Home > Flashcards > Finance > 1000

Details Title: 1000 Description: Exam 1 Total Flash Cards: 106 Created: 09/17/2007 08:51:53	To study from this set of flash cards, or to create your own your own study flash cards, register HERE. If you are already a registered user, CLICK HERE.
Cards Term What is the first rule of finance? Definition don't spend more than you make Term What do people save for? Definition - retirement - liquidity and emergency funds - education - major purchases Term What are the 6 steps of the financial planning process? Definition 1. analyze current situation 2. create a list of financial goals 3. identify ways of saving and ivesting to meet those goals 4. choose the best plan and implement it 5. measure performance 6. make changes and adjustments Term Why do we budget? Definition - to know where your money goes - prepare for larger purchases - determine your monthly income - set aside financial commitments - calculate monthly expenses Term What is the latte factor? Definition invest $5 per day for 40 years and you would end up with $523,650 with interest from a savings account Term Who can help you choose the bast plan when investing your money? Definition - Certified Financial Planner (CFP): creates big picture financial plan - Registered Investment Advisor (RIA): fee-based investment management - Insurance agents: make sure you have adequate insurance coverage - Certified Public Accountants (CPA): understand tax consequences of your plan Term Financial intermediaries Definition collect funds from entities who want to save and supplies these funds to entities that want to borrow Term List types of depository institutions Definition - commercial bank - savings institution - credit unions Term List types of non-depository institutions Definition - finance companies - securities firms (brokers, investment banks) - mutual funds - pension funds - insurance companies Term Commercial bank Definition accepts deposits and makes loans - attracts deposits by offering to pay interest to depositors - examples: bank of america, UMB Term Securities firms Definition sell securities (financial instruments that provide evidence of some claim of financial interest) - brokerage firms: transact securities from one investor to another - investment banks: primary market, sells securities to raise capital Term Mutual Funds Definition financial firms that raise funds by selling their own stock to investors, then uses the money raised to purchase securities Term Pension funds 2 plans: Definition Defined benefit plan: calculated based on age, years of employment, salary and others Defined contribution plan: set amount donated each month/ year and then invested thorugh the company - ex: 401k Term Insurance companies Definition underwrite contracts that financially compensate their policyholders in the event of a loss - take premiums from policies and invest them to pay out policy holders when they make claims Term Types of securities from investing in a business: Definition - own entire business - own stock - corporate bonds Term Types of securities from investing in your gorvernment Definition bonds - municipal bonds: bonds through state and local governments usually tax exempt Term Why do we invest in stocks? Definition long-term growth Term Why do we invest in bonds? Definition interest income Term Why do we invest in cash equivalents? Definition safety and liquidity Term Fee-based investment advisors (RIA) Definition - charge a fee for their services - based on the amount of money managed - more assets = lower % fee charged typically Term Commission based investment advisors Definition - recieve commission from the investment they sell you Term What does the monitoring process include? Definition - computing your ROI to evaluate investment performance - reviewing your stated goals and strategies - evaluating current market conditions - reassessing the investments that you now own Term Return on Investment (ROI) Definition profit per period for each dollar invested Term How do we calculate ROI? Definition Holding period return = PRICEend - PRICEbegin + income/ PRICEbegin Term You purchase a share for $24/share and sells for $26/ share a year later. During that year the company pays a $.40 dividend per share. What is the ROI? Definition 26-24 + .40 ----------- = 10% gain 24 Term Risk Definition the variation in future returns (actual return is different from real return) Term Expected return Definition the average return that we would recieve is we were able to invest in it a number of times Term How do we calculate expected return Definition E(r)= (p1 * r1) + (p2 * r2)... p= probability r= return Term What is the expected return? - 25% probability of 0.04 - 25% probability of 0.06 - 25% probability of 0.08 - 25% probability of 0.10 Definition E(r)= (.25*.04) + (.25*.06) + (.25*.08) + (.25*.10) = 7% Term What are some risk free investments? Definition capital preservation and money market instruments Term Name the 5 types of risk Definition - inflation risk - interest rate risk - business risk - market risk - currency exchange risk Term Asset allocation Definition finding the right mix of broad asset classes that will meet your needs for achieving a particular return as well as stay within your willingness to accept risk Term How much of your portfolio should consist of stocks if you're - conservate - moderate - aggressive Definition Conserative: 100 minus your age Moderate: 110 minus your age Aggresive: 125 minus your age Term What are 3 reasons why we hold cash? Definition - transactions motive: we need to make purchases - precautionary motive: financial cushion in case of unforseen circumstances - speculative motive: if you expect prices to fall, you can hold cash until you might be able to purchase investments at a lower price Term What are some examples of cash equivaletns? and why would someone want to invest in a cash equivalent? Definition - savings accounts and CDs - Money market funds - US savings bonds - US treasury bills because they are the safest types of investments Term Calculate the ROI: Purchase 500 shares of Ford stock at $7 Pays $0.05 per share dividend Sell 500 shares of Ford stock at $9 Definition r= 9 - 7 + .05 ----------- = .29 or 29% return 7 Term Which investment portfolio should you choose? - Portfolio 1: 25% at 4% return 25% at 6% return 25% at 8% return 25% at 10% return - Portfolio 2 20% at 50% return 30% at 5% return 30% at -5% return 20% at -10% return Definition Portfolio 1: E(r)= (.25*.04) + (.25*.06) + (.25*.08) + (.25*.10) = 7% Portfolio 2: E(r)= (.20*.50) + (.30*.05) + (.30*-.05) + (.20*-.10)= 8% So you would take portfolio 2 because the Er is higher Term Savings and interest-bearing checking accounts Definition issued by depositary institutions which pay set amount of interest, typically fairly low with low minimums Term Certificates of Deposit (CD) Definition - issued primarily depositary institutions - minimum usually $1000 or higher - pays set amount of interest over time until maturity - penalty for early withdrawal Term What are 3 types of money market funds? Definition - US treasury bills - commercial paper - money market mutual funds Term Us treasury bills Definition - issued by US treasury, maturities in 4, 13, and 26 weeks - minimum denominations of $1000 Term Commercial paper Definition - issued by corporations - under 270 days maturity - minimum investment of $1,000,000 Term Money market mutual funds Definition - invest in high quality money money market securities with lower minimums - maintain price of $1 per share - average around 5% currently Term What are the two main reasons money has value over time? Definition - there is an opportunity cost of money - over time, there are risks associated with holding or not holding money Term Opportunity cost of money Definition the value of foregoing the opportunity to have a given good, service, or activity Term You won $1000 in a raffle. Would you take the money now or in a year? Definition OC of waiting a year to collect the prize money is equal to what you could earn by using the $1000 over the next year (savings account interest you could earn) Term Interest Definition funds a borrower pays a lender for the priveledge of using the lenders money over a certain period (compensates the lender for taking a risk with the borrower) Term What is the formula for interest? Definition interest= principle*rate*time Term A savings acccount has a balance of $5000 and it pays interest of 5% which is paid at the end of the year. What is the amount of interest paid at the end of the year? Definition Principle= 5000 rate= 5% time= 1 year $5000*.05*1 = $250 Term Formula of future value of a single sum Definition FV= PV(1+i)^n Term present value of a single sum Definition PV= FV ---- (1+i)^n Term Future value of annuity Definition FV= PMT * ((1+i)^n -------- i Term Before calculators, what did people do to solve time value of money problems? Definition present value tables Term What are 5 advantages of marketable securities? Definition - marketability: a ready market is available for investors to buy/sell these investments - liquidity: ability to quickly buy/sell - Represent real income-producing assets: usually represent some form of ownership/obligation of a company that produces some real value - Availability of information: info about a company is readily available - relatively low expenses: low costs to buy and sell these investments Term Primary market Definition - corporation issues a security and sell to public to RAISE CAPITAL Term Who issues securities for corporations in the primary market? Definition investment banks Term Secondary market Definition one investor sells a security to another investor Term Who makes transactions of securities in the secondary market? Definition brokers Term stock exchange Definition organization that provides the frameowrk and mechanisms for trading securities thru a centralized location Term What are the three largest stock exchanges? Definition New York Stock Exchange (NYSE) NASDAQ American Stock Exchange Term NYSE Definition - orginally formed in 1792, most powerful stock exchange in the world - over 2600 companies Term NASDAQ Definition - electronic stock exchange - typically smaller companies listed than NYSE - technology companies Term AMEX Definition - traditional stock exchange system (like NYSE) - smaller companies (exchange-traded funds) Term Over the Counter Exchange (OTC) Definition - security traded on something other than a contralized exchange - broker to broker who makes market for security Term What type of investments do OTC exchange do? Definition - most bonds - unlisted stocks, penny stocks, etc. Term How can you buy foreign stocks? Definition - open a foreign account (difficult) - buy American Depositary Receipts (ADRs) Term American Depositary Receipts (ADRs) Definition receipt of a foreign company that trades on a foreign exchange, but ADR trades on a US exchange - EX: sony Term Commodity exchange Definition exchanges that trade futures and options on commodities, interest rates, currency etc. Term Market index Definition - represent portfolios of securities set up to measure market performance - snapshot of certain area of the market - cannot directly invest into an index Term What are examples of market indicies Definition - Dow jones industrial