Personal Finance CHapter 13 and 14 test

Question 1

bond

Answer 1

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

Question 2

COUPON RATE

Answer 2

Issuers promise to pay you back a specific rate of interest called the

Question 3

face value

Answer 3

value of the money put into the bonf

Question 4

Corporate: bonds

Answer 4

Majorsourceofcorporate borrowing,Can be “converted” to common stock,Bonds issued with a stated face value and interest rate (fixed)

Question 5

Debentures (corporate)

Answer 5

most common type of bond, backed by the general credit of the corporation.

Question 6

Mortgage Bonds (corporate)

Answer 6

Secured bond backed by a specific asset

Question 7

Convertible Bonds

Answer 7

Can be “converted” to common stock

Question 8

Market Value of Bonds

Answer 8

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

Question 9

Premium

Answer 9

– Bonds selling for more than their face value

Question 10

Discount

Answer 10

– Bonds selling for less than their face value

Question 11

Savings Bonds

Answer 11

$15,000 limit each year (individuals); $30,000 (joint owners)
– Very liquid and safe – Tax Benefits

Question 12

• Discount Bonds

Answer 12

– Bought at less the maturity rate value

Question 13

• Series EE

Answer 13

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

Question 14

US Treasury Bonds

Answer 14

Backedbyfullfaithand credit of the US government

• Whengovernmentdoesn’t collect enough in taxes it issues notes, bills, and bonds to make up the difference.

Question 15

Municipal Bonds

Answer 15

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

Question 16

• Investment grade

Answer 16

– High quality bonds

Question 17

• Junk bonds

Answer 17

– Low investment ratings or no ratings at all

Question 18

Mutual funds

Answer 18

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

Question 19

• Growth Fund

Answer 19

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

Question 20

• Aggressive Growth Fund

Answer 20

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

Question 21

• Income Fund

Answer 21

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

Question 22

• Growth-Income Fund

Answer 22

Buys common and preferred stock that pay good
dividends and make money (capital gain).
– Moderate risk
– Dividends for current income and capital gains

Question 23

• Balanced Fund

Answer 23

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

Question 24

• Money Market Fund

Answer 24

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

Question 25

Global Fund

Answer 25

Purchases international stocks and bonds as well as U.S. securities
Moderate to High Risk
Fluctuations in currency exchange rates and political instability affect value

Question 26

Index Fund

Answer 26

Holds stocks or bonds that react the same as the stock or bond markets as a whole do. Usually tied to a specific index (S&P 500, etc.)
Moderate Risk
Goal is to mimic a certain market index

Question 27

Net Asset Value

Answer 27

Value of Portfolio - Liabilities divided by number of shares

Question 28

• The Prospectus

Answer 28

A legal document that offers securities or
mutual fund shares for sale
– Must contain the terms, a summary of the fund’s portfolio of investments, its objectives, and financial statements showing past performance

Question 29

Front-end load

Answer 29

pay commission on your initial purchase (sometimes on reinvested dividends as well)

Question 30

Back-end load

Answer 30

pay commission when you sell your shares

Question 31

No-Load funds

Answer 31

do not charge commission
• May buy directly from the investment companies and no
salespeople are involved

Question 32

Additional Fees –

Answer 32

annual management fees
• Services of professional fund managers and for account maintenance
• 1-1.5% of a fund’s total assets

Question 33

Real estate

Answer 33

land and any buildings on it,land and any buildings on it When you sell you will have to pay taxes on your capital gain
• Risk of having renters
– Damages, security deposit – Vacancy

Question 34

Commercial Property

Answer 34

Land and buildings that produce lease or rental incomes

– Office buildings, stores, hotels, duplexes, apartment buildings

Question 35

• Vacant Land

Answer 35

May hold hoping the value will go up
– May have to pay cash
– Banks sometimes unwilling to issue loans because it is so speculative

Question 36

• Single Family Houses

Answer 36

Renter usually maintains the property as the owne

Question 37

Duplex

Answer 37

building with two separate living quarters
– Triplex, apartment building
– May join an investment group and pool
your cash
• Buy larger, more expensive pieces of property

Question 38

Condominium

Answer 38

individually owned unit in a an apartment style complex with shared ownership on common areas
– Monthly fees
– Renter is not responsible for maintaining

Question 39

Mortgage

Answer 39

loan to purchase real estate

Question 40

Leverage

Answer 40

Using borrowed money to make the purchase (mortgage loan)

– Example: You buy a $100,000 rental property and put 20% down ($20,000), you are borrowing $80,000 from the bank

Question 41

Equity

Answer 41

Equity– The difference between what you owe
and own
– When you sell property, you keep

Question 42

Depreciation-

Answer 42

decline in value of property due to normal wear and tear

– Can deduct depreciation expense on your taxes each year