Fin3244 Final Exam

Front 1

return

Back 1

the level of profit from an investment, the reward for investing

Front 2

most common source of return

Back 2

periodic payments (dividends or interest)

Front 3

sources of return

Back 3

1. Current Income
2. Capital Gain

Front 4

current income

Back 4

usually cash or near-cash that is periodically received as a result of owning an investment

Front 5

examples of current income

Back 5

dividends from stocks interest received on bonds, or dividends from mutual funds

Front 6

capital gain

Back 6

the amount by which the proceeds from the sale of an investment exceed its original purchase price

Front 7

capital loss

Back 7

an investment is sold for less than its original purchase price

Front 8

capital gains and losses are preferable as percentage returns than in dollar amounts because

Back 8

allow the direct comparision of different sizes and types of investments

Front 9

total return

Back 9

combining capital gain with current income

Front 10

how are returns preferred to be used? (form)

Back 10

as percentage returns over dollar returns

Front 11

why are returns important

Back 11

variables in investing decisions
allow the comparison of actual or expected gains of various investments
allow us to "keep score"

Front 12

why we measure returns

Back 12

historical performance
or measure future expectations

Front 13

historical performance measurement of a return

Back 13

evaluation of past investment returns
determines average and analyze the trend

Front 14

expected return measurement of a return

Back 14

measure of performance that is what you think the investment will earn in the future
helps determine what you should be willing to pay for it

Front 15

Key factors that affect the level of return

Back 15

1. internal characteristics
2. external forces

Front 16

internal characteristics of level of return

Back 16

the type of investment
quality of management
financing
issuers customer base

Front 17

external forces of level of return

Back 17

fed's actions
shortages
war
price control
political events
general level of price

Front 18

general level of price's affect on returns

Back 18

inflation and deflation

Front 19

inflation

Back 19

up's the price level
positive impact on stocks and fixed income securities
rising interest rates accompany it

Front 20

deflation

Back 20

down's the price level
worse than inflation

Front 21

inflation and interest levels movement

Back 21

move together
inflation rises
interest rates rise

Front 22

general rule of time value and money

Back 22

the sooner you recieve a return on a given investment the better

Front 23

why the sooner you recieve a return the better?

Back 23

because it allows you the option to reinvest and earn more income or the option

Front 24

computational aids for use in time value caculations

Back 24

1. financial tables
2. financial caculators
3. electronic spreadsheets

Front 25

satisfactory investment

Back 25

one for which the present value of benefits equal or exceeds the present value of its cost

Front 26

required rate of return

Back 26

the rate of return that fully compensates for an investments risk

Front 27

three componenets of the required rate of return

Back 27

1. real rate of return
2. risk premiums
3. expected inflation premium

Front 28

required rate of return=

Back 28

real rate or return + expected inflation premium + risk premium

Front 29

real rate of return

Back 29

the rate of return that could be earned in a perfect world where all outcomes were known and certain (no risk)
equilibrium between supply and demand

Front 30

what causes changes in the real rate of return

Back 30

economic conditions
tastes
preferences

Front 31

the average range of the real rate of return

Back 31

.05%-2%

Front 32

expected inflation premium

Back 32

the average ration of inflation expected in the future

Front 33

Risk Free Rate=

Back 33

real rate of return + expected inflation premium

Front 34

risk free return

Back 34

the rate of return that can be earned on a risk free investment
(ex US treaseury bill)

Front 35

most common risk free investment

Back 35

3 month US treasury bill

Front 36

Required Return=

Back 36

risk free rate + risk premium

Front 37

risk premium

Back 37

a return premium that varies depending on specific issue and issuer characteristics

Front 38

issuer characteristics

Back 38

type of vehicle
maturity
features

Front 39

the issue and issuer factors cause investors to require:

Back 39

risk premium above the risk free rate

Front 40

holding period

Back 40

the period of time over which one wishes to measure the return of an investment vehicle
(must be the same length for accuracy)
captures both periodic benefits and changes in value

Front 41

realized return

Back 41

the portion of current income recieved by the investor during the period

Front 42

capital gains returns realized when?

Back 42

only when the investment is actually sold at the end of the holding period

Front 43

paper return

Back 43

the capital gain that is achieved yet not realized

Front 44

negative current income

Back 44

requires you to pay out cash to meet an obligation

Front 45

negative capital gains

Back 45

capital loss from an invesment that declines in market value

Front 46

Holding period return

Back 46

the total return earned from holding an investment for a specified period of time (the holding period)

Front 47

HPR is used

Back 47

with holding periods less than one year

Front 48

HPR=

Back 48

(current income during a period – capital gain (or loss) during a period)
________________________ Beginning investment value

Front 49

Capital Gain or Loss=

Back 49

ending investment- begining investment

Front 50

HPR equation is used for either:

Back 50

measuring the total realized return
estimiating the expected total return

Front 51

HPR advantages

Back 51

easy
understadnable
considers both current income and capital gains compared to beining investment value
overcomes problems of investments of differing sizes
offers relative comparision by dividing the total return by the amount invested
shows the highest return per invested dollar

Front 52

HPR disadvantages

Back 52

fails to consider the time value or money
and is inappropriate for invesments over 1 year

Front 53

Yield or Internal Rate of Return

Back 53

present-valued based measure to determine the compounded annual rate of return earned on investment held for longer than one year

directly compare two investments b/c discounts back to zero

Front 54

if the yield on its investments exceeds or is equal to the required return

Back 54

investment is acceptable

Front 55

if the yield on its investment is lower than the required return

Back 55

unacceptable investment

Front 56

yields can be used to measure

Back 56

single future cash flow
or a stream of future cash flows

Front 57

yield for a single cash flow

Back 57

no periodic income but to provide a single future cash flow at maturity or when the invesment is sold

Front 58

yield for a stream of cash flow investment vehicles

Back 58

income oriented stocks and bonds

Front 59

most accurate approach for a yield of streamed of income

Back 59

based on searching for the discount rate that produces a present value of income just equal to the cost of the investment

Front 60

yield of streamed of income
rate you start with

Back 60

required or minimum reinvestment rate

Front 61

reinvestment rate

Back 61

the rate of return earned on interest or other income received over the relevant investment requirement

Front 62

fully compounded rate of return

Back 62

the earning of interest on interest
*You cant start reaping full potential from your investments until you start earning it *

Front 63

rate of growth

Back 63

the compounded annual rate of change in the value of a stream of income particularly dividends or earnings

Front 64

finding the rate of growth

Back 64

divide the dividend for the earliest year by the dividend of the latest year
answer represents the value of the present value of interest over the period

Front 65

risk

Back 65

the chance that the actual return from an investment varies from the expected return

