Why Invest Flashcards
How do you calculate ROI?
Profit divided by initial investment
What is the initial loan in a bond called, and what is it called when the bond expires?
Principal
Maturity
How do bond ratings work?
CCC-Ds and are junk bonds, too high risk to loan to due to a high interest rate
Bs and up are safe to invest in, with AAA being the highest rating (or Aaa). It is an inverse relationship due to the fact that the better the rating, the lower the interest rate and therefore higher chance you’ll be paid back
What are the three main reasons we save? What is a rainy day account, and what should be in it?
- Emergencies
- Major purchases
- Retirement
A rainy day account is for if you get fired or something such as C19 happens unexpectedly. It should hold six months of your take home pay
What is liquidity?
How quickly you can turn an asset into cash. For example, your house is your least liquid asset, while your most liquid asset is your checking account, savings, and cash
What is the rule of 72? What do you divide by, and what does it give you?
The rule of 72 is how long it takes to double your money. If you divide by your interest rate, it gives you the amount of years it would take to double your money. If you divide by the number of years you hope to double your money in, you get the interest rate required to do so
What is interest (three answers)?
The charge of borrowing money, usually expressed as a percent
The money a lender earns for providing a loan
The percentage of ownership a stockholder holds in a company
What is compounding interest?
Interest that builds on itself, sometimes called interest on interest. The interest is based on the principal plus any money you have made from previous interest
What is ROI?
ROI stands for return on investment. It is what you earn back on the original investment, usually expressed as a percent.
What type of bonds are not rated?
US Treasury Bonds
What are the three types of bonds?
- U.S. Treasury Bonds: To the US Government, who pay for many things including bridges, roads, national parks, and pay back interest on the national debt
- Corporate: To a company, who uses the money for modernization, technology, paying their employees, takeovers of other companies, and expanding with new plants
- Municipal Bonds: To a state, city, county, or town who uses the money to pay for public projects such as schools, highways, stadiums, and bridges
What is a security?
An instrument that represents financial value
What are some similarities between stocks and bonds?
- Both are investments
- Both are long term
What are some differences between stocks and bonds?
Stocks - Bonds
- No time factor - Expires on maturity
- No interest - Earns interest
- Pays a dividend - No dividends
- Represents
ownership - Is a loan - Issued once - Issued multiple times
- Not rated - Rated
What is a mutual fund?
A professionally managed portfolio made up of stocks, bonds, and other investments
What is a prospectus?
A legal document that is issued before we buy into a mutual fund
What does a portfolio do?
Represents all our assets:
- Stocks
- Bonds
- Mutual funds
- Houses
- Cars
- Jewelry
Why is there cash in a mutual fund? Why is having a mutual fund an advantage?
To pay investors who want to leave the mutual fund
Advantage: Supervised by professional manager
How many times a day are mutual funds traded?
Once a day, value is calculated daily
What is a CD?
A Certificate of Deposit is a financial product offered by banks and credit unions with a fixed interest rate if you loan them money. It relies on the fact that you leave your money in it, as there’s a given time (ex. six months, one year) until you should take it out. Removing the money before then can lead to a penalty (a few months worth of interest to a significant portion of the principal).
