Chapter 11 – Economics – Flashcards
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the act of redirecting resources from being consumed today so that they may create benefits in the future
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investment
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are investments good or bad?
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good; they promote growth and contribute to the nation's wealth
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the network of structures ad mechanisms that allow the transfer of money between savers and borrowers
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financial system
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securities, bank deposits, certificates, bonds
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financial assets
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what do financial systems do?
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bring savers and borrowers together
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institutions that help channel funds from savers to borrowers
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financial intermediaries
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examples of financial intermediaries
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banks, S&Ls, credit unions, finance companies
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funds pool the savings of many individuals and invest this money in a variety of stocks, bonds, and other financial assets
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mutual funds
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a private investment organization that employs risky strategies to try to make huge profits for investors
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hedge fund
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private fund mean what?
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not regulated by the SEC
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provide financial protection for beneficiaries of the insured
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life insurance companies
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how do life insurance companies operate?
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collecting premiums from the insured clients and then lend out part of the premiums to investors
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an income a retiree receives after working a certain number of years or by reaching a certain age
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pensions fund
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the process of spreading out investments to reduce risk
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diversification
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financial intermediaries can diversify your investments and reduce the risk that you lose all your funds if a single investment fails
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an investment report that provides information to potential investors (required by law)
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prospectus
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do financial intermediaries provide liquidity?
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yes; you can easily convert your savings into cash
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the money an investor receives above and beyond the sum of money that has been invested
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return
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the more liquid a fund is?
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the rate of the return will be lower
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the less liquid a fund is?
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the rate of the return will be higher
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the higher the potential return on the investment is?
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the risker the investment
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examples of debt the seller or issuer must repay to an investor
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loans and IOUs
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3 components of bonds
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coupon rate maturity par value
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the interest rate that a bond issuer will pay to a bondholder
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coupon rate
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the time at which payment to a bondholder is due
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maturity
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the amount to be paid to the bondholder at maturity; face value; principal
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par value
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not all bonds are held to maturity
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they can be bought and sold, and their price can change
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annual rate of return if the bond is held to maturity
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yield
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buying bonds at a discount from their face value
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discount from par
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the higher the bonding rate
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the lower the interest rate the company pays
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the higher the bonding rate,
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the higher the price at which the bond will sell
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the lower the bond rating
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the greater the risk
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the higher the bond rating
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the lower the risk
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advantages to issuer of bond rates
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-once the bond is sold, the coupon rate doesn't change -bondholders do not own part of the company; the company doesn't have to share its profits with bondholders
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disadvantages to issuer of bond rates
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-must make fixed interest payments even if the company is experiencing hard times -if the company doesn't maintain its financial health, the bonds may be downgraded to a lower bond rating. the lower rating could make it hard to sell future bonds
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types of bonds
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-savings bonds -treasury bonds, bills, and notes -municipal bonds -corporate bonds -junk bonds
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low denomination bonds issued by the US govt. to pay for public works. has virtually no risk
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savings bonds
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bonds that offer different lengths of maturity; has the problem of inflation
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treasury bonds, bills, and notes
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which bond has the problem of inflation indexed bond
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treasury bonds, bills, and notes
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a bond that links the principal and interest to an inflation index
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inflation indexed bond
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bonds issued by state, local, or municipal govt. to fund public projects; safe investments; interest payments are tax exempt
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municipal bonds
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bonds issued by corporations to help raise money to expand their business; moderate level of risk because the ability of the issuer to pay depends on the business's success; is monitored by the SEC
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corporate bonds
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non-investment grade bonds; fairly high risk bonds and potentially high yield
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junk bonds
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2 other types of financial assets
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certificates of deposit money market mutual funds
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savers deposit money; intermediary buys short-term financial assets; offer higher interest rates than savings accounts offer; and are not covered by FDIC insurance
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money market mutual fund
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markets that sell financial assets that can be redeemed only by the original holder
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primary market
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examples of primary markets
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savings bonds and small CDs
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markets that sell financial assets that can be resold
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secondary markets
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what do secondary markets do?
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provide liquidity to investors and lively trade in stock
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markets in which money is lent for period of one year or less
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money market
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markets in which money is lent for periods longer than a year
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capital markets
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stock is issued in portions known as?
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shares
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businesses sell stock to?
