Exam 3

Investment goals must be

Written, Specific, and measurable

The biggest mistake you can make is

not planning for retirement

Consequences of not paying back credit can be:

repossession, being sued, credit score can be damaged, and cost of additional credit

Rule of thumb is to limit consumer credit payments to no more than __% of your net(after-tax) income.

20%

A typical American has x amount of credit cards

3

In the US family, the average balance on credit cards are

$5,897

Paying minimum balance each month is

worse to get out of debt

Emergency funds should be about

3 months living expenses

A line of credit is

a short term loan approved before the money is actually needed

The definition of business cycle is

The increase and decrease in nation’s economic activity.

A speculative investment is

a high-risk investment in the hope of earning a relatively large profit quickly.

If investment income is primary objective you should choose:

municipal bonds, corporate bonds, preferred stocks, or selected common stock issues.

Asset allocation is

The process of spreading your assets among several different type of investments

Equity capital is

Money that a business obtains from its owners

A dividend is

a distribution of money, stock or other property that a corporation pays to stock holders

A corporate bond is

A corporation’s written pledge to pay a specified amount of money along with interest

A government bond is

A pledge written by the government or a municipality to repay a specified sum of money with interesting

Dollar amount of annual interest =

Face value x interest rate

Typical returns are higher for ? and mutual funds which offer high potential returns compared to CDs or ? accounts

Stocks / savings

For investment income choose the following stocks:

Preferred, corporate, municipal

A growth company generally:

pays little or no divide

Real estate is considered to have a low ? factor

Liquidity

Taxes can affect which of the following areas:

Dividends, interest, rental income

Dividends are paid from ___ and must be approved by board of directors. And may even reduce / omit dividends during bad years

Profits

• Utility companies may distribute ?-?% of earnings

70-90%

A proxy is a

legal form that list the issues to be decided at the stockholders’ meeting

The record date is

the date which a stockholder must be registered on the corporation’s books in order to receive dividend payments

A ex-dividend is

a situation when a stock trades without divided and the seller not the buyer is entitled to declared dividend payment

a stock split is

a procedure in which the shares of the stock owned by existing stockholders are divided into larger number of shares

A stock market bubble is

a term used to describe a situation when stocks are trading at prices above their actual worth.

Earnings per share equation

After-tax income / numbers of shares outstanding

Price per earnings ratio equation

Price per share / earnings per share

Price to earnings growth (PEG) ratio equation:

Price-earnings ratio / Annual EPS (earnings per share) growth

Dividend payout is

the percentage of a firm’s earnings paid to stockholders in cash.

Dividend payout equation

Annual div amt / earnings per share

Dividend yield is

The annual dividend amount divided by the investment’s current price per share.

Dividend yield equation

Annual div amt / price per share

Total return equation

Divd + capital gain

Annualized holding period equation

Total return / original investment x 1/N

A beta is

a measured reported in many financial publications that compares the volatility association with a specific stock issue.

Volatility for a stock equation

Beta for a specific stock x increase in overall market

Book value equation

Assets - liabilities / shares outstanding

market price to book ratio equation

market price per share / book value per share

fundamental analysis is

based on the assumption that a stock’s intrinsic or real value is determined by the company’s future earnings.

Technical analysis is

Based on the assumption that a stock market’s value is determined by the forces of supply and demand in stock market.

Efficient market hypothesis (EMH) is

an investment theory based on the assumption that stock price movements are purely random

Primary market

A market in which an investor purchases financial securities via an investment bank or representative

Investment bank

A financial firm that assist corporations in raising funds usually by helping to sell new security issues

initial public offer (IPO) is

when a corporation sells stock to the general public for the first time

Secondary market is

a market for existing financial securities that are currently traded among investors

Securities exchange

where member brokers who represent investors meet to buy and sell securities

designated market maker (DMM)

buys or sells a particular stock in an effort to maintain a orderly market

Over the counter market (OTC)

A network for dealers who buy and sell the stocks of corporations that are not listed on a securities exchanged

