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Personal Finance
Acct 473 Final Exam 1
134
Accounting
04/26/2010

Additional Accounting Flashcards

 


 

Cards

Term
Emergency fund
Definition
An amount of money you can obtain quickly in case of immediate need. it nomally equal to three to nine months' living expenses
Term
A line of credit
Definition
a short-term loan that is approved before you actually need the money.
Term
Speculative investment
Definition
A high-risk investment made in the hope of earning a relatively large profit in a short term. eg: speculative stocks, certain bonds, some mutual funds, some real estate, commodities, options, precious metals, precious stones, and collectible.
Term
Rate of return
Definition
The total income you receive on an investment over a specific period of time divided by the original amount invested.
Term
five risk factors for the investment
Definition
  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

 

Term
Approximate market value
Definition

Dollar amount of annual interest / Comparable interest rate

 

Dollar amount of annual interest = face value x interest rate

Term
Growth
Definition
growth means their investments will increase in value. Often the greatest opportunity for growth is an investment in common stock.
Term
Liquidity
Definition
the ability to buy or sell an investment quickly without substantially affecting the investment's value. Investments range from near-cash investments to frozen investments from which it is impossible to get your money.
Term
Asset allocation
Definition
the process of spreading your assets among several different types of investments (sometimes referred to as asset classes) to lessen risk
Term
William Bernstein said you should have beaten over 90% of all professional moey mangers and with considerably less risk over a 10 to 20 year period if your investment portfolio in
Definition
  1. U. S large-cap stocks
  2. small-cap U. S. stocks
  3. foreign stocks
  4. high-quality u.s. bonds

25% in each

Term
the percentage of your investments is determined by
Definition
  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
Term
Typical investments
Definition

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

Term
Equity capital
Definition
Money that a business obtains from its owners
Term
Two factors before investing in stock
Definition

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.

Term
reasons to purchase the common stock
Definition
  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
Term
Corporate bond
Definition
A corporation's written pledge to repay a specified amount of money, along with interest.
Term
Two major questions before investing in bonds
Definition

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

Term
Mutual fund
Definition
An investment company that pools the money from many investors-its sharholders -to invest in a variety of securities.
Term
You should answer the following questions before making a decision to purchase any property
Definition
  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?
Term
Steps for effective investment planning
Definition
  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
Term
Proxy
Definition
A legal form that lists the issues to be decided at a stockholders' meeting and requests that stockholders transfer their voting rights to some individual or individuals
Term
The record date
Definition
the date on which a stockholder must be registered on the corporation's books in order to receive dividend payments.
Term
Ex-dividend
Definition
A situation when a stock trades "without dividend", and the seller -not the buyer- is entitled to a declared dividend payment.
Term
Stock split
Definition
A procedure in which the shares of stock owned by existing stockholders are divided into a larger number of shares.
Term
Par value
Definition
An assigned (and often arbitrary) dollar value that is printed on a stock certificate.
Term
Cumulative preferred stock
Definition
stock whose unpaid dividends accumulate and must be paid before cash dividends are paid to common stockholders.
Term
Convertible preferred stock
Definition
it can be exchanged, at the stockholder's option, for a specified number of shares of common stock.
Term
Classification of stock investments
Definition
  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.
Term
Earnings per share
Definition

 

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

Term
Price-earning ratio
Definition

 

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.

Term
The dividend payout
Definition

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

 

Dividend payout = Dividend amount/Earnings per share

Term
Dividend yield
Definition

 

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

 

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

Term
Total return
Definition

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

Term
price/earnings - to - growth (PEG) ratio
Definition

 

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.

Term
Annualized holding period yield
Definition

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

Term
Beta
Definition

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.

Term
Book value
Definition

 

Book value = assets - liabilities

                   Shares outstanding

Term
Market-to-book ratio
Definition

 

 

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.

Term
Fundamental analysis
Definition

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.

Term
Technical analysis
Definition

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.