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raise funds
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a portion of the company's profits paid to stockholders no a quarterly basis
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dividend
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selling stock at a higher price than what you paid for the stock
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capital gain
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selling stock at a lower price than what you paid for the stock
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capital loss
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types of stock
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income stock growth stock common stock preferred stock
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dividends provide investors with income
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income stock
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pays little or no dividends; profits are reinvested in the company which will help its business and stock grow in value
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growth stock
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owners of this stock are usually voting owners in the company (1 vote for each share of stock)
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common stock
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owners of preferred stock are usually non-voting owners in the company
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preferred stock
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owners of preferred stock get their dividends before owners of common stock get dividends
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the division of each single share of a company's stock into more than one share
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stock split
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when do stock splits occur?
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when the price of one share of stock is so high that the price discourages potential investors from buying it
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are the risks of buying stock higher than the risk of buying bonds? why?
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yes bc there is greater potential return with stocks
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2 big risks of buying stocks
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the company's business may decline or they could go bankrupt
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a person who links buyers and sellers of stock
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stockbroker
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businesses that specialize in trading stocks
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brokerage firms
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buy stock at a low price and sell to investors at a higher price
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deal in stock
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a market for buying and selling stock
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stock exchange
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3 biggest places of stock exchange
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New York Stock Exchange Nasdaq internet
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largest most powerful stock exchange; handles stock and bond transactions for the top companies in the world
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new york stock exchange
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the largest more financially sound and best known firms on the NYSE (in high demand)
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blue chip companies
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est. to organize the over the counter stock exchange market; is the second largest securities market and the largest electronic market for stocks; conducts business via telecommunications (OTC)
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nasdaq
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contracts to buy or sell commodities at a particular date in the future at a price specified today
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futures
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most markets in which futures are bought and sold are associated with what?
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grain and livestock
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contracts that give investors the choice to buy or sell stock and other financial assets
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options
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a contract for selling stock at a particular price up until a certain time in the future
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call option
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a contract for selling stock at a particular price until a specified future date
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put option
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hopes to ride a rising stock's momentum for a short time and then sell the stock for a quick profit; make dozens of trades per day; VERY RISKY TRADING
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day trading
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a steady rise in the stock market over a period of time
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bull market
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in a bull market investors expect an increase in? so what do they do?
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profits; buy stocks
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a steady drop or stagnation in the stock market over a period of time
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bear market
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in a bear market investors expect an decrease in? so what do they do?
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profit; sell stocks
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the average value of a particular set of stocks
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DOW
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gives a broader picture of stock performance; tracks the price changes of 500 different stocks
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S&P 500
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market during the 1920s
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long time bull market agriculture struggling people in debt bc of consumer goods companies produced more than they could sell (so a surplus was created; prices decreased) speculation buying on the margin
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the practice of making high risk investments with borrowed money in hopes of getting a big return
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speculation
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allowed investors to purchase stock for only a fraction of its price and borrow the rest from the brokerage firm
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buying on the margin
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peak of the stock prices
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sept. 3, 1929
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Black Tuesday
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October 29, 1929
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the crash was one cause of what?
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the great depression
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Black Monday
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October 18, 1987
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1990s were known as the ____? why?
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dot com craze; investments in internet based companies and high tech enterprises
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enron scandal
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the company that reported false profits to cover up its huge losses
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new rules for how corporations must verify their financial reports
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Sarbanes-Oxley act
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Investments are resources used to create?
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future benefits
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An investment in a mutual fund is _________ than an investment in a single company.
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less risky
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Generally, if a fund is very liquid, the rate return will be
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low
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For the issuer, a bond is
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a debt
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A bond rating of BBB would be
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extremely high risk bond
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A stock split generally indicates that the corporation is doing
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well
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Which benefit of financial intermediaries includes putting an investor's money to work in a variety of investments?
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sharing risk
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If you invested your money and the rate of return was very high, you could conclude that your investment was
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very risky
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put in order from least risk to greatest risk -mutual funds -cds -hedge funds -stock in a company
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1. cds 2. stock in company 3. mutual funds 4. hedge funds
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A bond might be sold at a discount from par if
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interest rates have INCREASED
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Which bond would offer a greater interest rate?
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a CCC (the higher the rating (aaa) the lower the interest rate)
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Why are municipal bonds considered a low-risk investment?
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Because the municipal government have the ability to raise money through taxes
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A one-year CD would be sold on which market?
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money market
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A bond that could be resold to another buyer would be sold on a __________ market.
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secondary
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What does the group of stocks on the Dow represent?
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the market as a whole
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What was a problem in the 1920s that contributed to The Crash on Oct. 29, 1929?
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buying on the margin speculation on stocks
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The 1990s was a period of time where stock prices for high-tech companies were
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very low
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What is an advantage of owning preferred stock?
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you get paid dividends before common stockholders get dividends
