Finance Investment Test

Bond Indenture

The legal document containing complete details of a bond issue

Trustee

Financially independent firm that acts as the bondholder's representative

Sinking fund

Corporations deposit money in this fund annually or semiannually and use the money to pay off the bondholders when the bond issue comes due

Serial Bonds

Bonds of a single issue that mature on different dates

Debenture Bond

Most corporate bonds are debenture bonds, they are unsecured, and backed only by the reputation of the issuing company

Mortgage bond

A corporate bond that is secured by various assets of the issuing firm, usually real estate, they tend to have a lower interest rate because it is secured by collateral.

Subordinated Debenture Bond

An unsecured bond that gives bondholders a claim secondary to that of mortgage or debenture bond holders with respect to interest payments and claim on assets

Convertible bond

A special kind of corporate bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock.

High Yield Bond

A bond that pays a higher rate of interest, but has a higher risk of default

Call Feauture

Corporations can call in or buy back outstanding bonds from current bondholders before the maturity date, (most agree not to call bonds for the first 5 to 10 years after they are issued)

Interest Income

Investors receive interest every six months

Dollar Appreciation of Bond Value (Capital Gain)

May be able to sell the bond to someone else at a higher price if the interest rate on the bond is higher than the market rate.

Maturity

When are bond face amounts repaid?

Registered bonds

Bonds Registered in the owner's name

Registered Coupon Bond

Registered into he owner's name, has to clip the coupon to receive interest.

Bearer Bonds

The person who bears the bond gets the interest. Not registered

Zero-Coupon Bonds

Bonds sold at a deep discount. Do not receive semiannual interest payments.

Purpose of government bonds

Sold to obtain money to finance the national debt, and the ongoing costs of government.

3 levels of government issue bonds

Federal - no federal income tax on the interest

State

Local Municipalities

Treasury Bonds

Government bond with a maturity of 30 years and interest paid every 6 months. (Held until maturity or sold before maturity)

TIPS (Treasury Inflation Protected Securities)

Sold in 5, 10, and 30-year terms. Interest is paid every 6 months. (Held until maturity or sold before maturity)

Series EE & Series E Savings Bonds

Sold at a deep discount, if purchased after 2005 earn a fixed rate of interest currently .30%. Must keep a minimum of 1 year, and if sold before 5 years than you forfeit 3 months of interest.

Municipal Bonds

Issued by state or local governments, use funds for ongoing costs & to build major projects such as schools, airports, and bridges.

General Obligation bonds

Backed by the state or local government that issues them (Equivalent to debenture)

Revenue Bonds

Repaid from money generated by the project that funds finance, such as a toll bridge.

Features of Municipal Bonds

People like to invest in projects close to home

They like insured municipal bonds, or states that guarantee payment

May be callable, but usually not until after the first 5 to 10 years.

Interest earned may be exempt from federal income tax so yield is higher

Bond Rating

Tells the investor the risk category that has been assigned to the bond. Ranging from AAA to D. (Moody's investor service Inc., Standard and Poor's Corporation, and Fitch ratings provide bond ratings)

Investment Grade Bonds

Bonds rated triple-B or higher; many banks and other institutional investors are permitted by law to hold only investment-grade bonds

Junk Grade Bonds

Bonds below BBB that are not as quality of an investment option.

Bond Yield Calculation

Annual income amount/Current market value

Do corporate bonds require a tax on interest

Yes

Do municipal bonds require a tax on interest

No

Corporation

a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.

Different types of stocks

Common and preferred Stocks

IPO

The initial public offering, a corporation's first offer to sell shares to the public

Stock

A unit of ownership in a corporation

Common stock

Gives you the most basic form of ownership, including voting rights on major issues, in a company

Preferred Stock

a nonvoting share of ownership in a corporation that pays a fixed dividend

Board of Directors

a group of persons elected by the stockholders to manage a corporation

Annual Report

a yearly statement of the financial condition, progress, and expectations of an organization

Stock Split

The division of a single share of stock into more than one share. Shown by a "s" on the stock listing

Income Stock

a stock that pays higher-than-average dividends compared to other stock issues

Growth Stock

Stocks in companies that reinvest their profits into the business so that they can grow and expand. They usually pay little or no dividends.