Front 66

risker investments make

Back 66

higher returns

Front 67

the broader range of possible returns makes

Back 67

greater the investment risk

Front 68

risk return tradeoff

Back 68

the relationship between risk and return in which investors attempt to minimize risk for a given level of return or to maximize return for a given level of risk

Front 69

sources of risk

Back 69

1. Business Risk
2. Financial Risk
3. Purchasing Power Risk
4. Interest Rate Risk
5. Liquidity Risk
6. Tax Risk
7. Market Risk
8. Event Risk
(*currency exhange rates*)

Front 70

business risk

Back 70

the degree of uncertainty associated with an investments earnings and the investments ability to pay the returns to owed investors

Front 71

financial risk

Back 71

the degree of uncertainty of payment resulting from a firms mix of debt and equity

Front 72

whats the effect on financial risk if a firm has a larger portion of debt

Back 72

greater financial risk

Front 73

purchasing power risk

Back 73

the chance that changing price levels (inflation and deflation) will adversly affect investment returns

Front 74

rising prices (inflation) affect on purchasing power

Back 74

reduce purchasing power risk

Front 75

purchasing power

Back 75

the amount a given commodity that can be purchased with a dollar

Front 76

falling price levels (deflation) and its affect on purchasing power

Back 76

increases purchasing power risk

Front 77

purchasing power risk is low with

Back 77

investments whose values move with the general price levels and are most profitable during periods of rising prices
stocks of durable goods

Front 78

purchasing power risk is high with

Back 78

those that provide fixed return and are most profitable during periods of low inflation or declining prices
deposit accounts and bonds

Front 79

interest rate risk

Back 79

the chance that a change in interest rates will adversely affect a securities value

Front 80

interest rate risk especially affects

Back 80

securities that offer fixed periodic returns
and reinvestment of income

Front 81

interest rate changes result from

Back 81

changes in the general relationship between demand and supply of money

Front 82

interest rates and fixed security prices

Back 82

inversely related

Front 83

interest rate risk and short term securities

Back 83

Risk of when short term investments mature they may have to invest the proceeds in lower yielding new short term securities

Front 84

higher interest rate... (value of investmetn)

Back 84

lower value of an investment vehicle

Front 85

liquidity risk

Back 85

the risk of not being able to liquidate an investment conveniently and at a reasonably price

Front 86

less liquid markets are markets where...

Back 86

where demand and supply are small

Front 87

tax risk

Back 87

the chance that congress with make unfavorable changes in tax laws

Front 88

greater tax rates

Back 88

The greater the chance that such changes will drive down the after tax returns and market values of certain investments

Front 89

investments vulnerable to tax risk

Back 89

viritually all
YET especially tax-advantaged investments such as municipal and other bonds, real estate, and natural resources

Front 90

market risk

Back 90

the risk that investments returns will decline because of market forces independent of the given investmetn

Front 91

examples of market risk

Back 91

political, economic, social events and changes in investor’s tastes and preferences

Front 92

market risk embodies

Back 92

tax risk
purchasing power risk
interest rate risk

Front 93

market risk and more volatile price of a security

Back 93

more market risk

Front 94

event risk

Back 94

occurs when something happens to a company that has a sudden and substaintial impact on its financial condition

Front 95

standard deviation

Back 95

the most common single indicator of an assets risk that measures the dispersion (variation) of returns around an assets average expected return
provides a quantitive tool for comparing investment risk based on historical data

Front 96

whats an absolute measure of risk

Back 96

standard deviation

Front 97

whats a relative meaure of risk

Back 97

coefficient of variation

Front 98

measuring risk of a single asset

Back 98

standard deviation
coefficient of variation

Front 99

standard deviation=

Back 99

√((∑▒( Return for Outcome-Average or Expected Income))/(Total Number of Outcomes-1))

Front 100

the greater the absolute dispersion of investments return (reflected in larger variation)...

Back 100

greater the risk

Front 101

coeffecient of variation

Back 101

the measure of the relative dispersion of an assets returns
useful in comparing risk of assets with differing average or expected return

Front 102

coefficient of variation=

Back 102

(standard deviation )
_______________________
(average or expected return )

Front 103

the higher the coefficient of variation..

Back 103

the greater the risk

Front 104

coefficient of variation considers

Back 104

relative size or average return of each investment

Front 105

relationship between the investments returns and standard deviation and coefficient of variation

Back 105

investments with higher return have higher standard deviation and coefficients of variation

Front 106

risk indifferent

Back 106

an investor who does not require a change in return as compensation for greater risk

Front 107

risk adverse

Back 107

investor who does require greater return in exchange for greater risk

Front 108

Risk Seeking

Back 108

-an investor who will accept lower return in exchange for greater risk

Front 109

Steps in the Decision Process: combining return and risk

Back 109

1. Estimate the expected return using present value methods and historical/projected return rates
2. Assess the risk of the investment by looking at historical/projected returns using standard deviation or coefficient of variation of returns
3. Evaluate the risk-return of each investment alternative to make sure the return is reasonable given the level of risk
4. Select the investment vehicles that offer the highest expected returns associated with the level of risk you are willing to accept

Front 110

relationship between expected return and price

Back 110

inverse
prices rises
expected return lowers

Front 111

Real Rate of REturn=

Back 111

risk free rate - expected inflation

Front 112

expected inflation=

Back 112

risk free rate - real rate of return

Front 113

expected inflation premiums look at inflation in terms of...

Back 113

the entire economy not a particular good

Front 114

advantages of IRR

Back 114

uses time value and money
allows investments of differnt investment period to be compared with each other
if the yield is= to or greater than the required return its ok

Front 115

disadvantages of IRR

Back 115

complex cacluation

Front 116

How to caculate standard deviation:

Back 116

1. find mean return (average)
2. from each observation subtract mean)
3. square that number (step 2)
[1-3=numerator]
4. n-1
[4=denominator]

Front 117

residual owners

Back 117

common stock holders
stockholders that are entitled to dividend income and share of the company's earnings only after all other corporate obligations have been met (not guaranteed)

Front 118

appeal of common stocks

Back 118

allow investors to tailor investment to meet needs and preferences
may provide a steady stream of current income thru dividends
may increase in value over time thru capital gains

Front 119

what draws most people in to investing in common stocks

Back 119

capital gain (big returns)

Front 120

stock returns

Back 120

take into account both price behavior and dividend income

Front 121

routine decline

Back 121

a drop of 5% or more in one of the major market indexes
ex: dow jones

Front 122

correction

Back 122

a drop of 10% or more in one of the major market indexes

Front 123

bear market

Back 123

a drop of 20% or more in one of the major market indexes

Front 124

Advantages of stock ownership

Back 124

return opportunities (higher)
easy to boy and sell
modest transaction cost because of price and market info
unit cost is usually in reach for individual investors

