Exam 2 Flashcards
4 reasons Why IG Bonds?
- 12-year high yield = u.s treasury yield + compensation for additional risk the bonds offer
- They can withstand a recession = relationship between upgrades and downgrades
- investors can earn more by taking on credit risk
- IG bonds can withstand slow economic growth
Upgrades and downgrades
- upgrade = A:AAA
- high yield debt downgrades are higher than upgrades
- downgrades=upgrades in the investment grade sector
- if you want credit risk best place in the sector is when they are equal
- downgrades are going up and upgrades are going down
Best place to invest on the yield curve?
between three months to one year since there is compensation for assuming credit risk
Credit risk
the risk that an insurer may default or downgrade resulting in a drop in bond price
Financial planning steps
- establish and write out goals
- obtain relevant data
- analyze data
- pursue client to implement the plan
- monitor and revise the plan
Why did dow drop and by how much?
$1000 because inflation was more than expected
Barbee’s opinion on dow dropping
no matter what dow was due to drop the question was when
what accounts for long-term favorable returns?
growth and reinvestment of dividends
why do people procrastinate?
- instant gratification
- people don’t see the connection between today and 20 years from now
which has the lower price? bid or ask
bid
what happens when the maturity of a bond is extended?
interest rate goes up
why would someone be willing to assume such high-interest risk?
because the expect rates to drop
Reasons against IG bonds
- interest rate risk
- low compensation for credit risk
how do you measure credit risk?
- the yield on bond - the yield on treasury
how does the government pay off debt
- create more money
- raise taxes
Individual bonds
- less diversification
- the risk of downgrades
- broker markup
- bid ask difference
advantages of mutual funds
- diversification
disadvantages of mutual funds
- fees (load) compensation to brokerage financial planner
- managing and operating expenses as a percent of net asset value
front end load
price - NAV
Hidden loads examples
12-b-1 or deferred redemption fee
hidden loads
is load the same as compensation
no load is paid by investors compensation is paid by the brokerage firm
why is the fed raising short-term rates
to combat inflation
mutual fund
investment of stocks and bonds
how do mutual funds perform
underperform an unmanaged index
close end fund
- has a fixed number of shares
- is sector specific ie. gas and oil
what are the 4 close end fund advantages
- diversification
- discount to NAV
- intraday liquidity (buy and sell at any time)
- when investors are pessimistic there will be a high discount
ETF advantages
- diversification
- low expenses as % of NAV, 0.1%
common financial issues individuals have
- estate planning
- financial independence
- accomplishment of goals
three c’s
capacity - ability to pay off debts
character - creditworthiness
collateral - asset pledged to creditor until debt is paid
debt takes
7.5 years to leave your record
credit score
35% payment history
30% outstanding debt
15% credit history
10% type of credit
10% pursuit of new credit
Credit law
can be charged for score but not report
avg net worth of the black community is?
17k
emergency fund
should cover 3-6 months of expenses
best way to improve credit score
secured credit card
1 cause of divorce
money
what card does the speaker not carry
macy’s credit card
what type of insurance should you get when you are old
long term care insurance
if you get it while you are young it’s cheaper
series 6 financial advisor
not licensed to offer all securirties
series 7 financial advisor
offer all securities
Marketing yourself as a financial advisor
have to be a series 65 if not and you call yourself that there is a fee from SEC
what does estate planning include
settlement of estate
who are beneficiaries
when is having an estate most important
being a single parent
what did speaker two say about attorneys
the more competent the more expensive
why should you get an estate planning attorney
laws constantly change and its their area of expertise
annuity
the only vehicle you can buy that will guarantee income
most stable annuity
life insurance
current economic outlook
jobs are opening up but people aren’t applying
3 types of saving
reserve - do not touch
replacement - put and take
long term - personal long term not 401k or pension
