Chapter 11 Questions And Answers – Flashcards
Unlock all answers in this set
Unlock answersquestion
Interest (simple and compound)
answer
simple interest is interest paid on the original principal only and compound interest is the interest earned not only on the original principal, but also on all interests earned previously. Interest is what you're paying to borrow money or what you're earning to put money in a bank
question
Principal
answer
original amount of money
question
Debit card
answer
a card issued by a bank allowing the holder to transfer money electronically to another bank account when making a purchase.
question
Creditor
answer
person who owes money
question
Investment
answer
the act of redirecting resources from being consumed today so that they may create benefits in the future; the use of assets to earn income or profit
question
Financial system
answer
the system that allows the transfer of money between savers and borrowers
question
Financial asset
answer
claim on the property or income of a borrower
question
Financial intermediary
answer
institution that helps channel funds from savers to borrowers
question
Mutual fund
answer
fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets
question
Diversification
answer
spreading out investments to reduce risk
question
Portfolio
answer
a collection of financial assets
question
Prospectus
answer
an investment report to potential investors
question
Return
answer
the money an investor receives above and beyond the sum of money initially invested
question
Bonds (savings, municipal, corporate, junk)
answer
loans or IOUs that represent debt that the government or a corporation must repay to an investor
question
Savings bond
answer
low-denomination bond issues by the US government
question
Municipal bond
answer
a bond issued by a state or local government or municipality to finance such improvements as highways, state buildings, libraries, parks, and schools
question
Corporate bond
answer
a bond that a corporation issues to raise money to expand its business
question
Junk bond
answer
a lower-rated, potentially higher-paying bond
question
Coupon rate
answer
the interest rate that a bond issuer will pay to bondholder
question
Maturity
answer
the time at which payment to a bondholder is due
question
Par yield
answer
the amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity
question
Yield
answer
the annual rate of return on a bond if the bond were held to maturity
question
NASDAQ
answer
American market for OTC securities
question
Dow Jones Industrial Average
answer
index that shows how certain stocks have traded
question
Securities and Exchange Commission
answer
an independent agency of the government that regulates financial markets and investment companies
question
Capital market
answer
market in which money is lent for periods longer than a year
question
Money market
answer
market in which is lent for periods of less than a year
question
Primary market
answer
market for selling financial assets that can only be redeemed by the original holder
question
Secondary market
answer
market for reselling financial assets
question
Capital gain
answer
the difference between a higher price and a lower purchase price, resulting in a financial gain for the seller
question
Capital loss
answer
the difference between a lower selling price and a higher purchase price resulting in a financial loss to the seller
question
Stock split
answer
the division of a single share of stock into more than one share
question
Stockbroker
answer
a person who links buyers and sellers of stock
question
Brokerage firm
answer
a business that specializes in trading stocks
question
Stock exchange
answer
a market for buying and selling stock
question
OTC market
answer
an electronic marketplace for stocks and bonds
question
Futures
answer
contracts to buy or sell at a specific date in the future at a price specified today
question
Options
answer
contracts that give investors the choice to buy or sell stock and other financial assets
question
Call option
answer
the option to buy shares of stock at a specified time in the future
question
Put option
answer
the option to sell shares of stock at a specified time in the future
question
Bull Market
answer
a steady rise in the stock market over a period of time
question
Bear Market
answer
a steady drop in the stock market over a period of time
question
The Dow
answer
index that shows how certain stocks have traded
question
S & P 500
answer
index that shows the price changes of 500 different stocks
question
Great Crash
answer
the collapse of the stock market in 1929
question
Speculation
answer
the practice of making high-risk investments with borrowed money in hopes of getting a bug return
question
Name several financial intermediaries, institutions that help channel funds from savers to borrowers
answer
Banks, Savings and Loan Associations and Credit Unions: take deposits form savers, then lend out some of these funds to businesses and individuals Finance companies: make loans to consumers and small businesses, charge higher fees and interest rate to cover their losses from the loans that are not repaid Mutual Funds: pool savings of many individuals and invest this money in a variety of stocks, bonds, and other financial assets Life Insurance Companies: provide financial protection for the family or other beneficiaries of the insured. They collect premiums from customers, and lend money to investors. Pension Funds: an income that a retiree receives after working a certain number of years or reaching a certain age.
question
Name three roles of financial intermediaries
answer
Sharing risk, providing information, providing liquidity
question
What is the relationship between risk and return? Why diversify?
answer
The higher the potential return, the riskier the investment.
question
What are the three components of bonds?
answer
Coupon rate, maturity, par value
question
How are bond ratings useful to investors?
answer
A high bond rating means that the bond will sell at a higher price, and that the firm will be able to issue the bond at a lower interest rate. Look at the grade and see rating, tells you if it's risky or not.
question
What are the various types of bonds?
answer
Savings bonds, treasury bonds, municipal bonds, corporate bonds, junk bonds
question
Name two ways in which investors can earn money from bonds
answer
a) Coupon rate: interest bond issuer gives to bond holder b) Buy bonds at discount
question
How do capital markets and money markets differ?
answer
In capital markets money is lent for longer than 1 year, while in money markets money is lent for less than a year.
question
How can you make money off of stocks?
answer
Dividends (portions of a corporation's profits) are paid out to stockholders of many. You can also sell stock for more than you paid for it.
question
Describe the difference between income stock and growth stock. Describe the difference between common stock and preferred stock
answer
Growth stock pays few or no dividends. Instead, the issuing company reinvests earnings into its business. Income stock pays dividends at regular times during the year. Preferred stock owners are nonvoting owners of the company, but receive dividends before the owners of common stock. Investors who buy common stock are voting owners of the company.
question
What is a stock split and why might it occur?
answer
Each single share of stock splits into more than one share. If the price of a company's stock becomes too high that discourages potential investors from buying it.
question
What are some of the major stock markets? What is the OTC market?
answer
New York Stock Exchange OTC Market NASDAQ (National Association of Securities Dealers Automated Quotations)
question
How can you make money off of futures and options?
answer
You buy something now for a low price and have it delivered in the future when the price is higher, so you end up saving money. Options give you the choice to buy or sell in a certain period. If you pay $100 for a stock and have a 6 months window, and at the end the price has risen, you can sell for profit. If it has dropped you can throw away the option and buy at the going rate.
question
How can you make money off of day trading?
answer
Using computer programs to try and predict minute-by-minute price changes that tell a trader when to buy and sell.
question
Describe two popular indexes of stock performance
answer
Bull (doing well) and Bear (doing poor) Markets.
question
What were the causes of the Great Crash? What about the Dot-com crash?
answer
The Dow had reached an all time high of 381, so eager investors filled brokerage firms t catch the latest news coming in on ticker tape. Prices for many stocks soared far above their real values in terms of the company's earnings. After the peak, prices fell, and investors began to sell. People worried and tried to get out of the market.