Front 125

disadvangtages of stock ownership

Back 125

risk (most significant)
earning and general performance are subject to wide swings (hard to predict)
sacrifice in current income

Front 126

marturity date of common stock

Back 126

none

Front 127

equity capital

Back 127

evidence of ownership position in a firm in the form of shares of common stock and participation in corporate earnings and dividends, an equal vote, and and equal voice in management

Front 128

publically traded issues

Back 128

the shares that are readily available to the general public and that are bought and sold in teh open market

Front 129

issuing new shares:

Back 129

public offering
rights offering

Front 130

public offering

Back 130

the most widely used to issue shares
the corporation offers the investing public a certain number of shares of stock at a certain price

Front 131

rights offering

Back 131

offering existing shareholders the first opportunity to the new shares
gives them the right but not obligation

Front 132

net result of rights and public offering

Back 132

the same
firm ends up with more equity in its capital structure and the number of shares outstanding

Front 133

stock spin off

Back 133

occurs when a company gets rid of one of its subsidaries or divisions and creates a new standalone company and distributes stock in that company to its existing shareholders

Front 134

when are stock spin offs executed

Back 134

when companies believe the subsidary is no longer a good fit or if they feel theyve become too diversified and want to focus on their core products

Front 135

stock split

Back 135

increasing the number of shares outstanding by exchanging a specified number of new shares for each outstanding share of stock

Front 136

when is stock splitting used

Back 136

when it wants to enhance its stocks ability trading appeal by lowering its market price

Front 137

2 for 1 split

Back 137

2 new shares for 1 old

Front 138

treasury stocks

Back 138

the shares that have been sold and repurchased by the issuing firm

Front 139

why a company uses treasury stocks

Back 139

reduce the number of shares when they view it as undervalued in the market place
makes the stocks more attractive investmetn

Front 140

reasons treasury stocks are kept by the firm

Back 140

merger and acquisitions
to meet employee stock option plans
means of paying stock dividends
prop up the price of an undervalued stock (public reacts)

Front 141

classified common stock

Back 141

each classification entitles shareholders to different privileges and benefits
each differs

Front 142

uses of classifications of common stock

Back 142

denote different voting rights
denote different dividend payouts
allow a small group to control

Front 143

round lot

Back 143

100 shares of stock or mulitples there after

Front 144

odd lot

Back 144

less than 100 shares of stock

Front 145

the worth of a share of common stock

Back 145

par value
book value
market value
investment value

Front 146

par value

Back 146

the state or face value of a stock
relatively useless

Front 147

book value

Back 147

the amount of a stockholder equity in the firm
used in stock valuation
indicates the amount of stock holders funds to finance in firm

Front 148

book value=

Back 148

firms assets-firms liabilities

Front 149

market value

Back 149

the current market price of an issue in the market currently
indicates market as a whole have assessed the value of a stock

Front 150

market capitalization

Back 150

the market value of the firm itself found by multiplying the market price of the stock by the number of shares outstanding

Front 151

investment value

Back 151

indicates the work that investors place on a stock (what they thing that the stock should be traded for)
most important for stockholder
based on expectation of risk and return
max price they should pay

Front 152

over the long haul what provides the bigger source of return for common stock

Back 152

capital gains but can be uncertain and lead to capital loss

Front 153

more certain source of return for common stock

Back 153

dividends (miight be more attractive cause they are less risky)

Front 154

tax rate of dividends and capital gains

Back 154

15%

Front 155

dividend payment

Back 155

quarterly basis
decided how much by firms board of directors and payment dates

Front 156

what does the board look at when deciding dividend payment

Back 156

1. The firms earnings (EPS)
2. The firms growth prospects (needs earnings to help finance expected growth)
3. The firms cash position
4. Meeting all legal and contractual constraints
5. Consider certain market effects and responses (after internal matters)
6. Meet the dividend expectations of its share holders

Front 157

Earnings per share

Back 157

ESP the measure of the amount of annual earnings available to stockholders stated in a per share basis

Front 158

EPS=

Back 158

(net profit after taxes-preferred dividends)/(number of shares of common stock outstanding )

Front 159

date of record

Back 159

the date on which the investor must be a registered shareholder of the firm to be entitled to a dividend
the day the firm looks at it

Front 160

holders of record

Back 160

the stockholders that hold it on the date of record

Front 161

payment date

Back 161

the actual date of payment of dividends
set by the board of directors that follows the date of record by one or two weeks

Front 162

Ex dividend date

Back 162

dictates whether you were an official shareholder and therefore eligibile to recieve the declared dividend

Front 163

if sold on or after the ex dividend date

Back 163

old owner recieves the dividend

Front 164

if sold before the ex dividend date

Back 164

new owner/ buyer will recieve the dividend

Front 165

types of dividends

Back 165

1. cash dividends
2. stock dividends
3. rarely but can be stock spinoffs or samples of a companies products

Front 166

cash dividends

Back 166

payment of dividend in cash
most common
tend to increase over time as earnings grow

Front 167

dividend yield

Back 167

a way of assessing the amounts of dividends recieved
the measure of the dividends on a relative (%) basis rather than an absolute ($) basis

Front 168

dividend yield=

Back 168

annual dividends received per share
_________________________
current market price of the stock

Front 169

dividend pay out ratio

Back 169

describes the portion of earnings per share (EPS) that is paid out in dividends

Front 170

divident pay out ratio=

Back 170

dividends per share
_______________
earnings per share

Front 171

stock dividend

Back 171

payment of a dividend in the form of additional shares of stocks
really has no value because they represent a reciept of somethig already owned
total market value remains the same

Front 172

when are stock dividends taxed

Back 172

not until you sell the stock

Front 173

Dividend Reinvestment plan

Back 173

DRIP corporate sponsored programs in which shareholders can have their cash dividends automatically reinvested into additional shares of the companys common stock

Front 174

Advantages of DRIPS:

Back 174

conveient and inexpensive way to accumulate capital
free of brokerage comission fees
over 1,000 comapnies offer
use dollar cost averaging

Front 175

dollar cost averaging

Back 175

opposite of market timing done through dividend reinvestment plans

Front 176

DRIPS and taxes

Back 176

even though the dividends take the form of new additions of stock you must still pay taxes on them as if they were cash dividends

Front 177

types of stocks

Back 177

1. Blue chip stocks
2. Income stocks
3. Growth stocks
4. Tech stocks
5. Speculative stocks
6. Cyclical stocks
7. Defensive stocks
8. Mid cap stocks
9. Small cap stocks

