1. inflation risk - a rise in the general level of prices
2. interest rate risk- associated with government or corporate bonds or preferred stock
3. business failure risk - associated with investments in stock, corporate bonds, and mutual funds that invest in stocks.
4. market risk - because of the behavior of investors in marketplaces, or maybe political or social conditions
5. global investment risk

Dollar amount of annual interest / Comparable interest rate

Dollar amount of annual interest = face value x interest rate

1. U. S large-cap stocks
2. small-cap U. S. stocks
3. foreign stocks
4. high-quality u.s. bonds

25% in each

1. your age
2. investment objectives
3. ability to tolerate risk
4. how much you can save and invest each year
5. the dollar value of your current investmetns
6. the economic outlook for the economy
7. several other factors

Level 1- Financial security: cash, CDs, money-market mutual funds, and u.s. government bonds

Level 2 - Safety and income: U.S securities, selected corporate and municipal bonds, income stocks, and conservative mutual funds

Level 3 - Growth: Growth stocks, growth-oriented mutual funds, and rental property

Level 4 - Speculation: speculative stocks, options, commodities, and other high-risk investments

1. a corporation is not required to repay the money obtained from the sale of stock or to repurchase the stock at a later date

2. a corporation is under no legal obligation to pay dividends to stockholders.

1. a source of income if the company pays dividends
2. growth potential if the dollar value of the stock increases
3. profit potential if the company splits its common stock

1. will the bond be repaid at maturity? the maturity dates for most bonds range between 1 and 30 years.

2. will the corporation or government entity be able to maintain interest payments to bondholders until maturity? bondholders normally receive interest payments every six months

1. Is the property priced competitively with similar properties?
2. What type of financing is available, if any?
3. How much are the taxes?
4. What is the condition of the buildings and houses in the immediate area?
5. Why are the present owners selling the property?
6. Is there a chance that the property will decrease in value?

1. Establish your investment goals
2. Determine the amount of money you need to obtain your goals
3. Speicfy the amount of money you currently have available to fund your investments
4. List different investments that you want to evaluate
5. Evaluate (a) the risk factor and (b) the potential return for all investments
6. reduce possible investments to a reasonable number
7. Choose at least two different investments
8. Continue to evaluate your investment program

1. Blue chip- A safe investment that generally attracts conservative investors
2. Cyclical - A stock that follows the business cycle of advances and declines in the economy.
3. Defensive - A stock that remains stable during declines in the economy.
4. Growth - A stock issued by a corproation that has the potential of earning profits above the average profits of all firms in the economy
5. Income - An investment that pays higher -than- average dividends
6. Large cap - A stock issued by a corporation that has a large capitalization,in excess of $10 bil
7. Midcap - A stock issued by a corporation that has capitalization of b/c $2-10 bil
8. Small cap - A stock issued by a company that has a capitalization of b/c $ 250 mil - $ 2 bil
9. Micro cap - a stock issued by a company that has a capitalization of $ 250 mil or less
10. Penny stock - A stock that typically sells for a low price, often defined as $ 1 or less per share.

Earnings per share =After-tax income/Number of shares outstanding

An increase in earnings per share is a healthy sign for any corporation and its stockholders

PE ratio = Price per share / Earnings per share

the higher the PE ratio, the more investor sare paying for earnings. it is a key calculation that serious investors use to evaluate stock investments.

it is the percentage of a firm's earnings paid to stockholders in cash.

Dividend payout = Dividend amount/Earnings per share

Dividend yield = Annual income amount (annual dividend amount) / Market value

an increase in dividend yield is a healthy sign for any investment.

a calculation that includes not only the yearly dollar amount of income but also any increase or deccrease in the original purchase price of the investment.

Total return = current return + capital gain

PEG ratio = price-earnings ratio / annual EPS growth

a PEG value less than 1 implies that a stock may be undervalued based on its projected growth rate.

Annualized holding period yield

=   Total return                              1          

 Original investment        x              N 

N = Number of years investment is held

an increase in annualized holding period yield is a healthy sign

A measure that compares the volatility associated with a specific stock issue with the volatility of the standard & Poor's 500 stock index.

The beta for the S&P 500 is 1.0. The majority of stocks have betas b/c 0.5 and 2.0. conservative stocks have low betas and speculative stocks have high betas.

Book value = assets - liabilities

                   Shares outstanding

Market-to-book ratio = Market value per share($mkt)

                                 Book value per share

A low market-to-book ratio could mean that the stock is undervalued, and a high could mean that a sotck is overvalued.

An investment practice based on the assumption that a stock's intricnsic or real value is determined by the company's future earnings.

fundamentalists consider (1)the financial strength of the company,(2)the type of industry the company is in (3) new-product development (4)theeconomic growth of the overall economy.

An investment practice based on the assumption that a stock's market value is determined by the forces of supply and demand in the stock market as a whole.

Technical analysts, sometimes called chartists, construct charts or use computer programs to plot past price movements and other market averages.

A speculative technique whereby an investor borrows part of the money needed to buy a particular stock.

The current margin requriement is 50%. it means you may borrow up to half of the total stock purchase price.

