsystematic risk can be mitigated through diversification. While systematic risk can be thought of as the probability of a loss that is associated with the entire market or a segment thereof, unsystematic risk refers to the probability of a loss within a specific industry or security.
What is a specific risk?
specific risk is a hazard that applies only to a particular company, industry, or sector. It is the opposite of overall market risk or systematic risk. Also known as unsystematic risk.
What is an open-end mutual fund?
It is a mutual fund that can issue an unlimited number of shares
What is a close-end mutual fund?
It is a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) and cant issue new shares.
What is a turnover ratio?
It is the percentage of a mutual fund or other portfolio holdings that have been replaced in the course of one year.
What is the expense ratio?
It is the ratio of a mutual funds expenses to its total assets.
What is a load fund?
It is the commission charged on a mutual fund which goes to a broker, financial planner, investment advisor for their time.
What is a no-load fund?
it is a mutual fund in which shares are sold without a commission or sales charge.
Types of Mutual Funds: Money Market Mutual Funds
A Money Market fund is a mutual fund that invests in short-term, higher quality securities.
It carries no loads, trades at a constant $1 NAV, and minimal expense ratios. Can be tax-exempt
Types of Mutual Funds: Aggressive growth funds
is a mutual fund that seeks capital gains by investing in the shares of growth company stocks.
Types of Mutual Funds: Sector Funds
is an investment fund that invests solely in businesses that operate in a particular industry or sector of the economy
Types of Mutual Funds: Balanced Mutual Funds
a type of mutual fund that owns both stocks and bonds.
It tries to balance objective of long-term growth, income, and stability.
Aimed at those needing income to live on and moderate stability in their investment
Less volatile than stock mutual funds
Types of Mutual Funds: Asset Allocation Funds
A fund that provides investors with a diversified portfolio of investments across various asset classes.
Invests in stocks, bonds, and money market securities
Moves money between stocks and bonds to outperform the market
Types of Mutual Funds: Life Cycle and Target Retirement Funds
Mutual funds that try tot tailor their holdings to the investors individual characteristics such as age and risk.
Target retirement funds are managed based on when you plan to retire.
Types of Mutual Funds: Bond Funds
Mutual Funds that invest primarily in bonds
Fluctuate in value with market interest rates.
Used for small amounts of money, to keep investments liquid.
Otherwise, individual bonds where there is no professional management or fees.
Types of Mutual Funds: U.S. Government Bond Funds or GNMA Bond Funds
Municipal bond funds
Corporate bond funds
Bond funds and their maturities:
- short term (1-5 years)
- intermediate term (5-10 years)
-long term (10-30 years )
What are some Mutual Fund Services?
Automatic investment and withdrawal plans
Automatic reinvestment of interest, dividends, and capital gains.
Wiring and funds express options
Easy establishment of retirement plans
What is an ETF?
Exchange Traded Funds (ETF) is a hybrid between a mutual fund and an individually traded stock or bond that trade on an exchange like individual securities do and can be bough and sold through the trading day.
What are some aspects of an ETF?
They charge lower annual expenses but still pay trading commissions
They are more efficient than most mutual funds
Investors are able to stake out an investment position in a sector, industry, or country
Investors can make their move during the markets trading hours.
What is a Roth IRA?
is a special type of tax-advantaged individual retirement account to which you can contribute after-tax dollars.
What are the benefits of a Roth IRA?
Contributions are not tax deductible but made out of after-tax income.
Money grows tax free and withdrawals are tax free.
No withdrawal restrictions or tax penalty imposed like traditional IRA but can also rollover.
What is a traditional IRA?
is an individual retirement account designed to help people save for retirement, with taxes deferred on any potential investment growth.
What are benefits of a traditional IRA?
Tax advantaged- contribution may or may not be tax-deductible depending on individual’s level or income and whether he/she, or spouse, is covered by a company retirement plan.
Restrictions are placed on timing and amount of withdrawals but can rollover a distribution
Savers tax credit
What is a defined benefit plan?
Traditional pension plan where you receive “defined” pension payout at retirement
What is a Defined-Contribution Plan?
is a retirement plan that’s typically tax-deferred, like a 401(k) or a 403(b), in which employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements.
Is an Employer-Sponsored Retirement Plan
What is a beneficiary?
a person who derives advantage from something, especially a trust, will, or life insurance policy.