Front 178

blue chip socks

Back 178

stocks that are unsurpassed in quality and have a long and stable record of earnings and dividends
issued by large well established firms and have impeccable financial credientials

Front 179

income stocks

Back 179

stocks with high and sustained records of paying out higher than average dividends

Front 180

growth stocks

Back 180

shares that have experienced and are expected to continue experiencing consistently high rates of growth in operations and earnings

Front 181

tech stocks

Back 181

represent the technology sector of the market

Front 182

speculative stocks

Back 182

shares that lack sustained records of success but still offer the potential for substantial price appreciation

Front 183

cyclical stocks

Back 183

issued by companies whose earnings are closely linked to the general level of business activity
move up and down with the business cycle

Front 184

defensive stocks

Back 184

stocks whose prices remain stable or even increase when general economic activity is tapering off
less affected than average issue by downsizing in the business cycle

Front 185

market capitilzation caculated

Back 185

as the market price of the stock times the number of shares outstanding

Front 186

stock size is based on

Back 186

market cap

Front 187

categories in $ of small cap, mid cap and large cap

Back 187

small cap: less than $1 billion
mid cap: $1 billion to $4 or $5 billion
large cap: more than $4 or $5 billion

Front 188

large cap stocks

Back 188

fewest yet take up 80-90%

Front 189

mid cap stocks

Back 189

offer investors attractive return opportunities
good sized companies
offer some of the safety of large caps
solid balance sheets, modest levels of debt, histories of steady profit growth

Front 190

small cap stocks

Back 190

small companies to be in a class by themselves in terms of attractive return opportunities
generally less than $250 million
not a lot of outstanding stocks
arent widely traded

Front 191

category of small cap stocks

Back 191

initial public offerings (IPO's)

Front 192

IPO's in terms of small caps

Back 192

difficult to buy
high risk investments
investors who can tolerate substaintial risk exposure

Front 193

US equity market makes up

Back 193

50% of the world markets

Front 194

six countries make up

Back 194

80% of the worlds market

Front 195

largest equity market in the world

Back 195

US

Front 196

going global in investing

Back 196

buying shares directly in foreign markets
buying american depository shares
buying international mutual funds

Front 197

international investing requires investors to be right on these factors

Back 197

the right stock
the right market
the correct direction for currecny exchange rate flucuations

Front 198

common stocks can be used as: (relating to investment strategies:

Back 198

1. A “storehouse” of value
2. As a way to accumulate capital
3. As a source of income

Front 199

storage of value

Back 199

rank safety of principle as most important stock selection criteria
Quality conscience
Gravitate toward blue chips and other non speculative shares

Front 200

accumulation of capital

Back 200

use capital gains and/dividends that stocks provide to build up their wealth
Growth stocks or income shares or both to do so

Front 201

source of income

Back 201

dependable flow of dividends is essential
High yielding, good quality income shares are preferred

Front 202

investment strategies:

Back 202

1. Buy and hold
2. Current income
3. Quality long term growth
4. Aggressive stock management
5. Speculation
6. Short term trading

Front 203

investment strategies for storage of value:

Back 203

buy and hold
current income
quality long term growth

Front 204

investment strategies for acculumation of capital

Back 204

any depending on time and temprament

Front 205

investment strategy for source of income

Back 205

current income strategy

Front 206

buy and hold

Back 206

most basic
most conservative
placing money in secure investment outlet and watch it grow over time
high quality stocks
value oriented investors

Front 207

current income strategy

Back 207

diserable because dividends increase over time
safety of principle and stability of income are vital
capital gains secondary of imporance
quality income shares
earn high and safe returns

Front 208

quality long term growth

Back 208

less conservative
capital gains are primary source of income
fair amount of trading
high quality growth stocks
chance for price appreciation
greater risk
amount of return>source of return

Front 209

total returns approach

Back 209

variation of quality long term growth strategy
long term returns considering dividends and capital gains

Front 210

aggressive stock management

Back 210

seeks attractive rates of return through a fully managed potfolio
trades in and out
returns from capital gains
shorter investment horizon
substaintal risk and trading costs

Front 211

speculation and short term trading

Back 211

least conservative
sole objective is capital gains
shorter the better
constantly switching
so much risk
yield little or no profit

Front 212

bonds

Back 212

liabilities, public IOU's where bond holders are actually lending money to the issuer
negiotable, publically traded, long term debt investmetns

Front 213

why are bonds considered fixed securities?

Back 213

becasue debt payments of the issuers are fixed
pay fixed amount of interest periodically
repay a fixed amount of principle at maturity

Front 214

bonds generate two types of income

Back 214

generous amount of current income
and used to generate capital gains

Front 215

current income of bonds

Back 215

interest payments over the life of the issue

Front 216

capital gains of bonds

Back 216

earned whenver market interest rates fall

Front 217

relationship between bond prices and interest rates

Back 217

inverse

Front 218

what drives the bond market

Back 218

interest rates-single most important force

Front 219

interest rates determine what of a bond

Back 219

the amount of current income investors will receive
and the amount of capital gains or losses bondholder will incur

Front 220

total returns

Back 220

current income and capital gains or losses

Front 221

advantage of bonds

Back 221

low risk
high levels of current income
desirable diversificaation properties

Front 222

disadvantage of bonds

Back 222

comparative returns

Front 223

comparative returns

Back 223

(relative to stocks) there is a big give up in returns (which is the price you pay for the bigger reduction in risk)

Front 224

when bond markets are bearish

Back 224

interest rates are high and rising

Front 225

when bond markets are bullish

Back 225

interest rates are falling and low

Front 226

why do people buy bonds

Back 226

current income and or for the stability they bring to the portfolio (diversification)

Front 227

types of risk for bonds

Back 227

interest rate risk
purchasing power risk
business/financial risk
liquidity risk
call risk

Front 228

interest rate risk for bonds

Back 228

#1 source of risk (b/c major source of price volatility)
translates into market risk
affects all of the market

Front 229

purchasing power risk for bonds

Back 229

accompanies inflation

Front 230

when inflation takes off what effect does it have on bond prices and purchasing power risk

Back 230

purchasing power risk rises
bond yield lags behind inflation rates

Front 231

business/financial risk for bonds

Back 231

the risk that the issuer will default on interest and or principal payments
AKA credit risk
related to the quality and finanical integrity of the issuer

Front 232

liquidity risk of a bond

Back 232

the risk that a bond will be difficult to unload at a reasonable price if you want to sell it

Front 233

call risk

Back 233

prepayment risk
the risk that a bond will be "called" or retired long before its schelduled maturity date

Front 234

when are bonds usually called

Back 234

when interest rates take a big fall

Front 235

result of the call risk of investor/bondholder

Back 235

will have to find another place for investment funds (reinvest with lower yields)
have a disruption in cash flow and reduced rate of return

