Ch 9 Flashcards
How is investment income taxed?
As normal income
Uncertainty caused by changes in the overall price level of goods and services.
Inflation risk
Which assets are less susceptible to inflation risk?
Assets that emphasize capital appreciation. Ex. Stocks and real estate because their rate of return usually beats inflation.
Risk of loss caused by changes in the level of interest rates.
Interest rate risk.
What happened to bonds when the market interest rate increases?
Value of bonds decreases.
A stock that tends to pay high dividends which means mostly investment income.
Value stock
Which bonds are more susceptible to interest rate risk?
Older bonds
Uncertainty about an investment’s future value because of potential changes in the market
Market risk
What kind of risk can be diversified away?
Unsystematic
Risk that a company has taken on too much debt.
Financial risk
Dollar cost averaging for bonds where dates are staggered and maturing investments are reinvested.
Laddering.
Mutual fund dividend reinvestment option.
DRIP
What is the tax treatment of reinvestment of dividends?
Dividends have to be reported. It’s like getting the cash and manually investing it.
Bonds where interest isn’t pad the tip redeemed.
EE or I
Treasury security with maturity of less than a year
T-bill
Bond secured by the full faith and taxing authority of the issuer.
GOB
Bond that only pays after the collateralized debt has been satisfied.
Debentures
Bond where owners only receive interest if the corporation has earnings from which the interest can be paid.
Income bond
Stock where the company’s earnings are growing at a faster rate than the general economy.
Growth stock
Stock considered undervalued since current price is less than the intrinsic value.
Value stock
Stock with earnings that are closely correlated with the economic cycle.
Cyclical stock (ex. Automobile companies l)
Stocks that are less affected by the economic cycle (ex grocery stores, tobacco, medical companies)
Defensive stock
Stocks with a record of steady dividend payments.
Income stock
Stock with a price of less than $1/share.
Penny stock
Four systematic risks
Purchasing power risk
Interest rate risk
Market risk
Exchange rate risk
What does it mean if a stock has a beta of 1? How about -1; +1
-1 = less risky than market
1= same as market
2=more risky
Mutual fund constantly issuing new shares. Outstanding shares are redeemed based on the current net asset value.
Open-end fund
How do you calculate the by asset value of an open-end fund?
Assets - liabilities / number of shares
Mutual fund that sells a fixed number of shares.
Closed-end fund
Key advantage of mutual funds.
Diversification.
What do cds derive their return from?
Investment income
Risk that a business may take on too much debt
Financial risk
What is the tax treatment of treasury notes?
Not taxed Federally or by the State.
Are sector funds diversified?
No; so they should only be a small portion of the portfolio
What does a beta less than 1 mean?
Returns are less than the market rate of return.
What happens with an asset-allocation or life-cycle fund?
The mix becomes less risky over time.
Are tbills actively traded on securities markets?
Yes
