Investment Basics and Strategies Flashcards
The return on investments after applicable income taxes are subtracted. An investment with a before-tax return of 8% would have an after-tax return of 6.08% for an individual in the 24% bracket. This is calculated by multiplying .08 by 1 minus the tax bracket of .24: [.08 (1 – .24)].
After-tax return
A mutual fund that invests primarily in the stocks of companies that plow all or most of their earnings back into the company, producing little current income but growth in the value of the company and the stock.
Aggressive growth fund
A mutual fund that invests in different types of assets to create a diversified portfolio of investments, including such items as foreign and U.S. stocks and bonds, real estate, precious metals, and currencies. The point of these funds is to minimize volatility in the overall portfolio while attaining favorable returns.
Asset allocation fund
Pertains to investments. It is a strategy of diversification aimed at reducing variability of return from a portfolio of investments. The point of asset allocation is to invest in different types of assets that move in different ways from others in the portfolio
Asset allocation strategy
A mutual fund that combines different types of assets, such as stocks and bonds, within one fund. Types of these funds include balanced funds, lifestyle funds, and lifecycle funds.
Asset combination fund.
A mutual fund that invests in stocks, preferred stocks, and bonds. Investment objectives are security of principal, reasonable current income, and reasonable long-term capital appreciation.
Balanced mutual fund
A measure of the volatility of an asset relative to the volatility of an index. Beta measures only systematic risk
Beta
Stock that is issued by major, well-established companies. ______ stocks have long records of earnings growth and dividend payments in both good and poor economic conditions.
Blue-chip stock.
A debt of the issuer that is a legal obligation to pay principal and interest when due.
Bond
A mutual fund that invests in bonds. Funds of this type may invest in short-term, intermediate-term, or long-term maturity bonds. They may also specialize in bonds of a specific type of issuer; for example, they may invest only in corporate bonds, only in municipal bonds, or only in Treasury securities.
Bond mutual fund
Investment risk that addresses the uncertainty of investment returns resulting from the nature of a business or the industry in which it operates. Examples include the uncertainty relating to future earnings, competition, and management of the business
Business risk
If a bond is callable, the issuer has the right to redeem the bond before maturity at a predetermined amount.
Callable bond.
An excess of the sale price of a capital asset—such as a stock, a bond, a personal automobile, or a home—over its basis (generally its purchase price).
Capital gain.
An excess of the basis in a capital asset over its sale price. Some capital losses are tax deductible, but personal losses are typically not deductible (such as a loss on the sale of a personal automobile).
Capital loss
A company that invests in diversified portfolios of investments on behalf of investors, but which has fixed capitalization. The company issues a fixed number of shares, and by purchasing shares of the company, an investor presumably will share in the gains or losses experienced by the underlying portfolio of investments. When the portfolio performs well, the investor’s shares in the company generally will increase in value; when the portfolio does poorly, the shares generally will decrease in value. The investor must buy or sell shares in the market; they are not purchasable or redeemable by the investment company. As a result, changes in the value of the portfolio are not the only determinant of changes in the price of the shares; share price is also determined by market conditions and investor sentiment.
Closed-end investment company
Short-term promissory notes issued by major, well established corporations. Commercial paper is issued in large denominations.
Commercial Paper
Pertains to investment strategies. It is the opposite of diversification; it involves investing in a single security, industry, or type of security.
Concentration.
Pertains to bonds and preferred stock. The corporate issuer may include a provision enabling bond or preferred stockholders to exchange their securities for a certain number of common stock shares at a specified price.
Conversion privilege
An asset allocation approach that divides a portfolio into two components: (1) a core for 70% to 80% of the portfolio that typically contains indexed mutual funds or broad-based exchange-traded funds, and (2) a satellite for the remainder of the portfolio to increase returns and/or provide additional diversification to the portfolio.
Core/satellite asset allocation
A debt instrument issued by a business. Typical features include semiannual interest payments based on a stated coupon rate and payment of the face amount upon maturity.
Corporate bond
The annual interest rate paid by a bond issuer
Credit Risk
Also called exchange rate risk, it is the risk of diminishing both principal and return on a foreign investment because of unforeseen changes in the relative values of U.S. and foreign currencies. It is considered a type of nondiversifiable (i.e., systematic) risk.
Currency risk
When a firm cannot meet its obligations, it is in danger of defaulting. Default risk tends to be highest among businesses without enough profitable sales, especially when they also have excessive debt.
Default risk
A bond selling below its par value
Discount bond