Front 236

bondholders returns

Back 236

interest and principal payments

Front 237

fixed claim on the issuer's income AKA

Back 237

periodic interest payments

Front 238

fixed claim on asset of the issuer
AKA

Back 238

equal to the repayment of the principal at maturity

Front 239

how often do bonds pay interest

Back 239

every six months

Front 240

coupon

Back 240

the annual interest income that the issuer will pay to the bondholder

Front 241

current yield

Back 241

a measure of the annual interest income that a bond produces relative to its prevailing market price

Front 242

current yield=

Back 242

annual coupon rate/market price of the bond

Front 243

principal

Back 243

AKA par value
the amount of a bond that must be repaid at maturity

Front 244

face value

Back 244

always stays at the principal rate and never changes

Front 245

coupon rate changes

Back 245

always stays at the percent given on the original bond

Front 246

coupon=

Back 246

face value X coupon rate

Front 247

current interest rate of bond

Back 247

change with market

Front 248

current market prices of bond

Back 248

change

Front 249

if demand increases of a bond

Back 249

price goes up
interest rates go down
market rate goes down

Front 250

maturity date

Back 250

date on which a bond matures and the principal must be repaid
fixed

Front 251

what determines a note from a bond

Back 251

maturity

Front 252

note

Back 252

debt security that is orignally issued with a maturity of 2-10 years

Front 253

typical bond maturity

Back 253

more than 10 years

Front 254

the price of a bond is the function of

Back 254

its coupon
its maturity
and the movement of the market interest rate

Front 255

premium bond

Back 255

a bond that sells for more than its par value

Front 256

premium bonds result from

Back 256

market interest rate dropping below the bond's coupon rate

Front 257

discount bonds

Back 257

a bond that sells for less than its par value

Front 258

discount bonds result from

Back 258

the market interest rate rising above the bond's coupon rate

Front 259

the extent to which bond prices move depend on both

Back 259

the direction of change in interest rates and the magnitude of change

Front 260

greater change in interest rates mean what for bond prices

Back 260

greater swings

Front 261

bonds with lower coupon maturities have...

Back 261

lots of price volatlilty
and are more responsive to changes in market interest rates

Front 262

all bonds are priced at

Back 262

a percentage of par

Front 263

what causes a call

Back 263

market interest rates to drop

Front 264

call

Back 264

the issues is being retired early before the maturity date

Front 265

call feature

Back 265

stipulates whether and under what conditions a bond can be called in for retirement prior to maturity
every bond has one

Front 266

types of call features

Back 266

1. freely callable
2. noncallable
3. deferred call

Front 267

freely callable

Back 267

issuer can prematurely retire a bond at any time

Front 268

noncallable

Back 268

issuer is prohibited from retiring the bond prior to maturity

Front 269

deferred call

Back 269

the issue cannot be called until after a certain length of time has passed from the date of issue

Front 270

why are call features placed on bond

Back 270

benefit the issuer

Front 271

call features are most often used

Back 271

to replace one issue with another that carries a lower coupon benefiting the issuer by having a lower annual interest cost

Front 272

what is used to attempt to compensate investors who find their bonds called out from under them

Back 272

call premium

Front 273

call premium

Back 273

the amount added to a bond's par value and paid to investors when a bond is retired early
issuer pays

Front 274

call price

Back 274

the amount the issuer must pay to retire the bond prematurely

Front 275

call price=

Back 275

par value + call premium

Front 276

refunding provision

Back 276

some bonds carry
like a call feature but the prohibit just one thing
the premature retirement of an issue from the proceeds of a lower coupon bond

Front 277

bonds can be differientated by the type of collateral issued: types:

Back 277

1. senior bonds
2. junior bonds

Front 278

senior bonds

Back 278

secured obligations which are backed by legal claim on some specific property of the issuer

Front 279

types/examples of senior bonds

Back 279

mortgage bonds
collateral trust bonds
equiptment trust certificates
first and refunding bonds

Front 280

mortgage bonds

Back 280

secured by real estate
hard to value because you dont know the worth of a house

Front 281

collateral trust bonds

Back 281

backed by financial assets owned by the issuer but held in trust by a third party
risky b/c value can change

Front 282

equiptment trust certificates

Back 282

secured by specific pieces of equipment such as rail cars or airplanes

Front 283

first and refunding bonds

Back 283

basically a combo of first mortgage and junior lien bonds

Front 284

junior bonds

Back 284

backed by the promise of the issuer to pay interest and principal on a timely basis

Front 285

income bond

Back 285

most of all junior bonds
unsecured debts required that the interest be paid only after a certain income has been earned

Front 286

types/examples of junior bonds

Back 286

income bond
debenture
subordinated debentures

Front 287

debentures

Back 287

no collateral other than the good nature of the issuer

Front 288

subordinated debentures

Back 288

have on income secondary to the debenture

Front 289

unsecured debt (bond)
secured debt

Back 289

junior unsecured
senior secured

Front 290

bond ratings

Back 290

a letter grade that designated investment quality that is assigned to an issue on the basis of extensive professionally conducted financial analysis
indicate the amount of risk

Front 291

main bond rating firms

Back 291

moodys
S&P

Front 292

higher bond rating=

Back 292

more profitable companies that rely less on debt as a form of financing, are more liquid, have stronger cash flows, have no trouble servicing their debt in a prompt and timely fashion

Front 293

split rating

Back 293

differing ratings given to a bond issue by two or more rating agencies

Front 294

bond market characteristics

Back 294

over the counter in nature
big
far more stable than stock
growing rapidly

Front 295

what makes a bond market stable

Back 295

measured on a daily basis

Front 296

investment grade

Back 296

rating are received by financially strong companies

Front 297

junk bond ratings

Back 297

recieved by companies making payments but default risk is high
very risky with high returns

Front 298

higher rated bonds have

Back 298

less default risk
pay lower interest rates

Front 299

four major segments of bonds according to the type of issuer

Back 299

1. treasury
2. agency
3. municipal
4. corporate

Front 300

treasuries

Back 300

dominate force in the fixed income security market if not most popular best known
backed by "full faith and credit" of us gov
highest quality
$1000 denominations
noncallable securities
issued at regularly schelduled auctions

Front 301

types of treasuries

Back 301

notes
bonds
inflation indexed securities

Front 302

treasury notes

Back 302

us debt securities that are issued with maturities of 2,3,5, and 10 years
(2-10)

Front 303

treasury bonds

Back 303

us debt securities taht are issued with maturities of 20- or 30- year

Front 304

taxes of treasuries

Back 304

subject to normal federal income tax EXEMPT from state and local taxes

Front 305

Treasury inflated index obligations (treasury inflated protected seurities)