Term
The efficient market hypothesis (EMH)
Definition
An investment theory based on the assumption that stock price movements are purely random.
Term
Primary market
Definition
A market in which an investor purchases financial securities, via an investment bank or other representative, from the issuer of those securities
Term
Investment bank
Definition
A financial firm that assists corporations in raising funds, usually by helping to sell new security issues.
Term
Initial public offering (IPO)
Definition
Occurs when a corporation sells stock to the general public  for the first time.
Term
Secondary market
Definition
A market for existing finacial securities that are currently traded among investors.
Term
Security exchange
Definition
A marketplace where member brokers who repersent investors meet to buy and sell securities
Term
Specialist
Definition
Buys or sells a particular stock in an effort to maintain an orderly market
Term
Over-the-counter (OTC) market
Definition
A network of dealers who buy and sell the stocks of corporations that are not listed on a securitites exchange.
Term
Nasdaq
Definition
An electronic marketplace for approximately 3200 different stocks.
Term
Account executive (stockbroker)
Definition
A licensed individual who buys or sells securities for clients.
Term
Market order
Definition
A request to buy or sell a stock at the current market value
Term
Limit order
Definition
A request to buy or sell a stock at a specified price
Term
Stop order
Definition
An order to sell a particular stock at the next available opportunity after its market price reaches a specified amount
Term
Speculators or traders
Definition
Individuals who routinely buy and then sell stocks within a short period of time
Term
Investors
Definition
Individuals who hold an investment for a long period of time. (at least a year or longer)
Term
Dollar cost averaging
Definition
A long-term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals.
Term
Direct investment plan
Definition
A plan that allows stockholders to purchase stock directly from a corporation without having to use an account executive or a brokerage firm
Term
Dividend reinvestment plan
Definition
A plan that allows current stockholders the option to reinvest or use their cash dividends to purchase stock of the corporation.
Term
Day trader
Definition
An individual who buys and then later sells stocks and other securities in a very short period of time.
Term
Margin
Definition

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.

Term
Selling short
Definition

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.

Term
Option
Definition
The right to buy or sell a stock at a predetermined price during a specified period of time.
Term
A call option
Definition
it is sold by a stockholder and gives the purchaser the right to buy 100 shares of a stock at a guaranteed price before a specified expiration date.
Term
A put option
Definition
It is the right to sell 100 shares of a stock at a guaranteed price before a specified expiration date. 
Term
Corporate bond
Definition
A corporations' written pledge to repay a specified amount of money with interest.
Term
Face value
Definition
The dollar amount the bondholder will receive at the bond's maturity.
Term
Maturity date
Definition
For a corporate bond, the date on which the corporation is to repay the borrowed money
Term
Bond indenture
Definition
A legal document that details all of the conditions relating to a bond issue
Term
Trustee
Definition
A financially independent firm that acts as the bondholders' representative. Usually the trustee is a commercial bank or some other financial institution.
Term
Debenture
Definition
A bond that is backed only by the reputation of the issuing corporation. if the corporation fails to make either interest payments or repayment at maturity, debenture bondholders become general creditors, much like the firm's suppliers.
Term
Mortgage bond ( secured bond)
Definition
A corporate bond secured by various assets of the issuing firm
Term
Convertible bond
Definition
A bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock.
Term
Subordinated debenture
Definition

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.

Term
three advantages by issuing convertible bonds
Definition
  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
Term
Call feature
Definition
A feature that allows the corporation to call in or buy outstanding bonds from current bondholders before the maturity date.
Term
Sinking fund
Definition
A fund to which annual or semiannual deposits are made for the purpose of redeeming a bond issue.
Term
Serial bonds
Definition
Bonds of a single issue that mature on different dates.
Term
Investors purchase corporate bonds for three reasons
Definition
  1. interst income
  2. possible increase in value
  3. repayment at maturity
Term
Registered bond
Definition
A bond that is registered in the owner's name by the issuing company
Term

Bearer bond

 

Definition
A bond that is not registered in the investor's name
Term
Zero-coupon bond
Definition

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.

Term
Definition
Term
Approximate market value
Definition

 

Approximate market value

 

=   Dollar amount of annual interest

        Comparable interest rate

 

Term
Bond ladder
Definition

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.

Term
Five principal types of securitiies issued by U. S . Treasury Department
Definition
  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

Term
Treasury bill (T-bill)
Definition

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.

Term
Current yield for a T - bill
Definition

 

Current yield for a T-bill 

 

= Discount amount

    Purchase price

Term
Treasury note (T-note)
Definition
it is issued in $ 100 units with a maturity of more than 1 year but not more than 10 years. Typical maturities are 2, 5, and 10 years. Interest for treasury notes is paid every six months.
Term
Treasury bond
Definition
it is issued in minimum units of $100 that have a 30 uear maturity. interest is paid every six months.
Term
Treasury inflation-protected securities (TIPS)
Definition
it is sold in minimum units of $ 100 with additonal increments of $ 100 above the minumum. is is sold with 5, 10, or 20 year maturities. the principal of TIPS securities increases with inflation and decreases with deflation, as measured by the consumer price index. When TIPS mature, you are paid the adjusted principal or original principal, whichever is greater. Interest paid twice a year at a fixed rate.
Term
Municipal bond (Muni)
Definition

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.

