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Finance Flashcards

Personal Finance 2.06 Quiz – Economic Basics

What is scarcity? Scarcity is when people want more of something than is available.
Which of the following producers is a producer of services? Raul, who fixes cars, is a producer of services.
Which of the following is not something that money does in an economy? Money does not keep the rate of inflation low.
The teenage market is a market that is categorized in what way? The teenage market is categorized by consumer.
Which of the following is not a characteristic of a weak economy? A low unemployment rate is not a characteristic of a weak economy.
Which economic system has the most government control? A planned economy
Which of the following is a feature of capitalism? Competition between businesses is a feature of capitalism.
A company that is most motivated to make money has a ___________. Profit motive
A store that sells books and a store that sells tools are what type of competitors? Noncompetitors
What is capital as a factor of production? Capital as a factor of production is the tangible goods created by labor.
What is demand? Demand is the amount of something that consumers want.
Which of the following will probably happen to a product when demand is low? When demand for a product is low, the price will go down.
What might happen to a product when supply is low? When supply is low, the price of a product will go up.
Which of the following might financial planning help you do? Financial planning might help you keep track of earning and spending.
Joey owns a shoe store in a neighborhood with other shoe stores. Demand for the products he sells is probably ____________. Elastic
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Finance Flashcards

Personal Finance Pt. 2 (Exam 3)

A mutual fund in which shares are issued only when the fund is organized is called a(n) __________ fund. closed-end
The typical expense ratio for an index fund is: 0.50% or less.
The commission charge for purchasing shares of a load fund that imposes an up-front commission charge is __________ percent. as high as 8 1/2
Owen Cartwright has joined a real estate syndicate that bought an office building in downtown Orlando, Florida. What type of investment does he hold? Indirect investment in real estate
You can avoid storage and assaying problems by investing in: gold bullion coins.
Brian Wilson has a baseball card collection passed down to him from his grandfather. He is particularly proud of the signed Hank Aaron baseball card that he has. What type of investment does he hold? Investment in collectibles
The Capitalist Mutual Fund’s portfolio is valued at $45 million. The fund has liabilities of $3 million, and the investment company sponsoring the fund has issued 1,600,000 shares. What is the fund’s net asset value? $26.25
If you want a risk-proof real estate investment, invest in: participation certificates (PCs).
Illiquidity in real estate means that: you cannot quickly sell the property.
One of the advantages of being a limited partner in a real estate investment venture is that you have __________ liability. limited financial
Which of the following statements is FALSE? There is no need to evaluate mutual fund investments because investment companies hire the best professional managers they can to manage their funds.
A fee that some investment companies charge for marketing and distributing a mutual fund is called a: 12b-1 fee.
An example of a direct real estate investment is a: real estate dwelling.
A mutual fund in which no sales charge is paid by the individual investor is called a(n) __________ fund. no-load
All the different management fees and fund’s operating costs are often referred to as a(n): expense ratio.
Sharon Tate has a mutual fund and she has all dividend income and capital gains income used to purchase additional shares in her mutual fund. Which of the following plans is she using? A reinvestment plan
The average management fee for all mutual funds is: 0.50 to 1.25%.
An example of an indirect real estate investment is: a real estate investment trust (REIT)
For residential real estate investments, the depreciation period now is __________ years. 27 1/2
The most popular and least complicated method of purchasing shares in an open-end mutual fund is through a: regular account transaction.
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Finance Flashcards

Finance 410, Mutual Fund Practice

A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds hedge fund
Advantages of investment companies to investors include all but which one of the following? Guaranteed rates of return
Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares? NAV = ($500 − $50)/50 = $9
NAV formula The net asset value formula is used to calculate a mutual fund’s value per share. (Fund assets- Fund Liabilities)/ shares out standing
Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund? $300m *(1.18)= $354m.02* $354m = 7,080,000($354m- 7,080,000- 300m)/300m=15.64%
Higher portfolio turnover:I. Results in greater tax liability for investorsII. Results in greater trading costs for the fund, which investors have to pay forIII. Is a characteristic of asset allocation funds High Portfolio Turnover results in all 3
Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________. balanced funds
Net asset value is defined as MARKET value of assets minus liabilities divided by shares outstanding
Rank the following fund categories from most risky to least risky:I. Equity growth fundII. Balanced fundIII. Sector fundIV. Money market fund Most= Sector fund2nd most= Eq Growth fund3rd most = Balanced Fundleast risky= Money Mkt Fund
Specialized-sector funds concentrate their investments in _________________. securities issued by firms in a particular industry
The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied. Assume $100 is invested.Class A: Investment after load = $100 – .05($100) = $95After four years = $95(1.104) = $95 × 1.4641 = $139.09Class B: Rate of return after 12b-1 fee = 10% – 1% = 9%After four years = $100(1.094) = $100 × 1.4116 = $141.16Class B is the better choice.
Investors who want to liquidate their holdings in a closed-end fund may ___________________. sell their shares on the open market
The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________. portfolio turnover
Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as 12b-1 charges
You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal. front-end load; 12b-1 fee
You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain? Total fees = 10,000 – (10,000 × .97) × (.99) × (.99) × (.99) × (.995) = 635
You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund’s expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? [((21600.96 )1.10*(1-.013))/21600]-1=4.23%
_____ is an example of an exchange-traded fund An SPDR or spider
______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager’s forecast of the performance of that market sector asset allocation funds
__________ funds stand ready to redeem or issue shares at their net asset value Open-end
______________________ are often called mutual funds Open-end investment companies
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Finance Flashcards

