Economics Ch. 11 – Flashcards
Unlock all answers in this set
Unlock answersquestion
What are the two things you can do with your money?
answer
Spend it or save it
question
savings
answer
income not used for consumption or not spent on immediate wants
question
What are savings put to use?
answer
investments
question
investment
answer
use of income today that allows for a future benefit
question
economic investment
answer
$ lent to businesses to finance "something"
question
personal investment
answer
act of individuals putting their savings into financial assets such as CDs, stocks, bonds, or mutual funds
question
financial systems allow for...
answer
transfer of funds b/w savers and investments
question
financial asset
answer
claim on property of borrower
question
When do savers and borrowers come together directly in a financial market
answer
situation in which buyers and sellers exchange particular types of financial assets
question
financial intermediary
answer
financial institutions that collects funds from savers and then invests these funds in loans and other financial assets
question
What do financial intermediaries bring together?
answer
savers, borrowers, and financial assets
question
What do common financial intermediaries include
answer
finance companies, pension funds, and life insurance companies
question
finance companies
answer
make small loans
question
pension funds
answer
invest $ for groups of workers
question
life insurance companies
answer
invest funds collected from policy holders
question
mutual fund
answer
pool of $ managed by an investment company that gathers $ from individual investors and purchases range of financial assets
question
What do investors own in a mutual fund?
answer
shares of entire fund based on amount of their investment
question
What do banking financial intermediaries include?
answer
banks, savings and loans, and credit unions
question
In bank. fin. inter., what do depositors earn?
answer
interest on savings and checking deposits
question
Approx. interest rates on checking and savings
answer
.98%
question
What do most bank. fin. inter. offer?
answer
CDs and $ market deposit accounts that pay slightly higher rates of interest
question
Bank. fin. inter. lend
answer
portions of deposits to borrowers but charger borrowers higher rate of interest than they pay to savers and hope to earn profit
question
What are financial assets to the bank?
answer
loans
question
What happens if the borrower cannot repay loan in time?
answer
bank can repossess property (home, car)
question
What did deregulation allowed banks to do, examples, and what is not insured?
answer
banks to offer other financial assets (money market, mutual funds, stocks, bonds, and insurance); fed. gov't does not insure funds invested in these
question
What do non-bank financial intermediaries include?
answer
finance companies, mutual funds, pension funds, and life insurance companies
question
Who do finance companies make loans to?
answer
households and small businesses
question
Size of loans for finance companies and how is it paid back
answer
under $2000; paid back in monthly installments, including interest, over a few years
question
Who do mutual funds get their $ from?
answer
pools $ from many personal investors
question
What do investors get in return for mutual funds?
answer
each investor receives shares in a fund that is made up of a larger # and variety of stocks, bonds, or other financial assets
question
Advantage of mutual funds
answer
make it easier and more affordable for individual investors to own a wide variety of financial assets
question
Once investors in a mutual fund purchase shares of a fund, they...
answer
allow its managers to make investment decisions
question
What do pension funds allow?
answer
employees to save $ for retirement and sometimes include contributions from employers
question
What and where do pension funds invest and what do they provide?
answer
invests pooled contributions in various financial assets that will increase in value and provide workers with more $ when they retire
question
What do life insurance companies allow and protect against?
answer
allow individuals to accumulate savings by building cash values and protect against losses from death or disability
question
What do life insurance companies do like banks and do any other insurances do this?
answer
lend or invest some of income earned from policyholders in a variety of financial policies; NO
question
financial asset markets
answer
different financial assets discussed are bought and sold on various financial markets
question
Markets are categorized on 2 factors:
answer
1) time- how long a loan is for 2) can financial assets can be resold
question
What are 2 time sensitive markets?
answer
capital and money
question
capital markets
answer
markets where assets are held for longer than a year
question
examples of assets sold on the capital market
answer
stocks and bonds, mortgages, long term CDs
question
money markets
answer
loans are made for less than a year
question
examples of assets traded in the $ markets
answer
short term CDs that depositors can redeem in a few months; treasury bills
question
What do treasury bills allows the government to do
answer
borrow $ for short periods of time
question
2nd markets are based on
answer
resale ability
question
What are the markets based on resale ability
answer
primary and secondary markets
question
primary markets
answer
for financial assets that can be redeemed only by original buyer
question
examples of assets in primary markets
answer
savings bones, small denomination CDs
question
primary markets also refers to
answer
mark where 1st issue of stock is sold to public through investment bankers
question
secondary markets
answer
resale market for financial assets
question
what do secondary markets offer
answer
liquidity to personal investors; investors able to turn assets to cash quickly
question
2 prominent assets sold on secondary markets
answer
stocks and bonds
question
investment objective
answer
financial goal that an investor uses to determine if an investment is appropriate
question
possible financial goals
answer
saving $ for retirement, saving for down payment on a house, college tuition, or dream vacation
question
issues role in determining which investments work best to achieve different investment objectives
answer
time and income
question
time
answer
short and long term
question
short term
answer
savings for vacation
question
long term
answer
savings for retirement
question
questions about income
answer
how much $ do you have available to save after meeting current expenses?; Will your income change in the future?; is there $ available for emergencies?; what is your savings plan?
question
risk
answer
possibility for loss on an investment
question
return
answer
profit or loss made on an investment
question
initial investment
answer
principle initially invested
question
What do investors think about when analyzing risk
answer
possibility of losing some of initial investment
question
investments that guarantee no loss of principle
answer
insured savings deposits and CDs
question
risk of bonds back by the U.S. gov't
answer
almost risk free b/c highly unlikely that gov't would not pay back its loans
question
Why do stocks and corporate bonds have higher degrees of risk?