Back 305

TIPS- issued notes with 10 year maturities and as bonds with 30 year maturities and offer investors the opportunity to stay ahead of inflation by periodically adjusting their returns for an inflation that has occurred

Front 306

2 ways tips provide protection against inflation

Back 306

1. principal value of the bond goes up over time
2. the annual interest income goes up each year (in tandem with principal value)

Front 307

advantage of TIPS

Back 307

even though the coupon rates are fixed for the life the size of the coupon payment will increase over time as the par value goes up

Front 308

what is the effect of coupon rates of TIPs being set low

Back 308

provides investors with real reaturns

Front 309

agency bonds

Back 309

debt securities issued by various agencies and organizations of the US gov
not an obligation of the US treasuries
high quality
almost no default risk
provide yields above market rate which increase returns w/o change in risk
normally noncallable

Front 310

types of agency bonds

Back 310

1. goverement sponsored (6)
2. federal agencies (24+)

Front 311

most agency bonds support

Back 311

argiculture or housing

Front 312

municipal bond

Back 312

issues of states, counties, cities, and other political subdivisions (schools and water and sewer districts)
individual investors play major roll (40%)
offen used as serial obligations

Front 313

serial obligations

Back 313

the issue (municipal bond) is broken down into a series of smaller bonds each with its own maturity date and coupon

Front 314

municipal bonds are brought into the market as

Back 314

revenue bonds
general obligation bonds

Front 315

revenue bond

Back 315

serviced by the income generated from specific income producing products
vast majority
no funds issuer doesnt have to pay
more risk higher yields

Front 316

general obligation bonds

Back 316

backed by the full faith credit and taxing power of the issuer
required to be serviced in a timely fashion irrespective of the level of tax income generated by municipality

Front 317

municipal bond guarantees

Back 317

a party other than the issuer assures the bond holder that principal and interest payment will be made in a timely manner

Front 318

collateral the 3rd party puts on the municipal bond guarantees

Back 318

form of insurance placed on the bond at the date of the issue that is nonrevocable over the life of the obligation which improves the quality

Front 319

three principal insurers of municipal bonds

Back 319

1. municipal bond investor assurance corporation (MBIA)
2. American municipal bond assurance corporation (AMBAC)
3. Financial guaranty insurance company (FGIC)

Front 320

tax advantage of municipal bonds

Back 320

tax free/ tax exempt bonds
interest income is exempt from federal income taxes
obligations are also exempt from state and local taxes in the state of issue

Front 321

why are individual investors the biggest buyers of municipal bonds

Back 321

tax free

Front 322

capital gains of municipal bonds

Back 322

not exempt from taxes

Front 323

tax advantage of municipal bond varies with

Back 323

the level of income
higher income more attractive the municipal bonds are

Front 324

taxable equivalent yield

Back 324

what we compute to determine the level of return a fully taxable bond would have to provide in order to match the after tax return of lower yielding tax free issue

Front 325

taxable equivalent yield=

Back 325

(yield on municipal bond)/(1-federal tax rate )

considers only federal taxes

Front 326

taxable equivalent yield only applies when

Back 326

1. to states with no income tax
2.situations where the investor is looking at an out of state bond
3. where the investor is comparing a municipal bond to a treasury/ agency bond

Front 327

taxable equivalent yield for both federal and state taxes=

Back 327

(municipal bond yield)/
(1-[federal state tax rate+state tax rate(1-federal tax rate)])

Front 328

corporate bonds

Back 328

interest semiannually
$1000 denominations
nongoverment agencies
wide variety available (quality and types)
provide higher returns that gov bonds due to higher risk

Front 329

corporate bonds are issued from four major segments

Back 329

– Industrials
– Public utilities
– Rail and transportation bonds
– Financial issues

Front 330

four types of speciality issues

Back 330

1. Zero-coupons
2. Mortgage backed securities
3. Asset backed securities
4. High yield junk bonds

Front 331

zero coupon bonds

Back 331

bonds with no coupons that are sold at a deep discount from their par values and then increase in value over time at a compounded rate of return
worth more at maturity
cheaper the greater return

Front 332

main attraction of zero coupon bonds

Back 332

pay nothing to the investor until maturity and so the investor doesnt have to worry about reinvesting coupon income twice a year
(rate of return is locked in)

Front 333

disadvantage of zero coupon bonds

Back 333

if the rate doesnt move up over time the you wont be able to participate in hight return
subject to price volatility
must report interest as it is accrued even though you dont get it

Front 334

zero coupon bonds are issued by

Back 334

corporations
municipalities
federal agencies

Front 335

mortgage backed bond

Back 335

a debt issued that is secured by a pool of residential mortgages
principal and interest paid monthly
self liquidating

Front 336

self liquidating

Back 336

since a portion of the principal is recieved each moth at maturity there is no big principal (problem)

Front 337

collateralized mortgage securities

Back 337

mortgage backed thats divided into tranches or classes of investors
investors can choose the term of investment
complex

Front 338

asset backed securities

Back 338

backed by pools
issued by corporations
loans
high yields
high credit quailty
short maturity
interest and principal paid monthly

Front 339

junk bonds

Back 339

high speculative secutiries that have recieved low sub investnemtn grade ratings but have high yields

Front 340

types of dollar denominated bonds

Back 340

yankee bonds
eurodollar bonds

Front 341

yankee bonds

Back 341

bonds issued by foreign governments or corporations that are issued and traded in the US registered with the SEC and all transactions are in us dollars
no currency exchange rate
highly competitive yields
traded on OTC

Front 342

eurodollar bonds

Back 342

bonds that are issue and traded outside of the US denominated in US dollars NOT registered with the SEC
aimed at insitutional investors

Front 343

mutual fund

Back 343

a type of financial service organization that recieves money from its shareholders and then invests those funds in a diversified portfolio of securities

Front 344

mutual fund investors

Back 344

become part owners of a widely diversified portfolio of securities
only have to decide on which fun the rest up to the professional money manager

Front 345

professional money manger and mutual fun

Back 345

make the decisions for the investor in a mutual fund

Front 346

mutual funds appeal to

Back 346

inexperience and experienced
all types of investors

Front 347

pooled diversification

Back 347

process where individuals pool their resources for the collective benefit of all the contributors
reduces risk

Front 348

as the securities move up and down in price, the market value of a mutual fund

Back 348

moves accordingly

Front 349

advantages of mutual funds

Back 349

1. portfolio diversification
2. full time professional management
3. modest capital outlay
4. convenience