Finance Chapter 6

T/F money management is a series of decisions made over a short term period regarding case inflows and outflows true
T/F liquidity refers to your ability to cover any long term cash deficiencies false
T/F money management has no relationship to the personal cash flow statement false
T/F you should attempt to have a sufficient amount of funds in liquid assets to draw on when your cash outflows exceed your inflows true
T/F maintaining liquid assets that you can easily access when you need funds allows you to avoid using credit and paying finance charges true
T/F in general, the more liquid the asset, the higher its return false
liquidity is necessary because there are times during the year when your cash inflows are not adequate to cover your cash outflows true
to achiever both liquidity and a adequate return, you should consider investing in only one money market investment with a fixed interest rate and long term maturity date false
good cash management requires some liquidity, but excessive liquidity has an opportunity cost true
Which of the following does money management not involve?A) A series of decisionsB) A long-term time periodC) Cash inflowsD) Cash outflows B
A disadvantage of using credit as a source of liquidity is theA) inconvenience of using credit.B) potential cost of finance charges.C) acceptability of credit by creditors.D) poor records available after credit use. B
Generally, yields are ________ for securities that are exposed to ________ liquidity risk.A) higher; moreB) higher; lessC) lower; lessD) Both A and C are correct D
To achieve both liquidity and an adequate return, you should consider investing inA) only one money market investment with a high return and low liquidity.B) only one money market investment with low return and high liquidity.C) multiple money market investments with varied returns and levels of liquidity.D) multiple money market investments with high returns and high liquidity. C
T/F overdraft protection for a checking account is a low cost short term loan False
T/F stopping payment on a check should be used if you paid to have your bathroom remolded and the job was not completed true
T/F if you loose your checkbook, the bank will not charge you for stopping payment on any unused blank checks false
T/F because most regular checking accounts do not pay interest, you should keep only enough funds in your account to cover anticipated expenses with a small reserve for unanticipated expenses true
T/F an advantage of Negotiable Order of Withdrawal (NOW) account over a traditional checking account is that your money is more readily available to you false
the $5oo minimum balance you are required to keep in your NOW checking account represents an opportunity cost true
certificates of deposit (CDs) are highly liquid and pay the highest investment return false
CDs that have small denominations (such as $10,000 or less) are sometimes referred to as retail CDs because they are more attractive to individuals than to firms true
since CDs are insured by the FDIC, the rates are usually the same from one institution to the other false
to calculate interest earned, multiply the deposit amount times the annual interest rate times the adjustment for the investment period true
a money market deposit account (MMDA) requires a minimum balance, pays interest, and allows a limited number of checks to be written each month true
treasury securities are T-bills with a maturity of one year or less true
t-bills may be purchased by individuals, but require a minimum investment of $10,000 par value true
t-bills are more liquid that CDs because there is a secondary market for T-bills true
money market funds (MMFs) which invest in commercial paper are insured by the FDIC false
a money market account combines deposit accounts with a brokerage account and provides a single consolidated statement, and “sweeps” the unused balance from the checking account to a savings account daily false
an asset management account combines deposit accounts with a brokerage account and provides a single account statement true
Which of the following is not a money market investment?A) Shares of corporate stockB) NOW accountC) Savings accountD) Treasury bills A
Which of the following should not be considered when evaluating a checking account?A) The overdraft protection availableB) The stop payment feature and the cost of itC) The fees charged monthlyD) The type of account insurance carried by the bank D
Stopping payment on a check A) is possible after the check clears in cases of disputes.B) can only be used if the check has not cleared.C) is free if your checkbook is lost or stolen.D) is encouraged by most banks as a customer service. B
If a bank provides overdraft protection at a rate of 12% for each $100 (or portion of $100) borrowed when an overdraft occurs, what amount of interest would a customer pay for a $188 overdraft?A) $24.00B) $22.56C) $10.56D) $12.00 A
Checking accounts may offer all of the following exceptA) account balance insurance in excess of $250,000.B) stop payment services.C) overdraft protection.D) ATM privileges. A
Which of the following is NOT an advantage of a checking account?A) Stop payment servicesB) Overdraft protectionC) Interest earned on balancesD) Liquidity C
Which of the following is not true of a NOW account?A) Offered by depository institutionsB) Pays relatively low interestC) Only three checks per month can be writtenD) Requires a minimum balance C
Kayla deposits $1,500 into a NOW account that requires a minimum balance of $500 and offers an interest rate of 2.4%. How much interest will she earn in one year in the NOW account?A) $360B) $24C) $12D) $36 D
Which of the following is not true regarding a savings account?A) It does not provide checking services.B) It is less liquid than a checking account.C) It pays lower interest than a checking account.D) It is less convenient than a checking account. C
You have $3,000 that you may need to use to replace the furnace in your home. If you need the funds, it would be on no less than a week’s notice. Into which type of account would it be best for you to deposit the $3,000?A) Checking accountB) Savings accountC) NOW accountD) All of the above would be equally acceptable. B
Which of the following is not true about a certificate of deposit (CD)?A) It pays higher interest than a saving account.B) Are only offered in denominations of $100,000 or more.C) It is not as liquid as a savings account.D) Funds are locked in for specific periods of time. B
Which of the following is not true about a certificate of deposit (CD)?A) They pay higher interest than T-bills.B) They are long-term investments of two years or more.C) Funds are locked in for specific periods of time.D) A penalty is imposed for early withdrawal. B
When purchasing a certificate of deposit (CD)A) you are always better off to buy the longer-term CDs.B) you will earn more interest percentage-wise on the lower dollar CDs.C) the amount you invest is at risk, so choose carefully.D) it is wise to shop around as rates vary among financial institutions. D
Which of the following items will give you the highest return?A) One year CDB) Savings accountC) NOW accountD) Checking account A
Which of the following items will give you the greatest liquidity?A) One year CDB) Savings accountC) Checking accountD) NOW account C
Which of the following is NOT true regarding a money market deposit account (MMDA)?A) A minimum balance is required.B) It has a maturity date.C) The account pays interest.D) A limited number of checks may be written monthly. B
In comparing an MMDA to a NOW account, the MMDA does all of the following exceptA) it pays a higher interest rate.B) MMDA accounts are less liquid.C) it provides more limited checking services.D) MMDA accounts must maintain a larger balance. B
All of the following are true of money market deposit accounts (MMDA) exceptA) a minimum balance is required.B) the account pays higher interest.C) a limited number of checks may be written monthly.D) they are the same regardless of the depository institution offering them. D
Which of the following accounts would tend to give you the higher interest combined with ease of access to your funds on a limited basis?A) Checking accountB) MMDAC) NOW accountD) CD B
Which of the following is not a good, short-term money market investment?A) NOW accountB) Savings accountC) AT&T common stockD) Treasury bills C
Which of the following is a feature of Treasury bills (T-bills)?A) They have a maturity of more than one year.B) They are available with a minimum value at maturity of $100.C) They are purchased at a discount from par value.D) They must be held to maturity. C
All of the following are true of Treasury securities except theyA) are a means by which the U.S. government lends money.B) have a maturity range from 3 months to 30 years.C) have a minimum par value of $100.D) can be bought and sold on the secondary market C
The secondary market for T-bills means thatA) they cannot be sold before their maturity date with the help of a brokerage firm.B) an individual may purchase T-bills that were owned by some other investor rather than from the government.C) T-bills are less liquid than CDs.D) All of the above. B
The market where an investor could sell T-bills that he owns is called theA) primary market.B) secondary market.C) stock market.D) T-bill market B
Money market funds (MMF) have all of the following characteristics exceptA) pooled money provided by individuals to invest.B) unlimited check writing.C) short-term maturity.D) a minimum investment amount. B
Which of the following is not a characteristic of money market funds (MMFs)?A) Pooled money provided by individuals to investB) Short-term maturityC) High-risk investmentsD) A minimum investment amount C
Money market funds (MMFs) offer all of the following exceptA) short-term maturity securities.B) safe investments with higher rates than T-bills.C) insured savings.D) check writing privileges. C
An asset management account combinesA) assets and expenses.B) deposit accounts with a brokerage account.C) a savings account with a brokerage account.D) a savings account with long-term investments. B
An asset management account that moves any unused balance in the brokerage account into a money market investment at the end of each business day is called a(n)A) sweep account.B) asset management account.C) money market fund.D) secondary market. A
An asset management account does all of the following exceptA) combines deposit accounts with a brokerage account that is used to buy or sell stocks.B) provides a single consolidated statement showing the ending balance and activity of all accounts.C) requires a small initial investment to start.D) sweeps any unused balance in the checking account into a money market account at the end of the day. C
Which of the following affords you access to a “sweep account”?A) Asset management accountB) NOW accountC) MMDA accountD) MMF A
T/F Some investments are subject to credit risk. This means that the borrowers may not repay on a timely basis true
T/F For relatively safe investments such as savings accounts, CDs, MMDAs, and T-bills, liquidity is rarely a concern. false
Generally, savings account yields are ________ than certificates of deposit that are exposed to ________ liquidity risk.A) lower; moreB) higher; lessC) higher; moreD) lower; less A
A one-year CD has a ________ return and ________ liquidity than a checking account.A) lower; lowerB) higher; higherC) higher; lowerD) lower; higher C
________ risk is the risk that an investment could decline as a result of a change in interest rates.A) CreditB) Interest rateC) LiquidityD) Asset B
________ risk is the potential loss of converting an investment into cash.A) CreditB) Interest rateC) LiquidityD) Asset C
If you purchase a bond that matures in 5 years but you may have to cash it in before that time, it exposes you to theA) credit risk.B) default risk.C) interest rate risk.D) liquidity risk. C
Because of the active bond market in Chicago, one risk that a corporate bond is less likely to expose you to is theA) liquidity risk.B) credit risk.C) default risk.D) interest rate risk. A
T/F Generally, short-term debt securities issued by large corporations, also known as commercial paper, typically offer a slightly higher return than Treasury bills. true
T/F Since the potential for default is very low for some types of money market securities, it’s not necessary to assess the risk before investing your money in one. false
Risk management of money market investments involves assessing the risk exhibited by the investment. true
Risk management of money market investments involves all of the following exceptA) credit risk.B) interest rate risk.C) potential for default when backed by the federal government.D) liquidity risk. C
The following money market securities are insulated from credit risk with the exception ofA) treasury securities.B) bank deposits.C) commercial paper.D) CDs. C
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Finance Practice Exam 2

