Personal Finance Chapter 11

Types of Bonds: -Debenture-Mortgage Bond
Debenture: A bond that is backed only by the reputation of the issuing corp-If corps fail to make payments debenture bondholders become general creditors
Mortgage Bond/Secure Bond: A corporate bond secured by various assets of the issuing firm-interest rates on mortgage bonds are lower than interest rates on unsecured debentures
Convertible Bond: A bond that can be exchanged at the owners option for a specified number of shares of the corporations common stock
Emergency Fund: An amount of money you can get quickly in case of an immediate need
Relationship of Interest Rates and Values of Bonds: As one increases the other decreases
3 Advantages that corporations have by issuing convertible bonds are: -Attracts investors who are interested in speculative gain-Interest rates are lower-If the bond is converted, it no longer has to be redeemed at maturity
Inflation: Is the rise in the general level of prices
Revenue Bond: A municipal bond that is repaid from the income generated by the project it is designed to finance
Government Bond: Written pledge of government or a municipality to repay a specified sum of money, along with interest
Municipal Bond: Debt security issued by a state or local govt
General Obligation Bond: A bond backed by the full faith, credit, and unlimited taxing power of the government that issue
Interest Rate: Risk in the result of changes in the interest rates of the economy
Bond Indenture: A legal document that details all of the conditions relating to a bond issue
Sinking Fund: A fund in which annual or semiannual deposits are made for the purpose of redeeming a bond issue
Serial Bonds: Bonds of a single issue that mature on different dates
Corporate Bond: Corporations written pledge to repay a specified amount of money along with interest
For Investment Incomes you should choose: -Municipal Bonds-Corporate Bonds-Preferred Stocks
Liquidity: The ability to buy or sell an investment quickly without affecting the investments value
Line of Credit: A short-term loan that is approved before the money is actually need
Steps to Investing: 1. Establishing Goals2. Performing a Financial Checkup3.Work to Balance Your Budget4. Manage Your Credit Card Debt
Call Feature: Allows the corporation to buy outstanding bonds from current bondholders before the maturity date
Business Failure Risk: Associated with investments in stock and corporate bonds-Bad management, unsuccessful products, competition, or other factors with cause the business to be less profitable than originally anticipated or experience loss.-The business could fail and become worthless
Market Risk: Rapid expansion is followed by a period of recession-the nation is still experiencing economic problems that are affecting the value of investments
Inflation Risk: Risk that the financial return on an investment will not keep pace with the inflation rate
Interest Rate Risk: Associated with preferred stocks or govt corp bonds is the result of changes in the interest rates in the economy
Investors Purchase Bonds because: -Interest income-Repayment at maturity-Interest income
Relationship of companies with potential dividends: -Growth company; no dividend-Non-Growth company; better chance of receiving a dividend
Municipal Bonds are used to finance: -Airports-Schools-Toll Roads
Trustee: Financially independent firm that acts as a bondholders’ representative
Maturity Date: For a corporate bond, the date on which the corporation is to repay the borrowed money
Speculative Investment: High-Risk investment made in the hope of earning a relatively large profit in a short time
Current Yield: Determined by dividing the annual interest amount by the bond’s current priceCurrent Yield= Annual Interest Amount/Current Pricethe lower the yield the less interest you will pay
Corporations who prefer debt financing over equity financing choose: Bonds
One Disadvantage of investing in U.S. treasuries is: They have low interest rates
A disadvantage of selling bonds is that in the event of bankruptcy, bondholders: Have a claim to the corporations assets
Face Value: The dollar amount the bondholder will receive at the bond’s maturity
Asset Allocation: The process of spreading your assets among several different types of investments to lessen risk;based on %diversifying
For treasury securities, most investors are willing to accept the interest rate determined at auction so they are using: Noncompetitive bids
Reasons Why Corporation Sell Bonds: -They find it difficult to sell stock-They use interest as a tax break-They need money to finance ongoing activities
Advantages of Purchasing US Treasuries: -Decreased risk of default-safe investment-Backed by the government