Front 350

advantage of mutual fund full time professional management

Back 350

dont have to watch it on a day to day basis, management offers better expertise

Front 351

advantage of mutual fund modest capital outlay

Back 351

services taht mutual funds offer make them appealing to many investors

Front 352

services that mutual funds offer that make them appealing (modest capital outlay)

Back 352

automatic reinvestment of dividends
withdrawal plans
exchange priveldges

Front 353

disadvantages of mutual funds

Back 353

1. costly and involve transaction costs
2. mutual fund performance depends on market performance

Front 354

disadvantage of mutual funds costly and involve transaction costs

Back 354

sizable commission fees
load charges
management fees
etc

Front 355

management fees (disadvantage)

Back 355

annual fee for professional mutual fund services provided
paid regardless of mutual fund performance

Front 356

good deal of mutual fund returns can be traced back to

Back 356

strong market conditions
and/or
the reinvesment of dividends and capital gains

Front 357

mutual funds are split:

Back 357

the fund itself
major key players

Front 358

major key players involved in mutual funds

Back 358

management company
investment advisior
distributor
custodian
transfer agent

Front 359

investment advisor includes

Back 359

money manager
securities analyst
traders

Front 360

management company

Back 360

runs the funds daily operations, create the funds, serve as an investement advisior

Front 361

investment advisor

Back 361

buys and sells stocks or bonds or otherwise oversees the portfolio

Front 362

money manager

Back 362

runs the portfolio and makes the buy and sell decisions

Front 363

securities analyst

Back 363

analyzes the securities and look for viable investment candidates

Front 364

traders

Back 364

buy and sell big blocks of securities at the best possible price

Front 365

distributor

Back 365

sells the funds shares, either directly to the public to thru authorized dealers

Front 366

custodian

Back 366

phyiscally safeguards the securities and other assets of the fund without taking a role in the investment decision (independent party)

Front 367

transfer agent

Back 367

keeeps track of purchase and redemption requests from shareholders and maintains other shareholder records

Front 368

importance of mutual fund separation of duties

Back 368

protect mutual fund shareholders

Front 369

what can never be in the hands of the mutual funds management company

Back 369

the company that manages the funds assets (stocks bonds etc)

Front 370

open end investment company

Back 370

investors buy and sell their shares from and sell them back to the mutual fund company without a secondary market
never trading between individuals
no limit to # of shares

Front 371

dominant type of mutual funds

Back 371

open ended mutual funds 90%

Front 372

purchase and selling price of open ended mutual funds

Back 372

set by Net Asset Value NAV

Front 373

net asset value NAV

Back 373

value of the shares of stock in a particular mutual fund; caculated at least once per day

Front 374

NAV=

Back 374

(total market value of all assets - any liability)/number of fund shares outstanding
OR
value of all securities - liabilities of all shares outstanding

Front 375

all purchases and sales of open end mutual funds

Back 375

completed at the end of the day after the stock market has closed

Front 376

Exchange traded funds EFTs

Back 376

type of open ended mutual fund that trades as a listed security on one of the stock exchanges
a basket of securities designed to track a specific market

Front 377

EFTs are structured like

Back 377

mutual fund indexes

Front 378

ETFs are structured in three ways

Back 378

1. Open-end mutual fund (90%)
2. Unit investment
3. Grantor trusts

Front 379

ETF are traded mostly on which exchange

Back 379

AMEX

Front 380

ETF types:

Back 380

spiders
diamonds
qubes

Front 381

spiders

Back 381

biggest and oldest based on the S&P500

Front 382

qubes

Back 382

based on NASDAQ 100

Front 383

diamonds

Back 383

based on the DJIA

Front 384

differences between EFT and open mutual funds

Back 384

EFT- traded on exchanges and at any time of the day

Front 385

EFT advantages

Back 385

1. can buy at any time
2. low cost
3. low porfolio turnover
4. low taxes

Front 386

mutual fund taxes

Back 386

taxes on capital gains but mutual fund will throw it out to shareholders so that the fund doesn’t have to pay it and the shareholders do have to pay the tax on the capital gain even though they are not receiving it (disadvantage because of TVM cant recover from that no additional funds paid out) ETF’s do not do advantage

Front 387

load charge on an open end mutual fund

Back 387

the comission you pay when you buy shares in a fund

Front 388

load fund

Back 388

a mutual fund that charges comission when shares are bought
can be substantial 8.5%

Front 389

no load fund

Back 389

charge no sales charges

Front 390

low load fund

Back 390

mutual fund that charges a small amount of commission 2-3% when shares are bought

Front 391

back end load

Back 391

the fund that charges commissions when shares are sold yet tend to decrease over time and most likely be gone after 5/6 years

Front 392

purpose of back end loads

Back 392

to enhance fund stability by discouraging you from trading in and out of funds over a short investment horizon

Front 393

12(b)-1 fund

Back 393

hidden loads
mutual fund fee that is assessed annually for as long as you own the fund to help cover their distribution and management costs
can be 1% per year whether good or bad market must pay

Front 394

management fees

Back 394

compensation paid to the professional managers who administer the funds portfolio paid regardless, charged annually on average net asset

Front 395

administration costs

Back 395

operating the fund
fairly modest
represent the normal costs of doing business (commissions)

Front 396

other than open ended, close ended, ETFs 4 other additional types of investment companies for mutual funds

Back 396

1. Real Estate Investment Trusts
2. Hedge Funds
3. Unit Investment Trusts
4. Annuities

Front 397

Real Estate investment trust

Back 397

REITs- a type of closed ended investment company that invests money in mortgages and various types of real estate investmetns

Front 398

three basic types of REITs

Back 398

1. property/equity
2. mortgage
3. hybirds

Front 399

mortgage REITs

Back 399

tend to be the more income oriented emphasize their high current yield

Front 400

property/equity yield

Back 400

shopping centers, houses, etc.
potiential for earning varying amounts of capital gains (properties appreciating in value)

Front 401

hybird REITS

Back 401

contain both mortgage and property

Front 402

appeal of REITs

Back 402

enables investors to recieve both capital appreciation and the current income form real estate ownership without the headaches of property management

Front 403

REITs are popular with

Back 403

income oriented investors because of their very attractive dividends they provide

Front 404

REIT taxes

Back 404

income earned on REIT is NOT taxed
income distributed to the owners is desiginated and taxed at ordinary income tax rate

Front 405

hedge fund

Back 405

private entities usually in the form of limited partnership that are not regulated and not really mutual funds

Front 406

general partner of a hedge fund

Back 406

runs the fund and directly participates in the funds profits and charfes a performance fee of 10, 20, 30% of the profits as well as a base fee of 1-2% of assets under mangement

Front 407

limited partners of a hedge fund

Back 407

the investors (consists mainly of institutions like pension funds, private banks, high income investors)

