Personal Finance Chapter 11 Test

A bond purchased for less than its maturity value.

discount bond

A contract sold by an insurance company that provides the investor a series of regular payments, usually after retirement.

annuity

An investment strategy for spreading risk among different types of investments.

diversification

The use of savings to earn a financial return.

investing

A rise in the general level of prices.

inflation

The chance that an investment's value will decrease.

risk

An SEC-required summary of a corporation's financial results for the year and prospects for the future.

annual report

A unit of ownership in a corporation.

stock

Professional investment planners who are trained to give investment advice.

financial advisors

An investment that represents the debt of a company or a government.

bonds

A professionally managed group of investments bought using a pool of money from many investors.

mutual fund

Contracts to buy and sell commodities or stocks for a specified price on a specified date.

futures

The right, but not the obligation, to buy or sell a commodity or stock for a specified price within a specified time period.

option

Low-priced stocks of small companies that have no track record.

penny stocks

Technique for estimating the number of years required to double your money at a given rate of return.

rule of 72

Name two (2) advantages and disadvantages of using both a discount broker and full-service broker.

Discount Broker-

+ Reduced commissions

+ Convenience

- Hidden fees

- No guidance

Full Service Broker-

+ Analysis and opinion based on their judgements

+ Monthly update letters / broker contact

- Higher commissions

- Contact broker to execute trade

What are the five (5) types of risk?

1. Interest rate risk

2. Political risk

3. Market risk

4. Non-market risk

5. Company or industry risk

List three (3) reasons for investing.

1. Beat inflation

2. Increase wealth

3. Fun and challenging

What is the difference between t-bills, Treasury notes, and Treasury bonds?

Treasury Bills-

Denominations of $10,000

Matures in 1 year or less

Treasury notes-

Denominations of $1,000 - $5,000

Matures in 2 -10 years

Treasury Bonds-

Denominations of $1,000

Matures in 10 - 30 years

1 - Put-and-Take Account: Description and Strategy

Description:

Put your paycheck into an account and take money out as needed

Pay for short-term expenses such as rent, utility bills, food, clothes

Strategy: Safety

2 - Beginning Investments:

Description and Strategy

Description:

20's and early 30's - Conservative & low risk investments

You only have a little money invested so you don't want to lose it

Strategy: Diversification

3 - Systematic Investment:

Description and Strategy

Description:

30's, 40's, and 50's

Investing on a regular basis

Strategy: Long-range return

4 - Strategic Investment:

Description and Strategy

Description:

The careful management of investing alternatives to maximize growth

Goal is to retire in 5-10 years

Strategy: Maximize return

5 - Speculation:

Description and Strategy

Description:

If you have extra money to invest after investing regularly

High risk/high return - you can make or lose a large sum of money very quickly

Strategy: Risk

Number of years for investment to double with 2% return rate.

36

Number of years for investment to double with 7% return rate.

10.29

Number of years for investment to double with 9% return rate.

8

Number of years for investment to double with 15% return rate.

4.8

Number of years for investment to double with 30% return rate.

2.4

Number of years for investment to double with 60% return rate.

1.2

Number of years for investment to double with 92% return rate.

.78

Number of years for investment to double with 100% return rate.

.72

What are the seven (7) sources of financial information?

1. Newspapers

2. Investor Services and Newsletters

3. Financial Magazines

4. Brokers

5. Financial Advisors

6. Annual Reports

7. Online

The greater the risk, the _____ the potential return.

Greater

The smaller the risk, the _____ the potential return.

Smaller

What are the seven (7) rules to follow when investing?

1. Define your goals

2. Go slowly - gather info, don't act on impulse

3. Follow through - start saving now!

4. Keep good records - net worth statement, account balances

5. Get good advice - ask questions, use professional

6. Stay current - watch news, read paper

7. Know your limits - don't risk to much

What are three (3) types of low risk, low return investments?

1. Bonds

2. U.S. Government Savings Bonds

3. Treasury Securities

What are the four types of medium risk, medium return investments?

1. Stocks

2. Mutual Funds

3. Annuities

4. Real Estate

What are the four types of high risk, high return investments?

1. Futures

2. Options

3. Penny Stocks

4. Collectables

T/F The put and take account is an emergency fund?

True

T/F Public corp. are not required to publish annual reports.

False

T/F Market risk is caused by business declines or other events

true

T/F Political risk refers to the effects of higher interest rates when you are locked into lower rates

False

T/F An investor does not need to build trust with a financial adviser; it is important only to communicate goals clearly

false

T/F Investments that require more risk usually provide greater potential returns

true

T/F An investment in real estate is generally considered relatively safe but fairly illiquid

true

T/F beginning investments should include only long range goals such as planning for retirement

false

T/F An investment adviser is responsible for your decisions

false

T/F Forbes and Business Week are examples of financial magazines

True

Which of these risks is associated with business decline?

a) long term risk

b) speculative risk

c) market risk

d) political risk

market risk

Permanent investments are generally made to provide for _________ goals.

a) short-term

b) long-term

c)risk-taking

d) savings

long-term

For how long a period of time are treasury bills issued?

a) 1 year

b) 2 years

c) 10 years

d) 30 years

1 year

The final level or realm of investing is called

a) put

b) take

c) permanent

d) speculation

speculation

Which of the following is a factor in selecting an investment?

a) liquidity

b) growth in value

c) safety

d) all of the above

all of the above

Which of the following is a high risk/ high return investment?

a) annuities

b) stock

c) treasury securities

d) bonds

stock

What is the first step to wise investment practices?

a) go slowly

b) define your goals

c) follow through

d) keep good records

define your goals

Financial advisers should provide you with info about their

a) training/background

b) fees

c) philosophy of investing

d) all of the above

all of the above

Which of the following is a savings plan whereby an individual invests on a regular and planned basis?

a) put and take account

b) systematic investment

c) strategic investment

d) emergency fund

systemic investment

to find the most detailed data about a corp consult

a) financial pages

b) a discount broker

c) an annual report

d) a financial magazine

an annual report