Personal Finance CHapter 13 and 14 test Flashcards
bond
A bond is an IOU from the government or a corporation to an investor,A bond is an IOU from the government or a corporation to an investor,Bonds are written promises to repay a loan with interest on a specific date.,Lower Risk = Lower Interest (or none at all for certain government bonds)
– Higher Risk = Higher Interest
COUPON RATE
Issuers promise to pay you back a specific rate of interest called the
face value
value of the money put into the bonf
Corporate: bonds
Majorsourceofcorporate borrowing,Can be “converted” to common stock,Bonds issued with a stated face value and interest rate (fixed)
Debentures (corporate)
most common type of bond, backed by the general credit of the corporation.
Mortgage Bonds (corporate)
Secured bond backed by a specific asset
Convertible Bonds
Can be “converted” to common stock
Market Value of Bonds
If market interest rates are up, a bond may sell for less than its face value
– Remember, fixed interest = a rate that won’t change
– If market interest rates are higher than the bond’s fixed interest rate, it won’t be worth as much
• If market interest rates are down, a bond may sell for more than its face value
Premium
– Bonds selling for more than their face value
Discount
– Bonds selling for less than their face value
Savings Bonds
$15,000 limit each year (individuals); $30,000 (joint owners)
– Very liquid and safe – Tax Benefits
• Discount Bonds
– Bought at less the maturity rate value
• Series EE
Bought at 1⁄2 its maturity rate value
– 10 to 30 years
– Receive interest at the time bond is cashed in
– Exempt from local and state taxes
– Federal taxation at time bond is cashed in
US Treasury Bonds
Backedbyfullfaithand credit of the US government
• Whengovernmentdoesn’t collect enough in taxes it issues notes, bills, and bonds to make up the difference.
Municipal Bonds
Issued by local and state governments
• Usually tax exempt
• High minimum investment (usually $5,000 or more)
• Lower interest rate than corporate bonds, but tax benefits can make them more attractive
• Investment grade
– High quality bonds
• Junk bonds
– Low investment ratings or no ratings at all
Mutual funds
A professionally managed group of investments bought using a pool of money from many investors
• Professionally managed through an investment company
• Fund managers buy stocks, bonds, and other securities,Kinds of securities depend on the fund’s objectives
– Aggressive growth stock or more conservative bonds
• Professional fund managers buy and sell according to their interpretation of market conditions, economic conditions, trends.Investors share the profits made (in the form of dividends and capital gains)
Mostly have to purchase $500-$3000 or more initially
Can make regular purchases each month
To take money out, may be able to simply call the company and place an order to sell your shares or request online,Professionally managed
• Don’t have to worry about regularly following the market
• Investment is liquid • Diversifying your
investments
• Don’t need a lot of money to invest
• Growth Fund
Investment goal is to buy stocks that will increase in
value over time
– Select companies that reinvest profit rather than distribute dividends
– Earn income through capital gains, not dividends
• Aggressive Growth Fund
Invests in common stock of less established companies.
– Accept high risk of loss in exchange for a chance to earn high returns
– Earn income through capital gains
• Income Fund
Buy bonds or dividend paying stock that produce
current income now rather than capital gains later – Low to moderate risk (less risky than growth)
– Some specialize in tax exempt bonds
• Growth-Income Fund
Buys common and preferred stock that pay good
dividends and make money (capital gain).
– Moderate risk
– Dividends for current income and capital gains
• Balanced Fund
Invests in a mixture of stocks and bonds rather than
stocks alone (like a Growth and Income fund)
– Low risk
– Current Income and long-term growth with safety
• Money Market Fund
Invests in safe, liquid securities such as Treasury
bills and bonds that mature in 3 weeks to 6 months – Provide current income with little risk
– Preserves principal and has high liquidity