average (DJIA): 30 large US industrial stocks - S & P 500 index: 500 of largest US stocks - Russell 2000: represents smaller US stocks - Wilshire 5000: broad representation of all US stocks - Lehman brothers aggregate bond: US bond market - MSCI EAFE: Europe, Austrailia-Asia, Far East foreign stocks Term bull market Definition rising stock market Term bear market Definition falling stock market Term What is a stock? Definition unit of ownership (equity) in a company Term How do we classify stocks? Definition - size: large, medium, small company - style: growth, value, blend - country: domestic and international Term common stocks Definition securities representing equity ownership in a company, providing voting rights, and entitling owner to a share of the company's earnings through dividend and/or capital appreciation Term Purpose of value stocks Definition - generally pay higher dividends, used for generating income and capital appreciation Term Purpose of grwoth stocks Definition used for capital appreciation Term What are some risks that common stocks have? Definition - higher volatility (risk) that more conservative asset categories - common stockholders have the last rights to a company's assets Term Preferred stocks Definition company capital stock that pays specific dividend that are paid before common stock holders Term Purpose of preferred stocks Definition - tend to offer relatively higher yields that common stock with less price fluctuation - if a company liquidation occurs, preferred stock holders have a greater claim to the company's assets before common stock holders Term Risks of preferred stock Definition - do not have voting rights - dividends may qualify for preferential tax treatment Term What is a bond? Definition debt obligations of governments or corporations Term For a stock, a borrower promises to: Definition - pay interest at a standard rate - return borrowed ammount by maturity date - duration may be short, medium, or long-term Term Purpose for investing in bonds Definition interest income Term Two types of US government bonds Definition - treasury securities - agency bonds Term treasury securities Definition - bonds issued by the US government that are back by the full faith and credit of the US government, and exempt from state and local taxes Term Agency bonds Definition bonds issued by US government agencies, but guaranteed by the government - exempt from state and local taxes but not from federal taxes Term Whats the purpose for investing in US government bonds? What about the risks? Definition capital preservation and generation of income - risks are lower in bond investments, but subject to interest rate risk Term Corporate bonds Definition bond issued by a corporation, usually with higher risk and return than government or municipal bonds Term Purpose for investing in corporate bonds Definition -generate income, preservation of capital - highest claim to company's assets if liquidated Term Muncipal bonds Definition a debt expenditure issued by a state or locality to raise capital, and usually are tax exempt from those local and state taxes Term What is the purpose for investing in municipal bonds? Definition - tax free generation of income and capital preservation - useful in tax accounts and for those in higher tax brackets Term What are the different types of municipal bonds? Definition Revenue: issued by a municipality for a specific project, and supported by revenues of that project General obligation: bonds issued by a municipality that are backed by the credit and taxing power of issuing jurisdiction Term Convertible bonds Definition bonds that can be converted into a predetermined amount of common shares at certain times Term Foreign bonds Definition bonds that are issued by a foreign entity, traded on the foreign market, and demoninated in a foreign currency have higher risks liek currency exchange and geopolitical risks Term How do we buy securities? Definition through and investment brokerage firm Term What are the functions of investment brokerage firms? Definition - handle your sales and purchases - provide investment advice and research - hold your securities in an investment account - lend your money to buy securities Term Qualified accounts Definition - retirement accounts - tax deferred status - individual retirement account (IRA) - 401K: employer sponsored accounts Term Non-qualified accounts Definition - non retirement accounts - corporate accounts: LLC, partnership, Ccorp - trust: revocable living trust, irrevocable living trust, charitable remainder trust - brokerage: individual, joint, cash vs. margin Term What is margin? Definition funds that brokerages lend to buy securities Term Initial margin requirement Definition downpayment to establish margin, now 50% Term maintenence margin Definition minimum account cash value required to maintain value/account Term When placing an order what 3 things do they need to know? Definition - buy or sell security - price - size Term Desribe Buy or sell securities when placing an order Definition Long position: purchase security and hold it because u think the price will go up Short position: sell security you do not have and buy it later to anticipate the price going down Term Properties of size when placing an order Definition number of shares to be purchased - round lot: trade in 100 shares - odd lot: less than 100 shares (charge higher commissions for odd lots) Term properties of price when placing an order Definition market order: execute immediately at best price - buy at ask price, what others will sell it for - sell at bid price, what others will buy for it - spread: the difference between bid and ask