The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for thefollowing two years, and then cease paying dividends altogether. How much is one share of this stock worth toyou today if you require a 19 percent rate of return?A. $2.31B. $2.36C. $2.56D. $2.60E. $2.64 A
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months.Which one of the following terms best describes these scholarship payments?A. Ordinary annuityB. Annuity dueC. ConsolD. Ordinary perpetuityE. Perpetuity due B
Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days fromtoday. Which one of the following statements is correct concerning this purchase?A. The present value of the car is equal to $500 + (36 × $450).B. The $500 is the present value of the purchase.C. The car loan is an annuity due.D. To compute the initial loan amount, you must use a monthly interest rate.E. The future value of the loan is equal to 36 × $450. D
The manager of Gloria’s Boutique has approved Carla’s application for credit. The maximum payment that has beenapproved is $65 a month for 24 months. The APR is 15.7 percent. What is the maximum initial purchase that Carlacan make given this credit approval?A. $1,288.90B. $1,300.00C. $1,331.42D. $1,350.00E. $1,428.46 C
Today is your 21st birthday and you just decided to start saving money so you can retire early. Thus, you are goingto save $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. Ifyou can earn an average of 8 percent on your savings, how old will you be when you retire?A. 33.39 years oldB. 42.87 years oldC. 54.39 years oldD. 64.71 years oldE. 63.87 years old C
What is the future value of $20 a week for 10 years at 6 percent interest? Assume the first payment occurs at the endof this week.A. $14,239.14B. $14,361.08C. $14,727.15D. $15,003.14E. $15,221.80 A
hich one of the following statements is correct?A. The APR is equal to the EAR for a loan that charges interest monthly.B. The EAR is always greater than the APR.C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 – 1.D. The APR is the best measure of the actual rate you are paying on a loan.E. The EAR, rather than the APR, should be used to compare both investment and loan options. E
What is the effective annual rate of 6.5 percent compounded quarterly?A. 6.02 percentB. 6.29 percentC. 6.54 percentD. 6.66 percentE. 6.83 percent D
A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR?A. 13.53 percentB. 13.59 percentC. 13.96 percentD. 14.07 percentE. 14.10 percent A
A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is compounded monthly?A. 13.09 percentB. 13.46 percentC. 13.90 percentD. 14.56 percentE. 14.82 percent D
Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one yearfrom now. This type of loan is referred to as a(n):A. interest-only loan.B. pure discount loan.C. quoted rate loan.D. compound interest loan.E. amortized loan. B
Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years.Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Billhave?A. AmortizedB. ComplexC. Pure discountD. Lump sumE. Interest-only A
You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal atthe end of three years. What type of loan did you obtain?A. Interest-onlyB. AmortizedC. PerpetualD. Pure discountE. Lump sum A
When you refer to a bond’s coupon, you are referring to which one of the following?A. Difference between the purchase price and the face valueB. Annual interest divided by the current bond priceC. Difference between the bid and ask priceD. Annual interest paymentE. Principal amount of the bond D
The current yield on a bond is equal to the annual interest divided by which one of the following?A. Issue priceB. Maturity valueC. Face amountD. Current market priceE. Current par value D
The written agreement that contains the specific details related to a bond issue is called the bond:A. indenture.B. debenture.C. document.D. registration statement.E. issue paper. A
A note is a(n):A. unsecured debt that is generally payable within the next 10 years.B. formal type of loan that is secured by real estate.C. long-term debt secured by part, or all, of the assets of the borrower.D. debt that is secured by a borrower’s accounts receivable.E. written agreement that details the information relative to a bond issue. A
Which one of the following is the price that an investor pays to purchase an outstanding bond?A. Dirty priceB. Face valueC. Call priceD. Bid priceE. Clean price A
A real rate of return is defined as a rate that has been adjusted for which one of the following?A. InflationB. Interest rate riskC. TaxesD. LiquidityE. Default risk A
he Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities.A. face valueB. market priceC. maturityD. coupon rateE. issue date C
Which one of the following represents additional compensation provided to bondholders to offset the possibility thatthe bond issuer might not pay the interest and/or principal payments as expected?A. Interest rate risk premiumB. Inflation premiumC. Liquidity premiumD. Taxability premiumE. Default risk premium E
Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.A. annualB. semiannualC. quarterlyD. monthlyE. daily B
bond has a make-whole call provision. Given this, you know that the:A. bond will always sell at par.B. call premium must equal the annual coupon payment.C. call price is directly related to the market rate of interest.D. call price is inversely related to the market rate of interest.E. bond must be a zero coupon bond D
What is the primary purpose of bond covenants?A. Meet regulatory requirementsB. Describe repayment termsC. Protect the lenderD. Define a bond’s ratingE. Increase a bond’s seniority position C
A 7 percent bond has a yield to maturity of 6.5 percent. The bond matures in seven years, has a face value of$1,000, and pays semiannual interest payments. What is the amount of each coupon payment?A. $30.00B. $35.00C. $60.00D. $65.00E. $70.00 B
A bond has a par value of $1,000, a current yield of 7.5 percent, and semiannual interest payments. The bond quoteis 98.6. What is the amount of each coupon payment?A. $32.07B. $36.98C. $37.50D. $72.31E. $75.00 B
Whitts BBQ would like to issue some semiannual coupon bonds at par. Comparable bonds have a current yield of9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rateshould Whitts BBQ set on its bonds?A. 9.00 percentB. 9.16 percentC. 9.50 percentD. 9.68 percentE. 10.00 percent C
Last year, you earned a rate of return of 12.37 percent on your bond investments. During that time, the inflation ratewas 3.6 percent. What was your real rate of return?A. 6.30 percentB. 7.60 percentC. 7.75 percentD. 8.47 percentE. 8.70 percent D
Jeffries, Inc. has 6 percent coupon bonds on the market that have 11 years left to maturity. The bonds make annualpayments. If the YTM on these bonds is 7.4 percent, what is the current bond price?A. $895.88B. $897.08C. $903.14D. $921.42E. $933.33 B
If Treasury bills are currently paying 3.2 percent and the inflation rate is 2.8 percent, what is the approximate real rateof interest? The exact real rate?A. 0.40 percent; 3.89 percentB. 0.40 percent; 3.98 percentC. 6.00 percent; 5.67 percentD. 6.00 percent; 5.87 percentE. 6.00 percent; 5.92 percent A
Global Trade, Inc. has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interestannually, mature in 11 years, and have a yield to maturity of 5.34 percent. What is the current yield?A. 5.39 percentB. 5.43 percentC. 5.50 percentD. 5.61 percentE. 5.77 percent B
One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of 6.5 percent and payinterest annually. Today, the market rate of interest on these bonds is 7.2 percent. How does the price of thesebonds today compare to the issue price?A. 4.99 percent lowerB. 5.38 percent lowerC. 6.05 percent lowerD. 0.07 percent higherE. 1.36 percent higher C
You’ve just found a 7 percent coupon bond on the market that sells for par value. What is the maturity on this bond?A. The bond must mature in 1 year.B. The bond could have any maturity date.C. The bond must be maturing today.D. The bond must mature in 10 years.E. None of these are correct. B