Blue Chip Stock

the stock of a large, well-established and financially sound company that has operated for many years

Penny Stock

Stock that costs less than $5 per share

Defensive Stock

Shares that remain stable and pay dividends during an economic decline

Cyclical Stock

Shares do well when the economy is stable or growing, but poorly during recessions.

Par Value

a value assigned to a share of stock and printed on the stock certificate

Market Capitalization

The total value of a company's issued shares

Earnings

Financial condition of the company

Earning per share

Corporations after-tax earnings divided by the number of shares outstanding. It is a measure of the companies profitability.

Earnings per share formula

After tax income / number of shares outstanding

Price Earning Ratio

Ratio of a company's current share price compared to it's per-share earnings. Shows how much investors are willing to pay per dollar of earning.

Price Earning Ratio Formula

Market Value Per Share / Earning Per Share

PEG Ratio

Price-Earning Ratio / Earnings per Share

Overvalued Stock

Has a high PEG Ratio

Undervalued Stock

Has a low PEG ratio

Bid

the price a dealer is willing to pay for a security

Ask

The price at which a holder of a stock is willing to sell

Spread

the difference between the bid and ask prices

Rate of Return

Tells the investor the percentage gain or loss on an asset based upon his purchase price.

New York Stock Exchange

The largest stock exchange, located in New York City. Most of the companies on this exchange are larger companies with higher-priced stock.

National Association of Securities Dealers Automated Quotation

Worlds first electronic stock market.

Stock exchanges

organizations that facilitate the buying and selling of stock

Stock Exchanges you should know

New York Stock Exchange, NASDAQ, American Stock Exchange, Philadelphia Stock Exchange, Chicago Board of Options.

Over the counter markets (OTC)

Stocks that are bought and sold through brokers, but not through an organized exchange.

Stock Ticker

A device which gives constant updates on the data prices of securities (Used to be called Ticker Tape and was invented in 1867)

How many types of orders are used to trade stocks

3 (Market order, Limit Order, and Stop Order)

Market Order

A request to buy or sell stock at the current market value

Limit Order

A request to buy or sell a stock at a specified price or better

Stop Order

An order to sell a particular stock at the next available opportunity after its market price reaches a specified amount.

Index

A group of similar stocks and bonds to see how well they are doing as a whole.

Dow Jones Industrial Average

Worlds oldest and best known stock index of 30 Large Cap stocks.

Standard and Poors 500

a stock index based on prices of 500 major US corporations in a variety of industries and market sectors

NASQAQ Composit

Represents al the stocks that trade on the NASQAD stock market

Securities and Exhange Commission (SEC)

Regulates the trading of stocks, bonds and the licenses of all brokers, advisors, etc.

Federal Reserve Bank

the central bank of the United States

Jerome Powell

The chairman of the federal reserve bank. Has the power to influence the suppl of money and credit.

Gross National Product

Total value of the goods/services produced by a nation

Recession

when economic activity slows down

Inflation

A general and progressive increase in prices from a rise in spending

Bull Market

Stocks are on an upward trend

Bear Market

Stocks are on a downward trend

Investors

People who hold stocks for a long period of time

Buy and Hold

When an investor buys a stock and holds on to it for a long period of time

Dollar-Cost Averaging

Involves the systematic purchase of an equal dollar amount of the same stock at regular intervals

Direct Investment

Investors buy stock directly from a corporation

Dividend Reinvestment Program (DRIP)

When dividends are automatically used to buy new shares of stock including fractional shares, a method that avoids a broker fee.

Speculator

Someone who is "playing the market" and buying and selling stocks for quick profits

Buying on margin

borrowing money from your broker to buy stock

Selling short

Selling stock borrowed from a broker that must be replaced at a later time

Trading in Options

an option gives you the right to buy or sell a stock at a predetermined price during a specified period of time

Call Option

the option to buy shares of stock at a guaranteed price before a specified expiration date

Put option

the option to sell shares of stock at a guaranteed price before a specified expiration date

Mutual Fund

An investment company which pools the money of many investors to buy a large selection of securities that meet the fund's investment goals