Term
General obligation bond
Definition
A bond backed by the full faith, credit, and unlimited taxing power of the government that issued it.
Term
Revenue bond
Definition
A bond that is repaid from the income generated by the project it is designed to finance.
Term
Taxable equivalent yield
Definition

 

Taxable equivalent yield =  Tax exempt yield   

                                       1.0 - your tax rate

Term
Clean price
Definition
It represents the price of a bond with no accrued or earned interest.
Term
Dirty price of a bond
Definition
It represents the price of the bond plus accrued interest earned by thebond owner since the last interest payment date. The dirty price is different from the clean price because bond owners earn interest for every day that they own a bond issue.
Term
the bid price
Definition
it is the price a dealer is willing to pay for a governemtn security. The bid price represents the amount that a seller could receive for a government bond.
Term
Asked price
Definition
it represents the price at which a dealer is willing to sell to a government security. The asked price represents the amount for which a buyer could purchase the security.
Term
Yield
Definition
The rat of return earned by an investor who holds a bond for a stated period of time
Term
Current yield
Definition

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.

Term
Time interest earned
Definition

    Time interest earned

 

Operating income before interest and taxes

             Interest expense

 

Higher number is better.

Term
yield to maturity
Definition

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.

Term
Mutual fund
Definition
An investment company that pools the money of many investors-its sharholders-to invest in a variety of securities.
Term
The major reasons investor purchase mutual funds
Definition
  1. Professional management
  2. diversification
Term
A closed -end fund
Definition
A mutual fund whose shares are issued by an investment company only when the fund is orgainzed.
Term
Exchange-traded fund (ETF)
Definition
A fund that invests in the stocks or other securities contained in a specific stock or securities index.
Term
Open-end fund
Definition
A mutual fund whose shares are issued and redeemed by the investment company at the request of investors.
Term
Net asset value
Definition

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

Term
Load fund ( A fund)
Definition
A mutual fund in which investors pay a commisiion ( as high as 8 1/2 percent) every time they purchase shares.
Term
No-load fund
Definition
A mutual fund in which the individual investor pays no sales charge
Term
Contingent deferred sales load (back-end load or B fund)
Definition
A 1 to 5 percent charge that sharholders pay when they withdraw their investment from a mutual fund
Term
12 b-1 fee
Definition

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%

Term
Expense ratio
Definition
All the different managemt fees,, 12b-1 fees, if any, and additional fund operating costs for a specific mutual fund. You need to choos a mutual fund with an expense ratio of 1% or less.
Term
Family of funds
Definition
A group of mutual funds managed by one investment company. Each fund within the family has a different financial objective.
Term
How to read the mutual funds sections in the footnotes
Definition
  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
Term
Income dividends
Definition
The earnings a fund pays to shareholders from its dividend and interest income
Term
Capital gain distributions
Definition
the payments made to a fund's shareholders that result from the sale of securities in the fund's portfolio.
Term
Advantages of investing in mutual funds
Definition
  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
Term
Disadvantages of investing in mutual funds
Definition
  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
Term
Turnover ratio
Definition
The percentage of a fund's holdings that have changed or "been replaced" during a 12-month period. It is a measure of a fund's trading activity.
Term
Four options to purchase shares in an open-end mutual fund from an investment company
Definition
  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
Term
Definition
Term
Direct investment
Definition

Investment in which the investor holds legal title to property.

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

Term
Definition
Term
Indirect investment
Definition

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.

 

Term
Advantages of real estate invesatments
Definition
  1. Hedge against inflation
  2. Limited financial liability
  3. No management headaches
  4. Financial leverage
Term
Disadvantages of real estate invesatments
Definition
  1. Illiquidity
  2. Lack of diversification
  3. No tax shelters
  4. New tax law provisions
Term
Commercial property
Definition
Land and building that produce lease or rental income
Term
Passive activity
Definition
A business or trade in which the investor does not materially participate.
Term
Passive loss
Definition
The total amount of losses from a passive activity minus the toal income from the passive activity.
Term
Syndicate
Definition
A temporary association of individuals or firms organized to perform a specific task that requires a large amount of capital.
Term
Real estate investment trust (REIT)
Definition
A firm that pools investor funds and invests them in real estate or uses thme to make construction or mortage loans.
Term
Participation certification (PC)
Definition
An equity investment in a pool of mortgages that have been purchased by a government agency, such as Ginnie Mae.
Term
Collectibles
Definition
Rare coins, works of art, antiques, stamps, rare books, and other items that appeal to collectors and investors.