. Which one of the following statements is correct?A. From a legal perspective, preferred stock is a form of corporate equity.B. All classes of stock must have equal voting rights per share.C. Common shareholders elect the corporate directors while the preferred shareholders vote on mergers andacquisitions.D. Dividends are tax-free income for individual investors.E. Shareholders prefer noncumulative dividends over cumulative dividends. A
. Which one of the following will increase the current value of a stock?A. Decrease in the dividend growth rateB. Increase in the required returnC. Increase in the market rate of returnD. Decrease in the expected dividend for next yearE. Increase in the capital gains yield E
Which one of the following statements is correct?A. Both preferred stock and corporate bonds can be callable.B. Both preferred stock and corporate bonds have a stated liquidation value of $1,000 each.C. Interest payments to bondholders as well as dividend payments to preferred shareholders are tax-deductibleexpenses for the issuing firm.D. Bondholders generally receive a fixed payment while preferred shareholders receive a variable payment.E. Preferred shareholders receive preferential treatment over bondholders in a liquidation. A
This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12percent rate of return and the annual dividend increases at 3.5 percent annually. What will your capital gain be onthis stock if you sell it three years from now?A. $2.43B. $2.51C. $2.63D. $2.87E. $2.92 A
Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm’sannual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 10 percentannually. What is a share of this stock worth today at a required return of 15 percent?A. $3.06B. $3.24C. $3.41D. $3.59E. $3.95 B
Lamey Headstones increases its annual dividend by 1.5 percent annually. The stock sells for $28.40 a share at arequired return of 14 percent. What is the amount of the last dividend this company paid?A. $3.50B. $3.55C. $3.60D. $3.65E. $3.70 A
The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for thefollowing two years, and then cease paying dividends altogether. How much is one share of this stock worth toyou today if you require a 19 percent rate of return?A. $2.31B. $2.36C. $2.56D. $2.60E. $2.64 A
General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend ispaid, the company expects to encounter some financial difficulties and is going to suspend dividends for fiveyears. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 pershare. What is the current value of this stock if the required return is 18 percent?A. $3.01B. $3.55C. $3.89D. $4.27E. $4.88 E
Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share three years from now.Starting in year 6, the company is expected to start increasing the dividend by 2 percent per year. What is thevalue of this stock today at a required return of 12 percent?A. $7.70B. $8.09C. $8.29D. $9.03E. $9.34 A
New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55,0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increaseby 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of thisstock if the required return is 16 percent?A. $8.50B. $9.67C. $10.46D. $12.23E. $12.49 A
A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent peryear for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share.The last dividend paid was $1 a share. What is the current value of this stock if the required rate of return is 12percent?A. $17.71B. $18.97C. $20.50D. $21.08E. $21.69 C
The Three Amigos Restaurant just paid an annual dividend of $4.20 per share and is expected to pay annualdividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain aconstant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is15 percent?A. $27.64B. $29.61C. $30.66D. $33.05E. $33.93 E
Last year, when the stock of Alpha Minerals was selling for $55 a share, the dividend yield was 3.2 percent.Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains aconstant dividend growth rate of 2.5 percent?A. 6.13 percentB. 6.58 percentC. 6.90 percentD. 7.47 percentE. 7.40 percent C
Laura Lynn owns 20,700 shares of Global Exporters. Her shares have a total market value of $787,270. In total,the firm has 65,000 shares outstanding. Each share is entitled to one vote under the straight voting policy of thefirm. The next election is in four months at which time two directors are up for election. How much more mustLaura Lynn invest in this firm to guarantee that she is elected to the board?A. $0B. $396,554C. $448,820D. $498,406E. $547,478 C
Spiral Staircase is offering preferred stock which is commonly referred to as 10-10 stock. This stock will pay anannual dividend of $10 a share starting 10 years from now. What is this stock worth to you today if you desire a15 percent rate of return?A. $16.70B. $18.95C. $19.63D. $20.52E. $20.94 B
Classic Pickles is a mature manufacturing firm. The company just paid a $4 annual dividend, but managementexpects to reduce the payout by 4 percent per year, indefinitely. If you require a 12 percent return on this stock,what will you pay for a share today?A. $21.42B. $24.00C. $25.24D. $28.56E. $30.02 B
Granger Corp. stock currently sells for $48.29 per share. The market requires a 13 percent return on the firm’sstock. If the company maintains a constant 5.5 percent growth rate in dividends, what was the most recent annualdividend per share paid on the stock?A. $3.43B. $3.57C. $3.90D. $4.15E. $4.36 A
The Dairy Delight wants to raise $1.0 million by selling some coupon bonds at par.Comparable bonds in the market have a 6.5 percent annual coupon, 15 years to maturity, andare selling at 98 percent of par. What coupon rate should The Dairy Delight set on its bonds?A. 6.48 percentB. 6.25 percentC. 6.72 percentD. 6.67 percentE. 6.50 percent C
Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share threeyears from now. Starting in year 6, the company is expected to start increasing the dividend by2 percent per year. What is the value of this stock today at a required return of 12 percent?A. $9.03B. $7.70C. $8.29D. $9.34E. $8.09 B
You purchase a bond with a coupon rate of 7 percent, semiannual coupons, and a clean priceof $1,011. If the next coupon payment is due in four months, what is the invoice price?A. $1,031.00B. $1,044.33C. $1,037.67D. $1,029.36E. $1,022.67 E
Today, you are borrowing $13,800 to purchase a car. What will be your monthly paymentamount if the loan is for four years at 7.5 percent interest?A. $298.40B. $400.10C. $380.24D. $321.150E. $333.67 E
The current yield on a bond is equal to the annual interest divided by which one of thefollowing?A. Current par valueB. Issue priceC. Current market priceD. Face amountE. Maturity value C
What is the primary purpose of bond covenants?A. Meet regulatory requirementsB. Describe repayment termsC. Increase a bond’s seniority positionD. Protect the lenderE. Define a bond’s rating D
One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of6.5 percent and pay interest annually. Today, the market rate of interest on these bonds is 7.2percent. How does the price of these bonds today compare to the issue price?A. 5.38 percent lowerB. 1.36 percent higherC. 4.99 percent lowerD. 6.05 percent lowerE. 0.07 percent higher D
. At the end of this month, Les will start saving $150 a month for retirement through hiscompany’s retirement plan. His employer will contribute an additional $0.50 for every $1.00that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5percent on his retirement savings, how much will Les have in his retirement account 30 yearsfrom now?A. $389,406.19B. $566,190.22C. $401,005.25D. $540,311.67E. $603,289.01 B
A credit card has a stated interest rate of 14.56 percent. What is the APR if interest iscompounded monthly?A. 13.46 percentB. 14.82 percentC. 13.09 percentD. 14.56 percentE. 13.90 percent D