What is a Will?
It is a legal document that describes how you want your property to be transferred to others.
What is an Executor?
they are the personal representative who will carry out the will’s provisions.
What is a Probate?
Probate is the legal procedure that validates a will and then distributes the estate’s assets.
What are the Advantages and Disadvantages of a Probate ?
Advantages:
- A probate allows for challenges to be settles
- probate allows for orderly distribution of assets of someone who dies intestate- without a valid will.
Disadvantages:
- cost and slowness
What is a codicil? And how should it be implented?
It is an attachment to a will that alters or amends a portion of the will.
A codicil should be drawn up by a lawyer, witnessed, and attached to the will.
What is a Trust?
It is a legal entity that holds and manages an asset for another person
How does a trust work?
A trust is created when a grantor transfers property to a trustee for the benefit of one or more beneficiaries
The trustee can be an individual, an investment firm, or a bank.
Any asset can be placed in a trust.
What is a living trust and how does it work?
When you place assets in a trust while alive and be able to withdraw them later if you wish.
With revocable living trusts, you control the assets int he trust and can receive income from the trust without removing assets from the estate.
What are the different clauses within writing a will?
Payment of debt and taxes clause, disposition of property clause, appointment clause, common disaster clause, attestation and witness clause.
What is a 401(k)?
is a retirement savings plan offered by many American employers that has tax advantages for the saver.
agrees to have a percentage of each paycheck paid directly into an investment account. An employer may match.
What is vesting?
It is the process of earning an asset, like stock options or employer-matched contributions to your 401(k), over time. Works as an incentive to stay longer at a company.
What is ESOP?
Employee Stock Ownership Plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company in the form of shares of stock.
What is a 403(b) Plan?
This plan refers to a retirement account designed for certain employees of public schools and other tax-exempt organizations. Participants may include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.
What is a SEP IRA?
Simplified Employee Pension, It is an individual retirement account (IRA) that an employer or a self-employed person can establish.
What is a Testamentary Trust?
It is a trust that is established in accordance with the instructions contained in a last will and testament. It is active after you die.
What are the 4 steps in the Estate Planning Process:
Step 1: Determine the Value of your Estate
Step 2: Choose Your Heirs and Decide What They Receive
Step 3: Determine the Cash Needs of the Estate
Step 4: Select and Implement Your Estate Planning Techniques
What is the Unified tax credit?
Estate and gift tax credit that in 2017 allows $5.49 million of an estate to be passed on tax free.
How would one calculate Estate Taxes?
- Calculate the value of your gross estate
- Calculate your taxable estate by subtracting funeral and estate
expenses, debts, taxes, and allowable deductions from the gross estate. - Calculate the gift-adjusted taxable estate.
- Estimate estate taxes using federal rate
What is tax deferred vs tax exempt in retirement terms?
Tax-deferred refers to earnings, such as those in a traditional retirement account, that accumulate tax-free until you withdraw funds from the account. Tax-exempt refers to earnings, such as those in a Roth retirement account, that generally aren’t subject to taxes at withdrawal.
How does a Social Security work for workers?
It acts as a primary source of retirement income for many senior citizens.
What is the eligibility like for social security?
You need to pay into system to be eligible and receive credits.
With 40 credits, you are eligible for retirement, disability, and survivor benefits.
What is a Joint Tenancy Account with Right of Survivorship?
It is when one owner dies, the other receives full ownership of assets in the account.
What is a Tenancy-in-Common Account?
It is the deceased’s portion of the account goes to the heirs of the deceased, no the surviving account holder.
What is Disability and Survivor Benefits?
provided by social security, it provides protection for those with impairment that keeps them from work for at least 1 year.
What is a employer-funded pension?
an employee benefit that commits the employer to make regular contributions to a pool of money set aside to fund payments made to eligible employees after they retire.
What is Portability?
helps minimize gift and estate tax by allowing a surviving spouse to use a deceased spouse’s unused gift and estate tax exemption amount.
What is a Gift Tax?
is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether or not the donor intends the transfer to be a gift.
What is the Generation Skipping Transfer Tax?
It is a federal tax on a gift or inheritance that prevents the donor from avoiding estate taxes by skipping children in favor of grandchildren.