Front 408

because hedge funds are unregulated they require

Back 408

accredited investors

Front 409

accredited investor of a hedge fund

Back 409

net worth in excess of $1 million
and/or annual income of $200,000-$300,000

Front 410

types of mutual funds

Back 410

1. Growth Funds
2. Aggressive Growth Funds
3. Value Funds
4. Equity Income Funds
5. Balanced Funds
6. Growth and Income Funds
7. Bond Funds
8. Money Market Funds
9. Index Funds
10. Sector Funds
11. Socially Responsible Funds
12. Asset Allocation Funds
13. International Funds

Front 411

growth funds

Back 411

primary goals are capital gains and long-term growth
Invest in large, well-established companies with above-average growth potential
Little or no dividend income
Moderately risk investments for more aggressive investors

Front 412

aggressive growth funds

Back 412

highly speculative mutual fund that seeks large profits from capital gains
Invest in small, unseasoned companies with high price/earnings ratios
Often look for turnaround situations
Prices are often highly volatile
High risk investments for very aggressive investors

Front 413

value funds

Back 413

seeks stocks that are undervalued in the market
Focus is on intrinsic value of stocks and requires extensive fundamental analysis
Invest in stocks with low P/E ratios, high dividend yields and promising futures
Looks for undiscovered companies with potential for future growth
Less risky investments for relatively conservative investors looking for moderate growth

Front 414

equity income funds

Back 414

emphasizes current income and capital preservation
Focus is on high current income with some long-term capital appreciation
Invest in high-yielding common stocks, convertible securities or preferred stocks
Invests in “blue chip” stocks and other high-grade securities
Typically less price volatility than overall stock market
Less risky investments for relatively conservative investors looking for moderate growth

Front 415

balance funds

Back 415

generates a balanced return of both current income and long-term capital gains
Invest in blend of fixed-income securities and common stocks, with 30% to 40% in fixed income
Allocation between stocks and bonds typically remains constant or varies very little
Emphasis between fixed-income and common stocks can be shifted as market conditions change
Less risky investments for relatively conservative investors looking for moderate growth

Front 416

growth and income funds

Back 416

seeks both long-term growth and current income, with primary emphasis on capital gains
Focus is on long-term capital appreciation with some high income to provide limited stability
Invest in blend of commons stocks and fixed-income securities, with up to 90% in common stocks
Moderate risk investments for investors who can tolerate moderate price volatility

Front 417

bond funds

Back 417

invests in various kinds and grades of bonds, with income as primary objective
Lower risk investments for investors who are looking for steady income
Some price volatility occurs with changing interest rates

Front 418

Advantages of bond funds over individual bonds:

Back 418

More liquid
Offer high diversification
Bond funds automatically reinvest interest

Front 419

types of bond funds

Back 419

1 governement bond funds
2 mortgage backed bond funds
3 high grade corporate bonds funds
4 high yield corporate bond funds
5 convertible bond funds
6 municipal bond funds
7 intermediate bond funds
8 short term bond funds

Front 420

government bond funds

Back 420

invest in U.S. Treasury and agency securities

Front 421

mortgage backed bond funds

Back 421

invest in mortgage-backed securities of U.S. government, such as GNMA’s

Front 422

high grade corporate bond funds

Back 422

invest in corporate bonds rated triple-B or better

Front 423

high yield corporate bond funds

Back 423

invest in lower rated corporate bonds (junk bonds)

Front 424

covertible bond funds

Back 424

invest in securities that can be converted into common stocks

Front 425

municipal bond funds

Back 425

invest in tax-exempt securities issued by states and political subdivisions
Single-state fund: invests in municipal issues of only one state to provide double tax-free income

Front 426

intermediate bond funds

Back 426

invest in bonds with maturities of 7 to 10 years or less

Front 427

short term bond funds

Back 427

invest in bonds with maturities of 2 to 5 years
Often used as alternative to money market funds when interest rates are low

Front 428

money market funds

Back 428

Invest in short-term securities with maturities of less than 90 days
Interest rates move up and down with market rates
Trade at a constant net asset value of $1 per share
Considered a safe, convenient investment to accumulate capital and temporarily store idle funds

Front 429

types of money market funds

Back 429

1. general purpose money fund
2. government securities money fund
3. tax exempt money fund

Front 430

general purpose money fund

Back 430

invests in all types of money market investments

Front 431

government securites money fund

Back 431

invest only in U.S. Treasury bills and other short-term government securities

Front 432

tax exempt money fund

Back 432

invest in very short-term tax-exempt municipal securities

Front 433

index fund

Back 433

buys and holds a portfolio of stocks (or bonds) equivalent to those in a specific market index
Objective is to match, not beat, the specific index
Strategy is buy-and-hold, which provides tax advantages with very little taxable capital gains
Operating costs are very low due to low turnover in investment portfolio

Front 434

sector fund

Back 434

investments are restricted to a particular segment of the market
Investments are concentrated in one specific industry sector
Objective is to produce capital gains
Considered speculative because limited diversification can increase investment risks

Front 435

socially responsible fund

Back 435

funds that actively and directly incorporate ethics and morality into the investment decision
Specific stocks are evaluated on financial criteria and moral, ethic or environmental tests
Stocks that do not meet these tests are not considered for the investment portfolio
Examples of excluded companies:
Tobacco or alcohol
Gambling
Nuclear energy
Returns may be reduced due to limited investment opportunities

Front 436

asset allocation fund

Back 436

funds that spread investors’ money across stocks, bonds, and money market securities
Provides built-in asset allocation by professional investment manager
As market conditions change over time, the asset allocation mix changes as well
Provides convenience of “one-stop shopping” without having to own several mutual funds

Front 437

international fund

Back 437

funds that do all or most of their investing in foreign securities
Objective is to benefit from changes in:
International market conditions
Valuation of U.S. dollar
Funds can specialize in international stocks, bonds or money market securities
Funds can specialize in growth, value, aggressive growth and other types of stocks
Funds can specialize in specific countries or regions of the world
Considered fairly high-risk due to currency exchange risks

Front 438

mutual fund services

Back 438

1. Automatic investment plans
2. Automatic reinvestment plans
3. Regular income programs
4. Conversion privileges

Front 439

automatic investment plans

Back 439

Regular investment from checking or savings account or paycheck
Monthly amounts as small as $25
Excellent way to build up investment over time

Front 440

Automatic Reinvestment plan

Back 440

enables shareholders to automatically buy additional shares in the fund thru reinvestment of Interest, Dividends, and Capital Gains

Front 441

Systematic Withdrawal Plans

Back 441

allows shareholders to automatically recieve a predetermined amount of money every month or quarter