You want to buy a new sports car from Roy’s Cars for $51,800. The contract is in the form of a48-month annuity due at a 9.2 percent APR. What will your monthly payment be?A. $1,284.13B. $1,345.70C. $1,384.32D. $1,352.98E. $1,309.29 A
The Food Store is planning a major expansion for four years from today. In preparation forthis, the company is setting aside $35,000 each quarter, starting today, for the next four years.How much money will the firm have when it is ready to expand if it can earn an average of6.25 percent on its savings?A. $610,411.20B. $640,516.63C. $528,409.29D. $662,009.14E. $540,288.16 B
Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15years. Yesterday, the firm announced the dividend will increase next year by 10 percent andwill stay at the level through year 3, after which time the dividends will increase by 2 percentannually. The required return on this stock is 12 percent. What is the current value per share?A. $26.84B. $26.02C. $24.57D. $26.08E. $25.51 E
You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basisand the principal at the end of three years. What type of loan did you obtain?A. Interest-onlyB. Pure discountC. AmortizedD. Lump sumE. Perpetual A
This morning, you purchased a stock that will pay an annual dividend of $1.90 per share nextyear. You require a 12 percent rate of return and the annual dividend increases at 3.5 percentannually. What will your capital gain be on this stock if you sell it three years from now?A. $2.51B. $2.87C. $2.43D. $2.92E. $2.63 C
The written agreement that contains the specific details related to a bond issue is called thebond:A. document.B. debenture.C. issue paper.D. indenture.E. registration statement D
Which one of the following bonds is the least sensitive to changes in market interest rates?A. Zero coupon, 4 yearB. 8 percent annual coupon, 4 yearC. Zero coupon, 10 yearD. 6 percent annual coupon, 10 yearE. 6 percent annual coupon, 4 year B
A real rate of return is defined as a rate that has been adjusted for which one of the following?A. InflationB. TaxesC. Interest rate riskD. LiquidityE. Default risk A
Which one of the following statements is correct?A. Interest payments to bondholders as well as dividend payments to preferred shareholdersare tax-deductible expenses for the issuing firm.B. Both preferred stock and corporate bonds can be callable.C. Bondholders generally receive a fixed payment while preferred shareholders receive avariable payment.D. Both preferred stock and corporate bonds have a stated liquidation value of $1,000 each.E. Preferred shareholders receive preferential treatment over bondholders in a liquidation. B
Laura Lynn owns 20,700 shares of Global Exporters. Her shares have a total market value of$787,270. In total, the firm has 65,000 shares outstanding. Each share is entitled to one voteunder the straight voting policy of the firm. The next election is in four months at which timetwo directors are up for election. How much more must Laura Lynn invest in this firm toguarantee that she is elected to the board?A. $0B. $396,554C. $498,406D. $547,478E. $448,820 E
Christie is buying a new car today and is paying a $500 cash down payment. She will financethe balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450each with the first payment due 30 days from today. Which one of the following statements iscorrect concerning this purchase?A. To compute the initial loan amount, you must use a monthly interest rate.B. The $500 is the present value of the purchase.C. The car loan is an annuity due.D. The present value of the car is equal to $500 + (36 × $450).E. The future value of the loan is equal to 36 × $450. A
The Chip Dip Co. has 15,500 shares of stock outstanding, grants one vote per share, anduses straight voting. How many shares must you control to guarantee that you will be electedto the firm’s board of directors if there are three open seats?A. 7,134 sharesB. 3,876 sharesC. 5,134 sharesD. 5,167 sharesE. 7,751 shares E
The Three Amigos Restaurant just paid an annual dividend of $4.20 per share and is expectedto pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. Afterthat, the firm expects to maintain a constant dividend growth rate of 2 percent per year. Whatis the value of this stock today if the required return is 15 percent?A. $29.61B. $33.93C. $30.66D. $27.64E. $33.05 B
Which one of the following statements is correct?A. From a legal perspective, preferred stock is a form of corporate equity.B. Dividends are tax-free income for individual investors.C. Common shareholders elect the corporate directors while the preferred shareholders voteon mergers and acquisitions.D. All classes of stock must have equal voting rights per share.E. Shareholders prefer noncumulative dividends over cumulative dividends A
Last year, you earned a rate of return of 12.37 percent on your bond investments. During thattime, the inflation rate was 3.6 percent. What was your real rate of return?A. 8.70 percentB. 6.30 percentC. 7.75 percentD. 8.47 percentE. 7.60 percent D
New Gadgets is growing at a very fast pace. As a result, the company expects to pay annualdividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. Afterthat, the dividend is projected to increase by 5 percent annually. The last annual dividend thefirm paid was $0.40 a share. What is the current value of this stock if the required return is 16percent?A. $12.23B. $9.67C. $12.49D. $10.46E. $8.50 E
General Importers announced today that its next annual dividend will be $2.60 per share. Afterthat dividend is paid, the company expects to encounter some financial difficulties and is goingto suspend dividends for five years. Following the suspension period, the company expects topay a constant annual dividend of $1.30 per share. What is the current value of this stock if therequired return is 18 percent?A. $3.89B. $3.01C. $3.55D. $4.27E. $4.88 E
Which one of the following refers to the relationship between nominal returns, real returns, andinflation?A. Fisher effectB. Clean-dirty spreadC. Bid-ask spreadD. Conversion ratioE. Call premium A
You are buying a bond at a clean price of $1,140. The bond has a face value of $1,000, an 8percent coupon, and pays interest semiannually. The next coupon payment is one month fromnow. What is the dirty price of this bond?A. $1,180.00B. $1,000.00C. $1,173.33D. $1,146.67E. $1,176.67 C
Jeffries, Inc. has 6 percent coupon bonds on the market that have 11 years left to maturity.The bonds make annual payments. If the YTM on these bonds is 7.4 percent, what is thecurrent bond price?A. $897.08B. $921.42C. $933.33D. $895.88E. $903.14 A
Today, you are buying a $1,000 face value bond at an invoice price of $987. The bond has a 6percent coupon and pays interest semiannually. There are two months until the next coupondate. What is the clean price of this bond?A. $987B. $967C. $947D. $957E. $977 B
When you refer to a bond’s coupon, you are referring to which one of the following?A. Difference between the bid and ask priceB. Principal amount of the bondC. Annual interest divided by the current bond priceD. Difference between the purchase price and the face valueE. Annual interest payment E
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing forthe next 48 months. Which one of the following terms best describes these scholarshippayments?A. Annuity dueB. Ordinary annuityC. Perpetuity dueD. Ordinary perpetuityE. Consol A
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ ofthose securities.A. coupon rateB. maturityC. face valueD. issue dateE. market price B
Spiral Staircase is offering preferred stock which is commonly referred to as 10-10 stock. Thisstock will pay an annual dividend of $10 a share starting 10 years from now. What is this stockworth to you today if you desire a 15 percent rate of return?A. $19.63B. $18.95C. $20.52D. $20.94E. $16.70 B
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Finance Flashcards