Nasdaq

is an electronic marketplace for buying and selling global stocks and securities

A stockbroker or a account executive

is a licensed individual who buys or sells securities for his or her’s clients

A market order

is a request to buy or sell a stock at the current market price

A limit order

is a request to buy or sell at a specified price or better

Dollar cost averaging equation

Total investment / total shares

A day trader

is an individual who buys and then later sells stocks and other securities in a very short period of time

A margin is

when you borrow part of the money needed to buy a particular stock

selling short is

selling stock that has been borrowed from a brokerage firm and must be replaced at a later date

A stock issued by a corporation that has the potential of earning profits above the average profits of all economies is known as

a growth stock

A corporation is under

no legal obligation to buy back shares from the public.

The following events will have a positive impact on the price of a stock?

• increase in future net income

• increase in future sales

Dividend payments must be approved by the company's

board of directors

the following exists to provide estimates of price-earnings ratios and earnings per share?

Earning estimates

The selling price for a share of stock is determined by:

how much a buyer is willing to pay.

Earning estimates exist to provide estimates of which of the following?

• price-earnings ratios

• earnings per share

Beta is a measure that compares the volatility associated with a specific stock issue with the volatility of the:

Standard & Poor's 500 Index.

Which of the following exists to provide estimates of price-earnings ratios and earnings per share?

Earning estimates

The buy-and-hold technique increases value in what two ways

dividends and stock value

A corporate bond is

a corporations written pledge to repay a specified amount of money with interest

Face value / par value is

The dollar amount the bondholder will receive at the bond’s maturity

Bond indenture is

A legally binding contract that details all of the conditions relating to a bond issue.

a debenture is

A bond or unsecured debt instrument that is backed only by the reputation of the issuing corporation.

a mortgage bond is

A corporate bond secured by various assets of the issuing firm.

a subordinated debenture is

An unsecured bond that gives bondholders a claim secondary to that of other designated bondholders with respect to interest payments, repayment at maturity, and assets in the case of bankruptcy.

a convertible bond

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

high-yield bonds

Corporate bonds that pay higher interest but also have a higher risk of default.

call feature

A feature that allows the corporation to call in, or buy, outstanding bonds from current bondholders before the maturity date.

sinking fund

A fund to which annual or semiannual deposits are made for the purpose of redeeming a bond issue at maturity or a percentage of a bond issue before maturity.

serial bonds

Bonds of a single issue that mature on different dates.

bearer bond

A bond that is not registered in the investor’s name.

yield

The rate of return earned by an investor who holds a bond for a stated period of time—usually a 12-month period.

bond ladder

A strategy where investors divide their investment dollars among bonds that mature at regular intervals in order to balance risk and return.

government bond

A written pledge of a government or a municipality to repay a specified sum of money, along with interest.

municipal bond

A debt security issued by a state or local government.

general obligation bond

A bond backed by the full faith, credit, and unlimited taxing power of the government that issued it.

revenue bond

A bond that is repaid from the income generated by the project it is designed to finance.

What is the usual face value for a corporate bond?

$1,000

How does a trustee evaluate the provisions contained in a bond indenture?

They act as a middleman, paying back the bondholders at maturity and if they cannot the trustee brings legal action to protect the bondholders interests

Why do corporations sell bonds?

To obtain borrowed money when they need money for xyz reasons

What are three reasons a corporation would sell convertible bonds

give a company more control over its debt/equity ratios, Issuing convertible bonds may help keep a company's stock price stable, For investors, the convertible structure offers risk-managed participation in the stock market.

What are the methods corporations can use to pay a bond issue

1) a call feature

2) Serial bonds

3) call feature

A typical bond transaction would not include:

advice and information from your discount broker.

Bonds that are judged to be of the best quality would have which rating?

AAA or Aaa

One disadvantage of investing in U.S. treasuries is:

low interest rates.

For Standard & Poor's, the bond ratings generally range from

AAA to D

yield to maturity

A yield calculation that takes into account the relationship among a bond’s maturity value, the time to maturity, the current price, and the dollar amount of interest.

According to Standard & Poor's, bond issues in default would have which rating?

D