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Finance 3300 > Chapter 13 > Flashcards

Chapter 13 Flashcards

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1
Q

When performing a financial checkup, you should establish an emergency fund with at least how much?

A

$1,000

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2
Q

When performing a financial checkup, you should establish an emergency fund that lasts how long?

A

3-6 months

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3
Q

When performing a financial checkup, what are two options for sources of cash in emergencies?

A

line of credit (an approved short-term loan); cash advance on credit card (last resort)

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4
Q

Give two examples of elective savings programs.

A

payroll deduction; electronic transfer

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5
Q

What are the three main variables in investing?

A

contributions; time and compounding frequency; rate of return

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6
Q

Safety in any investment means

A

minimal risk of loss

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7
Q

Define risk.

A

A measure of uncertainty about an outcome

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8
Q

Describe the relationship between safety and risk in investments. (2)

A

potential return on any investment should be directly related to the risk the investor assumes; maximize return per unit risk

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9
Q

Define treasury securities in the context of investing.

A

proxies for risk-free investing

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10
Q

(T/F) Speculative investments are low risk.

A

False, they are high risk.

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11
Q

Give three examples of Level 4 - Speculation risk investments.

A

speculative stocks; options; commodities

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12
Q

Give three examples of Level 3 - Growth risk investments.

A

growth stocks; growth-oriented mutual funds; rental property

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13
Q

Give four examples of Level 2 - Safety and Income risk investments.

A

U.S. securities; selected corporate and municipal bonds; income stocks; conservative mutual funds

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14
Q

Give five examples of Level 1 - Financial Secruity risk investments.

A

cash; CDs; money-market mutual funds; U.S. government bonds; U.S. treasury bills

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15
Q

What is the formula for rate of return? Write out an example.

A

write out Chapter 13 Notes, Slide 13

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16
Q

What are the five components of the risk factor?

A

inflation risk; interest rate risk; business failure risk; market risk; global investment risk

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17
Q

What is inflation risk?

A

during periods of high inflation, your investment returns may not keep pace with inflation rate

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18
Q

What is interest rate risk?

A

you may invest in a bond paying 6%, but then the rates later go up to 8% — 60/0.08 = 750+/-

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19
Q

What is business failure risk?

A

bad management or products affect stocks, municipal or corporate bonds and mutual funds that invest in stock

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20
Q

What is market risk? (3)

A

prices and values fluctuate because of behavior of investors; changing economic conditions; systematic vs. unsystematic risk

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21
Q

What is global investment risk?

A

currency risk and government risk affect the returns on your global investments

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22
Q

The safest investments yield what kind of income?

A

predictable income

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23
Q

Describe investment growth.

A

common stock; appreciation of stock price

24
Q

Growth companies pay

A

little or no dividends, but reinvest in the company

25
Q

Which types of entities offer growth potential? (3)

A

mutual funds, government/corporate bonds, real estate

26
Q

What is investment liquidity?

A

ability to buy or sell an investment quickly without substantially affecting the investment’s value

27
Q

Is real estate a liquid investment?

A

No

28
Q

Define asset allocation.

A

process of placing your assets among several types of investments, which lessens your investment risk

29
Q

Define time factor.

A

the longer that you are invested, the better your opportunity for increasing returns

30
Q

What is the percentage stock exposure Rule of Thumb?

A

110 - your age (i.e. for a 60 year old, 50% of your portfolio should be stocks)

31
Q

Equity capital is provided by

A

stockholders who buy shares of a company’s stock

32
Q

Who are stockholders?

A

owners and share in the success of a company

33
Q

(T/F) A corporation is required to repay the money obtained from the sale of stock.

A

False, a corporation is NOT required to repay the money obtained from the sale of stock

34
Q

Is a corporation under legal obligation to pay dividends to stockholders?

A

No, there is no legal obligation — the stockholders may instead retain all or part of the earnings

35
Q

What are the two basic types of stock?

A

common stock (voting rights); preferred stock (accumulation of skipped dividends)

36
Q

What is a bond?

A

loan to a corporation, the federal or state government, or a municipality from the bondholder

37
Q

Bondholders receive periodic interest payments called

A

coupons

38
Q

The principal in bonds is repaid at

A

maturity (1-30 years), therefore an interest-only loan

39
Q

(Face value x coupon rate) / 2 =

A

semi annual $coupon

40
Q

Bondholders can keep the bond until

A

maturity, or they can sell it to another investor before maturity

41
Q

What is a mutual fund?

A

investors’ money is pooled and invested by a professional fund manager

42
Q

In a mutual fund, what does the professional fund manager do?

A

buys stocks, bonds and securities

43
Q

What is an advantage of mutual funds?

A

provides diversification to reduce risk

44
Q

What are two things to be aware of with mutual funds?

A

be aware of fees, depending on the type of fund you choose; cannot control timing of cap gains

45
Q

What is the goal of real estate investment?

A

to buy a property, collect rents and sell it at a profit

46
Q

What is the year-on-year average appreciation increase?

A

3 percent appreciation price a year

47
Q

Define speculative investment.

A

high-risk investment made in the hope of earning a relatively large profit in a short time

48
Q

Give 6 examples of speculative investments.

A

antiques/collectibles; call and put options; derivatives; commodities; coins and stamps; precious metals and gems

49
Q

Buy call if

A

you expect stock price to rise

50
Q

Buy put if

A

you expect stock price to fall

51
Q

What is the capital gains tax?

A

tax on earnings from selling stock at a profit

52
Q

What is the ordinary income tax?

A

tax on wages and interest income

53
Q

What is the formula for current yield?

A

(annual income)/(market value) — see Chapter 13, Slide 26

54
Q

What is the formula for total return?

A

(total yield) + (change in price over holding period) — see Chapter 13, Slide 26

55
Q

What is the formula for annualized holding period return?

A

(total return) / (holding period in years * original investment — see Chapter 13, Slide 26

Finance 3300 (15 decks)

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