Finance Ch. 4 Managing Your Cash and Savings

cash management the routine day-to-day administration of cash and near-cash resources, also know as liquid assets, by an individual or family
liquid assets are considered liquid because they are either held in cash or can be readily converted into cash with little or no loss in value
examples of liquid assets cash, checking accounts, savings accounts, money market deposit accounts, money market mutual funds, and other short term investment vehicles
near-term needs are met using cash on hand
unplanned and future needs are met using savings or short-term investment vehicles
Low interest rates reflect the Federal Reserve’s policy goal of keeping rates low to help stimulate the economy during the fragile period following the global financial crisis of 2008-2009
financial services industry comprises all institutions that marker financial products such as checking and savings accounts, credit cards, loans and mortgages, insurance, and mutual funds and financial services (such as financial planning, tax filing, estate planning, rusts, and retirement)
Financial institutions can be classified into two broad groups depository and non-depository, based on whether or not they accept deposits as traditional banks do
The vast majority of financial transactions take place at depository financial institutions (commercial banks, savings and loan associations, savings banks, and credit unions)
depository financial institutions differ from nonbank counterparts, such as stick brokerages and mutual funds, in their ability to accept deposits. Most consumers use these institutions to meet their checking and savings account needs.
Depository financial institution: commercial bank offers checking and savings accounts and a full range of financial products and services; the only institution that can offer non-interest-paying checking accounts (demand deposits). The most popular of the depository financial institutions. Most are traditional brick-and-mortar banks, but internet banks-online commercial banks- are growing in popularity because of their convenience, lower service fees, and higher interest paid on account balances.
Depository financial institution: savings and loan association (S&L) channels the savings of depositors primarily into mortgage loans for purchasing and improving homes. Also offers many of the same checking, saving, and lending products as commercial banks. Often pays slightly higher interest on savings than do commercial banks.
Depository financial institution: savings bank similar to S&Ls (savings and loans) but located primarily in New England states. Most are mutual associations -their depositors are their owners and thus receive a portion of the profits in the form interest on their savings.
Depository financial institution: credit union a nonprofit member-owned financial cooperative that provides a full range of financial products and services to its members, who must belong to a common occupation, religious or fraternal order, or residential area. Generally small institutions when compared with commercial banks and S&Ls. Offer interest paying checking accounts-called share draft accounts, and a variety of savings and lending programs . Because they are run to benefit their members, they pay higher interest on savings and charge lower rates on loans than do other depository financial institutions.
share draft account an account offered by credit unions that is similar to interest-paying checking accounts offered by other financial institutions
nondepository financial institutions financial institutions that offer banking services, but don’t accept deposits like traditional banks (today you can hold a credit card issued by a stock brokerage firm or have an account with a mutual fund that allows you to write a limited number of checks)
Nondepository financial institution: Stock brokerage firms offer several cash management options, including money market mutual funds that invest in short-term securities and earn a higher rate of interest than bank accounts, special “wrap” accounts, and credit cards
Nondepository financial institution: Mutual funds provide another alternative to bank savings accounts, like stockbrokers, mutual fund companies offer money market mutual funds
Other nondepository financial institutions include life insurance and finance companies
The main reason that a bank goes out of business is its purchase by another bank
Almost all commercial banks, savings and loans, savings banks, and credit unions are federally insured by U.S government agencies
The few depository financial institutions that are not federally insured usually obtain insurance through either a state-chartered or private insurance agency
Most experts believe that these privately insured institutions have less protection against loss than those that are federally insured
If your checking and savings accounts are at a federally insured institution, you are covered up to $250,000
Deposit insurance protects the funds you have on a deposit at banks and other depository institutions against institutional failure, the insuring agency stands behind the financial institution and guarantees the safety of your deposits up to a specific maximum amount
Deposit insurance a type of insurance that protects funds on deposit against failure of the institution; can be insured by the FDIC (Federal Deposit Insurance Corporation) and the NCUA (National Credit Union Administration)
Deposit insurance is provided to the depositor rather than a deposit account, thus checking and savings accounts of each depositor are insured and, as long as the maximum insurable amount is not exceeded, the depositor can have any number of accounts and still be protected.
people mistakenly believe that the maximum insurance applies to each of their accounts
deposits in other banks which also provide the $250,000 of deposit insurance would fully protect the depositors funds under $250,000
only deposit accounts are covered by deposit insurance
Securities purchased through your bank are not protected by any form of deposit insurance
As a depositor, it’s possible to increase your $250,000 of deposit insurance if necessary by opening accounts in different depositor names at the same institution
people hold cash and other forms of liquid assets, such as checking and savings accounts, for the convenience they offer in making purchases, transactions, meeting normal living expenses, and providing a safety net, or cushion, to meet unexpected expenses or take advantage of unanticipated opportunities
financial institutions compete to offer a wide array of products meeting every liquid-asset need
demand deposit an account held at a financial institution from which funds can be withdrawn on demand by the account holder; same as a checking account
A checking account held at a financial institution is a demand deposit, meaning that the bank must permit these funds to be withdrawn whenever the account holder demands
You put money into your checking account by depositing funds
You withdraw money from your checking account by writing a check, using a debit card, or making a cash withdrawal
As long as you have sufficient funds in your account, the bank, when presented with a valid check or electronic debit, must immediately pay the amount indicated by deducting it from your account
regular checking is the most common type pf checking account, it pays no interest, and any service charges can be waived if you maintain a minimum balance
negotiable order of withdrawal (NOW) account a checking account on which the financial institution pays interest, NOW accounts have no legal minimum balance
time deposit a savings deposit at a financial institution ; remains on deposit for a longer time than a demand deposit
a savings account is another type of liquid asset available at commercial banks, Sand Ls, credit unions
Savings deposits are referred to as time deposits, because they are expected to to remain on deposit for longer periods of time than demand deposits
because savings deposits earn higher rates of interest savings accounts are typically preferable to checking accounts when the depositor’s goal is to accumulate money for future expenditures
most banks pay higher interest rates on larger savings account balances
Although financial institutions generally have the right to require a savings account holder to wait a certain number of days before receiving payment of a withdrawal most are willing to pay withdrawals immediately
Negotiable order of withdrawal accounts (NOW) (Interest-Paying Checking Account) checking accounts on which the financial institution pays interest, there is no legal minimum balance for NOW, but many institutions impose their own requirement, often $500 or $1000. Some pay interest on any balance in the account, but most institutions pay a higher rate of interest for balances above a specified amount.
Money Market Deposit account (MMDA) a federally insured savings account, offered by banks and other depository institutions, that competes with money market mutual funds.
Money Market Deposit Accoundts (MMDA) are popular with savers because of their convenience and safety because deposits in MMDA are federally insured
Most depositors view MMDA as savings rather than convenience accounts
MMDA pay the highest interest rate on which checks can be written
A major problem with the growing popularity of interest-paying checking accounts has been a rise in monthly bank charges, which can easily amount to more than the interest earned on all but the highest account balance, so the their rates of interest offered by MMDAs can be misleading
Money Market mutual fund (MMMF) a mutual fund that pools the fund of many small investors and purchases high-return, short-term marketable securities
Money market mutual funds have historically paid interest rates of 1% to 3% above those paid on regular savings accounts
asset management account (AMA) a comprehensive deposit account that combines checking, investing, and borrowing activities, offered primarily by brokerage houses and mutual funds