answer
b/c return depends on how profitable the company is
question
Investors expecting profit in stock may
answer
lose money b/c company has problems or economic factors dropped value of stock
question
Investors can suffer a loss when
answer
they cannot sell stock for more than they paid
question
Corporate bond risk
answer
less risky than stock b/c creditors (bondholders) are paid off before stockholders if company had financial problems
question
When making investment decisions, investors estimate
answer
what kind of return they expect to earn
question
safest investments offer what and in what form
answer
offer lowest return in form of fixed rates of interest
question
examples of safest investments that have lowest returns in interest
answer
treasury bills, interest bearing savings account, shorter term CDs
question
return on stocks and bonds are
answer
not guaranteed, vary
question
return on stocks and bonds
answer
depend on company and market; stocks give higher return over time over other
question
how are risk and return related
answer
directly related; higher risk, greater return
question
less time and income
answer
less willing to risk
question
diversification
answer
most common way for investors to max returns and limit risks (ex. 70% stocks, 20% bonds, 10% CDs)
question
What is the better way to offset losses?
answer
spreading $ in different assets
question
what helps small investors diversify investments
answer
mutual funds
question
when company 1st issues stock,
answer
sold to investment banker in primary market
question
initial public offering (IPO)
answer
when company 1st issues stock, it is sold to banker in primary market; stock sale that raises $ for the corporation
question
Most stock resold to investors through
answer
stock exchange (secondary market) where securities (S & B) are bought and sold
question
capital gains
answer
gains made from sale of securities
question
Reasons investors buy stock
answer
1) earn dividend payments which are share of corporation profits that are paid back to corporate stockholders 2) earn capital gains by selling stock at greater price than purchase price
question
investors who want to earn income from investments will be most interested in
answer
dividends
question
corporations are not required to
answer
pay dividends so investors have no guarantee they will earn income from stock
question
common stock
answer
share of ownership in a corporation giving holder voting rights and share of profits
question
preferred stock
answer
share of ownership in a corporation giving holders share of profits that is paid before common stockholders but has no voting rights
question
what type of stock do most people buy
answer
common stock
question
stock prices are determined by
answer
supply and demand
question
factors affecting stock price
answer
company profit or loss, technological advances
question
technological advances can affect
answer
businesses, whole industry, or overall state of economy
question
when perceived commercial value likely to rise,
answer
demand for stock rise and prices rise; ppl sell for profit
question
stockbroker
answer
agent who is paid a commission for buying and selling securities on behalf of customers; work for brokerage firms and investors can interact with brokers in person, by phone, or online
question
primary job of stockbroker
answer
carry out investor's instructions to make trades ( and may provide advice)
question
New York Stock Exchange (NYSE)
answer
oldest and largest of organize stock exchanges in the U.S.; located on Wall Street
question
Wall Street synonymous with
answer
U.S. stock market
question
Over-The-Counter (OTC)
answer
describes market for stocks that are not traded on a formal stock exchange
question
NASDAQ
answer
largest OTC exchange; majority are tech companies
question
futures
answer
contract to buy or sell a commodity as at specified future and price
question
example of future
answer
farmer uses on tomato crop to lock in price high enough to ensure a profit
question
option
answer
gives an investor right to buy or sell stock at future date at a preset price
question
example of option
answer
corn processing plant sign contract for corn, giving right to buy if prices don't rise too high
question
stock index
answer
measure of change in prices for specific set of stocks; provide snapshot of how a stock market, or segment of is performing
question
Dow Jones Industrial Average (DJIA)
answer
well known index; tracks stock of 30 of largest companies traded on NYSE
question
Other stock indexes
answer
Standards and Poore's 500 (S&P 500), NASDAQ Compact, Hang Sang Index (Hong Kong), DAX (Germany), Nikkei 225 (Japan), TSE 300 (Canada)m FTSE 100 (UK)
question
bull market
answer
trend in stock prices rise steadily; generally 20% rise over 2 months
question
bear market
answer
trend in stock prices steadily decline; 20% decline over 2 months
question
Most severe market crash
answer
1929; (1929-32) DJIA 341-41; did not reach 341 till 1954
question
bond
answer
contract issued by corporation promising to repay borrowed $, plus interest, on fixed schedule
question
par value
answer
amount that the bond issuer promised to pay the buyer at maturity
question
maturity
answer
date when bond due to be repaid
question
coupon rate
answer
interest rate a bondholder receives every year until bond matures
question
reasons to invest
answer
1) interest paid on bonds 2) gains from selling bonds
question
Why do people buy bonds
answer
for interest
question
Why are bonds less risky than stock
answer
bondholders are paid before stockholders
question
US government issues securities called
answer
treasury bonds, notes, or bills
question
different terms
answer
loans with different maturity dates
question
treasury bonds
answer
longest; 10+ years
question
treasury bills
answer
shortest; 1year or less
question
treasury notes
answer
1-10 years
question
Purpose of treasury bonds, bills and notes
answer
helps keep the government running
question
facts of municipal bonds
answer
issued by state and local government; finances government project; interest earned not subject to federal income tax; low risk investment
question
corporate bonds
answer
way for companies to finance expansion; pays higher coupon rate than government bond because risk is higher
question
junk bond
answer
one kind of corporate bond that is considered high risk but has potential for higher yields; same risk as stock