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

When you sell shor, you sell today, knowing you must buy, or cover your short transaction, at a later date.

An unsecured bond that gives bondholder a claim secondary to that of other designated bondholders with respect to interest payments, repayment, and assets.

Investors who purchase subordinated debentures usually enjory higher interest rates than other bondholders because of the increased risk associated with this type of bond.

1. the interest rate on a convertible bond is often 1 to 2% lower than that on traditional bonds.
2. the conversion feature attracts investors who are interested in the speculative gain that conversion to common stock may provide.
3. if the bondholder converts to common stock, the corporation no longer has to redeem the bond at maturity

1. interst income
2. possible increase in value
3. repayment at maturity

Bearer bond

A bond that is sold at a price far below its face value, makes no annual or semiannual interest payments, and is redeemed for its face value at maturity.

Be aware two factors (1) even though all of the interest on these bonds is paid at maturity, the IRS requires you to report interest each year-that is, as you earn it, not when you actually receive it. (2)zero-coupon bonds are more volatile than other types of bonds.

Approximate market value

=   Dollar amount of annual interest

        Comparable interest rate

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

To start your bond ladder, you purchase different bonds with maturities spread out over a number of years. The short-term bonds provide a high degree of stability because the bonds are not very sensitive to changing interest rates.

1. Treasury bills
2. Treasury notes
3. Treasury bonds
4. Treasury Inflation-protected Securities (TIPS)
5. U.S. government savings bonds

Treasury Direct conducts auctions to sell treasury securities.

Intertest paid on U.S government securities is taxable for federal income tax purpose but is exempt from state and local taxation

sold in a minimum unit os $ 100 with additional increments of $ 100 above the minimum. currently only sells T-bills with 4 weeks,13 weeks, 26 weeks and 52 weeks maturities.

T-bills are discounted securities, and the actual purchase price you pay is less than the maturity value of the T-bill.

Current yield for a T-bill 

= Discount amount

    Purchase price

A debt security issued by a state or local government. The interest on municipal bonds may be exempt from federal taxes.  Municipal bonds exempt from federal taxation are generally exempt from state and local taxes only in the state where they are issued.

A captial gain that results when you sell a municipal bond before mayturity and at a profit may be taxable just like captial gains.

Taxable equivalent yield =  Tax exempt yield   

                                       1.0 - your tax rate

Determined by dividing the annual dollar amount of income generated by an investment by the investment's current market value.

Current yield on a corporate bond

=  Annual income amount

     Current market value

The higher the current yield, the better.

    Time interest earned

=  Operating income before interest and taxes

             Interest expense

Higher number is better.

It takes into account the relationship among a bond's maturity value, the time to maturity, the current price, and the dollar amount of interest.

   Yield to maturity

                                                  FaceValue-MktValue

  Dollar amount of annual interest+  Number of periods

=                  Market value + face value

                                      2

The higher the yield to maturity, the better.

1. Professional management
2. diversification

The current market value of the securities contained in the mutual fund's portfolio minus the nutual fund's liabilities divided by the number of shares outstanding.

Net asset value=Value of the fund's portfolio-Liabilities

                            Number of shares outstanding

A fee that an investment company levies to defray the costs of advertising and marketing a mutual fund and commissions paid to a broker who sold you shares in the mutual fund.

It calculated on the value of a fund's assets and cannot exceed 1%of the fund's assets per year. for no-load fund, it must not exceed 0.25%

1. "p" means a 12b-1 distribution fee is charged
2. "r" means a redemption charge may be made
3. "t" means both the p & r footnotes apply
4. "s" means the fund has had a stock spolt or paid a dividend

1. Diversification
2. Professional management
3. Ease of buying and selling shares
4. Multiple withdrawal options
5. Distribution or reinvestment of income and capital gain distributions
6. Switching privileges within the same fund family
7. Services that include toll-free telephone numbers, complete recors of all transactions, and savings and checking accounts

1. Purchase/withdrawal costs
2. Ongoing management fees and 12b-1 fees
3. Poor performance that may not match the standard & poor's 500 stock index or some other index
4. Inability to control when capital gain distritutions occur and cmoplicated ta-reporting issues
5. Potential market risk associated with all investments
6. Some sales personner are aggressive and/or un ethical

1. regual account transactions
2. voluntary saving plans-the minimum purchase ranges from $25to 100 for each purchase after the initial investment
3. contractual savings plans- it requires you to make regular purchases over a specified period of time, usually 10-20 yrs. it's referred to as front-end load palns because alomost all of the commisiions are paid in the first few years of the contract period.
4. reinvestment plans-A service provided by an investment company in which income dividends and capital gain distributions are automatically reinvested to purchase additional shares of the fund

Investment in which the investor holds legal title to property.

It includes single-family dwellings, duplexes, apartments, land, and commercial property

Investment in which a trustee holds legal title to property on behalf of the investors.

E.g. Limited parnerships and syndicates, real estate investment trusts, mortgages, and mortgage pools.

1. Hedge against inflation
2. Limited financial liability
3. No management headaches
4. Financial leverage

1. Illiquidity
2. Lack of diversification
3. No tax shelters
4. New tax law provisions