Safe investments: -Certificates of Deposit-Government bonds-Select mutual funds
Emergency Fund: Should be how much you spend a month times 3 months
When evaluating bonds: Business periodicals and federal agency publications are 2 additional sources of information that can be valuable
Bond Ratings Range: AAA (highest) to D (the lowest)
As the common stock value increase: The market value of the convertible bond
Safety: An investment means minimal risk or loss
Risk: An investment means a measure of uncertainty about the outcome
A speculative investment or one that stresses immediate returns should not be considered for long term growth
Taxable equivalent yield is equal to tax-exempt yield divided by X minus your tax rate. X is equal to: 1.0
Rule of thumb for consumer credit payments: Limit consumer credit payments to 20% of after-tax income
With a lower risk of a bond and the possible high return of a stock, investors may choose which investment option? Convertible bonds
Maturity of a Treasury Bond takes: 30 years
Treasury inflation-protected securities pays: Interest twice a year at a fixed rate
Bond Quotations: Are given as a percentage of face value
Speculative investments: Should not be considered for long-term growthA high risk investment made in the hope of earning a relatively large profit in a short time
The advantage for an investor to trade bonds through an online broker is discounted commissions on trades True
Yield is: The Percentage Rate of Interest earned by an investor who holds Bonds for a state period of time
Dollar amount of annual interest formula: dollar amount of annual interest = face value x interest rate
Yield: The rate of return earned by an investor who holds a bond for a stated period of time
If the corporation fails to make either interest payments or repayment at maturity, debenture bondholders become: General Creditors
If you are a young married couple with no children, you will most likely choose investments: With higher risks
Inflation Formula: ($10,000 x 3.5%) – ($10,000 x 4%)$350 – $400 = $50
To calculate the current price for a bond: Current price = bond price quotation x face value
Interest paid on U.S. government securities is: Taxable for federal income tax purposes, but is exempt from state and local taxation
Bonds paying 10% in an economy where the average is 5% are advantageous for the investor, and the investor would prefer for the bond: Not to be called
Guaranteed municipal securities usually carry a slightly: Lower interest rate than uninsured bonds
When a company calls a bond when the current interest rates are lower than the bond’s interest rate, this is: unfavorable for inestors
Conservative Investments with Less Risk -People with no financial training or investment background-Old investors-Lower-income investors-Families with children-Employees worried about job loss
Speculative Investments with High Risks: -Investors with financial training and investment background-Younger investors-Higher-income investors-Married couples with no children or single individuals-Employees with secure employment positions
False: General obligation bonds are repaid from income generated by the project that the bond issue is financing
Captain Gain: Results when you sell a municipal bond before maturity and at a profit may be taxable just like gains on other investments sold as a profit
The risk associated with bad news that a company may bring to the public is the risk in decreased… value
Registered Bonds: A bond that is registered in the owners name by the issuing company.-tracked electronically
Registered Coupon Bond: Is registered for principal only, not interest
When evaluating if a bond is a good investment, you can use: -reports provided by the federal reserve system-reports on corporations by the SEC-business periodicals at your libs
Government Bonds: a written pledge of a government or a municipality to repay a specified sun of money along with interest
Which is a better bond buyer? -Stagger your bond holdings to receive interest each month-the most useful yield calc is yield to maturity-realize that commission on existing bonds are usually higher than on new bond issues
Capital Gains Tax: This is enforced if you sold the bond for more than you paid it.
Callable Bonds: -The money for calling bonds comes from profits, a new bond issue, or the sale of addition stock-Companies usually cannot call bonds for 5 to 10 yrs-Companies will often call bonds to reissue bonds with lower interest rates
TRUE Revenues bonds are repaid from income generated from project the bonds are financing
Bonds: -Govt and corporate bonds are often seen a safer than stocks-considered a safe harbor in tough economic times-a way to diversify your portofolio

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