AMA (asset management account) appears to investors because they can consolidate most of their financial transactions at one institution and on one account statement
AMA (asset management accounts) have increased in popularity as more institutions have lowered minimum balance requirements to $5000 and they pay higher interest rates on checking account deposits than banks do
AMA (asset management accounts) distinguishing feature is they automatically “sweep” excess balances into a higher-return MMMF (money market mutual fund) daily or weekly
Drawbacks of AMAs (asset management accounts) there are fewer branch locations
AMAs are not covered by deposit insurance, although these deposits are protected by the Securities Investor Protection Corporation and the firm’s private insurance
The fastest changing area in cash management is electronic banking services
electronic funds transfer system (EFTSs) systems using the latest telecommunications and computer technology to electronically transfer funds into and out of customers’ accounts
debit cards specially coded plastic cards used to transfer funds from a customer’s bank account to pay for goods or services
ATM (automated teller machine) a remote computer terminal that customers of depository institutions can use to make basic transactions 24 hours a day 7 days a week
Banks charge an average per-transaction fee of _______ for using the ATM of another bank $2.40
Debit card use is increasing because they are convenient for retailers, who don’t have to write checks and for retailers, who don’t have to worry about bounced checks, and for consumers who don’t have to write checks, and can often get cash back when they make a purchase
The convenience of debit card may be their biggest drawback, it can be easy to overspend
EFT service, preauthorized deposits and payments allow you to receive automatic deposits or make payments that occur regularly
Sometimes there are charges for preauthorized payments
Electronic Fund Transfer Act describes your rights and responsibilities as an EFTS user
Safe-deposit box ( other bank services) rented drawer in a bank’s vault, you receive one key to it and the bank keeps another key, the box can only be opened when both keys are used, items stored ex. jewelry, contracts, titles
Keeping valuables in a safe-deposit box may also reduce homeowner’s insurance by eliminating the “riders” that are often needed to cover such items
Trust services (other bank services) bank trust departments provide investment and estate planning advice, they manage and administer the investments in a trust account or from an estate
A checking account is one of the most useful cash management tools you can have, it’s a safe and convenient way to hold money and streamline point-of-sales purchases, debt payments, and other basic transactions
Don’t keep anything in a safe-deposit box that you might need in an emergency when your bank is closed
Factors that typically influence the choice of where to maintain a checking account are convenience, services, and cost (and rates)
Today few, if any, banks and other depository institutions allow unlimited free check-writing priviledges
Although some banks use the average monthly balance in an account to determine whether to levy a service charge, most use the daily balance procedure
Service charges take two forms a base service charge every month and additional charges for each check you write or each ATM transaction
two people wishing to open a checking account may do so in one of three ways they can each open individual checking accounts on which the other cannot write checks, they can open a joint account that requires both signatures on all checks, or they can open a joint account that allows either one to write checks (the most common type of joint account)
one advantage of the joint account over two individual accounts is lower service charges
checkbook ledger a booklet, provided with a supply of checks, used to maintain accurate records of all checking account transactions
In a checkbook ledger you subtract the amount of each check, debit card purchase, ATM cash withdrawal, or payment, and add the amount of each deposit to the previous balance to keep track of your current account balance
good transaction records on an account balance prevent overdrawing the account
overdraft the result of writing a check for an amount greater than the current account balance
overdraft protection an arrangement between the account holder and the depository institution when the institution automatically pays a check the overdraws the account(this also helps not damage your credit worthiness)
stop payment an order made by an account holder instructing the depository institution to refuse payment on an already issued check
Occasionally, it’s necessary to stop payment on a check that has been issued because a good or service paid for by check is found to be faulty or on a check issued as part of a contract that is not carried out
account reconciliation/balancing the checkbook verifying the accuracy of your checking account balance in relation to the bank’s records as reflected in the bank statement, which is an itemized listing of all transactions in the checking account
account reconciliation can help you avoid overdrafts by forcing you to verify your account balance monthly
cashier’s check a check payable to a third party that is drawn by a bank on itself in exchange for the amount specified
traveler’s check a check sold by many large financial institutions typically in denominations ranging from $20-$100 dollars, that can be used for making purchases and exchanged for local currencies in most parts of the world
cashier’s checks are often used by people who don’t have checking accounts,
because they are insured against loss or theft by the issuing agency traveler’s checks provide a safe and convenient and popular form of money for travel
certified checks a personal check that the bank certifies to guarantee that the funds are available , the bank immediately deducts the amount of the check from your account
The act of saving is a deliberate well thought-out activity designed to preserve the value of money, ensure liquidity, and earn a competitive rate of return
What we normally think of as “savings” is really a form of investment-a short-term , highly liquid investment, that’s subject to minimal risk
Careful finance planning dictates that you hold a portion of you assets to meet liquidity needs and accumulate wealth
How much money should you keep in liquid reserves (savings?) 6-9 months of after-tax income
Savings should be a priority item in your budget not something that occurs only when income happens to exceed expenditures
The key to success is to establish a regular pattern of saving
Short term interest rates generally fluctuate more than long-term rates, so it pays to monitor interest rate movements, shop around for the best rates, and place your funds in savings vehicles consistent with your needs
Interest earned is the reward for putting your money in a savings account of short-term investment vehicle
interest can be earned in two ways discount basis, direct payment
Some short-term investments are sold on a discount basis, this means the security is sold for a price that is lower than its redemption value; the difference is the amount of interest earned
another way to earn interest on a short-term investment is by direct payment which occurs when interest is applied to a regular savings account
compound interest when interest earned is each subsequent period is determined by applying the nominal (stated) rate of interest to the sum of the initial deposit and the interest earned in each prior period
simple interest interest that is paid only on the initial amount of the deposit
effective rate of interest the annual rate of return that is actually earned (or charged) during the period the funds are held (or borrowed)
effective rate of interest = amount of interest earned during the year/amount of money invested or deposited
The more frequently interest is compounded the greater the effective rate for any given nominal rate
compound interest generates future value
future value= amount deposited x future value factor
future value of an annuity= amount deposited yearly x future value annuity factor
Certificate of deposit (CD) a type of savings instrument issued by certain financial institutions in exchange for a deposit; typically requires a minimum deposit and has a maturity ranging from 7 days to as long as 7 or more years
Certificates of deposit (CD) differ from other savings instruments in that CD funds must remain on deposit for a specified period
CDs are convenient to buy and hold because they offer attractive and highly competitive yields plus federal deposit insurance protection
U.S Treasury Bill (T-bill) a short term (3 or 6 month maturity) debt instrument issued at a discount by the U.S. treasury in the ongoing process of funding the national debt
U.S. treasury bill is considered the ultimate safe haven for investments
T-bills are issued by the U.S. treasury as part of its ongoing process of funding the national debt
Backed by the full faith and credit of the U.S. government, T-bills pay an attractive and safe return that is free from state and local income taxes
T-bills have interest on a discount basis, their interest is equal to the difference between the purchase price paid and their stated value at maturity
Series EE bonds a savings bond issued in various denominations by the U.S. treasury
Savings bonds are accrual type securities, which means that interest is paid when they are cashed in or before maturity rather than periodically during their lives,
The higher the rate of interest on a savings bond, the shorter the time it takes for the bond to accrue from its discounted purchase price to its matiruity value
series EE bonds give their holders an appealing tax twist savers need not report interest earned on their federal tax returns until the bonds are redeemed,
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Finance Flashcards

Corporate Finance Quiz 5

Sales commissions and raw material are variable operating costs True
A highly automated plant would generally have more fixed operating costs than variable operating costs.
As the contribution margin rises, the breakeven point goes down True
At the break-even point, a firm’s operating profits are True
A firm’s break-even point will rise if unit variable operating cost rises
Cash breakeven analysis eliminates the depreciation expense and other non-cash charges from fixed operating costs True
A high DOL means: there are high fixed operating costs
The degree of financial leverage is concerned with the relationship between changes in EBIT and changes in EPS.
Degree of combined leverage considers the impact of a change in sales volume on the change in operating income. False
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Finance Flashcards

Finance Chapter 6

Generally, an increase in risk will result in ____________. a higher required return or interest rate
The legal contract setting forth the terms and provisions of a corporate bond is a(n)_________. indenture
_____________ rate of interest creates equilibrium between the supply of savings and the demand for investment funds. Real
The current yield on a bond is measured by​ ________. the annual interest payment divided by the current price
In the basic valuation​ model, risk is generally incorporated into the​ ________. discount rate
A​ $1,000, 8% bond sells for 980.​ $1,000 is called the​ ________. par value
To compensate for the uncertainty of future interest rates and the fact that the longer the term of a loan the higher the probability that the borrower will​ default, the lender typically​ ________. charges a higher interest rate on long-term loans
The purpose of the debt covenant that requires maintaining a minimum level of net working capital is to​ ________. ensure a cash shortage does not cause an inability to meet current obligations
Nominal rate of interest is equal to​ ________. the risk-free rate plus a risk premium
​A(n) ________ is a paid​ individual, corporation, or a commercial bank trust department that acts as a third party to a bond indenture. trustee
Nico invested an amount a year ago and calculated his return on investment. He found that his purchasing power had increased by 15 percent as a result of his investment. If inflation during the year was 4​ percent, then​ Nico’s ________. nominal return on investment is more than 15 percent
Tangshan Industries has issued a bond which has a​ $1,000 par value and a 15 percent annual coupon interest rate. The bond will mature in ten years and currently sells for​ $1,250. Using this​ information, the yield to maturity on the Tangshan Industries bond is​ ________. 10.79%
Less certain a cash​ flow, the​ ________ the​ risk, and​ ________ the present value of the cash flow. higher;lower
The value of a bond is the present value of the​ ________. interest payments and maturity value
What is the yield to​ maturity, to the nearest​ percent, for the following​ bond: current price is​ $908, coupon rate is 11​ percent, $1,000 par​ value, interest paid​ annually, eight years to​ maturity? 13%
Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the​ issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This​ firm’s bonds are currently selling for​ $1,091.96. If interest is paid annually for both​ bonds, what must the coupon rate of the new bonds be in order for the issue to sell at​ par? 6.71%
The riskiness of publicly traded bond issues is rated by independent agencies. According to​ Moody’s rating​ system, an Aaa bond and a Caa bond are​ ________ and​ ________ respectively. prime quality; speculative
A firm has an issue of​ $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8​ percent, the​ firm’s bond will sell for​ ________ today. 1,268.4
What is the current price of a​ $1,000 par value bond maturing in 9 years with a coupon rate of 8​ percent, paid​ annually, that has a YTM of 9​ percent? $940
A bond will sell​ ________ when the stated rate of interest exceeds the required rate of​ return, ________ when the stated rate of interest is less than the required​ return, and​ ________ when the stated rate of interest is equal to the required return. at a​ premium; at a​ discount; equal to the par value
The​ risk-free rate on​ T-bills recently was 4.32​%. If the real rate of interest is estimated to be 0.82​%, what was the expected level of​ inflation? The expected level of inflation IP is 3.50​%.
A debenture is​ ________. an unsecured bond that only creditworthy firms can issue
The return expected from an asset is fully defined by its​ ________. cash flow and timing
A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called​ ________. inverted yield curve
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Finance Flashcards

chapter 15 Personal Finance

networks are computer systems that match desired purchases and sales of stocks. They receive and buy and sell stocks. What are electronic communications networks
??? How is the market for a stock created?
The two types of firms are discount brokerage firm is a brokerage firm that executes your desired transactions but does not offer investment advice. The other type is a full-service brokerage firm which is a brokerage firm that offers investment advice and executes transactions. Types of brokerage services
they have real time updates, the charge per transaction is low, and it’s convenient and easy What are some advantages of using online brokerage services
To set up an account, go to the website and set up an account. Then send a check so you can purchase stocks. Describe how an investor would set up and use an online brokerage account
know the name of the stock, whether you want to buy or sell, the number of shares you want, and the market order/limit order. What information must you provide when placing an order to buy or sell stock
A ticker symbol is the abbreviated term used to identify a stock. What is a ticker symbol
Round lot are shares that are bought or sold in multiples of 100. Odd lot are less than 100 shares of a stock What do the terms round lot and odd lot mean in stock transactions
an order to buy or sell a stock at its prevailing market price. What is a market order
an order to buy or sell a stock inly if the price is within limits that you specify What is a limit order
an order to execute a transaction when the sotck price reaches a specified leve What is a stop order
purchasing a stock with a portion of the funds borrowed from a brokerage firm What is buying a stock on margin
you may get a margin call to increase the cash in your account to bring the margin back to minimum level What happen if stocks bought on margin decline?
Some investors achieve high returns this way, but it’s risky What are some advantages of stocks bought on margin
to assess its future performance Why is it necessary to analyze a firm
reports standardized financial performace and expected performance. Also may have financial statements. What is an annual report
analyzes a firm’s sources of funds and how it has invested its funds. An income statement measures a firm’s revenues, expenses, and earnings. List the characteristics of a firm that investors analyze by sing a balance sheet and income statement
are evaluated according to how a firm’s value changes over time. Why may top managers of a firm be tempted to use misleading estimates of revenues and expenses
They want to increase the value of their firm, so that they can sell their shares at a high price and earn a high level of compensation How do managers boost reported earnings of their firm
13. When analyzing economics in stocks, they analyze economic growth, impact of international economies, and inflation When performing an economic analysis of a stock, what economic factors are most closely watched
measured by gross domestic product (GDP) which is the total market value of all products and services produced in a country Explain how economic growth is measured
The government’s fiscal olicy is the means by which the U.S. government imposes taxes on individuals and corporations and by which it spends its money. How does economic growth affect stock prices?
Low interest rates cause stocks to do better. The Federal Reserve Board uses monetary policy to adjust the supply of funds in the economy and influence interest rates. Interest rates affect economic growth and therefore have an indirect impact of stock prices How do interest rates affect economic growth.
increase in the general level of prices of products and services over a specified period. What is inflation
measured by the consumer price index (CPI) and the producer price index (PPI) How is inflation measured?
it allows you to assess a firm’s future performance and decide whether or not to buy that stock. You can use Bloomberg.com or yahoo finance to analyze an industry. Why is an industry analysis of stocks important
a process by which investors sell a stock that they do not own. This would be used to sell a stock that is overvalued in their opinion. What is a short sale? When would this strategy be used?
If another country has a weak or strong economy, it affects the imports and exports we have with that country. These imports and exports influence our economy. How can another country’s economic conditions impact a U.S. firm and its stock
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Finance Flashcards

Finance chapter 7

A proxy statement is a statement transferring ________. a. the votes of a stockholder to another party
Which of the following is true of common stocks? . The common stock of a corporation can be either privately or publicly owned.
________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends. a. Preferred stockholders
Which of the following is an advantage for a firm to issue common stock over long-term debt? c. no maturity date on which the par value of the issue must be repaid
From a corporation’s point of view, a disadvantage of issuing preferred stock is ________. a. that the dividends are not tax-deductible
Holders of equity capital ________. a. own the firm
A(n)________ is hired by a firm to find prospective buyers for its new stock or bond issue. c. investment banker
Which of the following is true of preferred stocks? d. Preferred stock with a conversion feature allows holders to change each share into a stated number of shares of common stock.
Which of the following is typically a feature of common stock? c. Common stocks may or may not pay dividends.
________ is a guide to a firm’s value if it is assumed that investors value the earnings of a given firm in the same way they do the average firm in the industry. c. The P/E multiple