Investing for your Future Review

1. Investing for your FutureReview Personal Finance Chapter 11

2. 11.1 Check Your UnderstandingP. 264 #1 • You should have an emergency fund so that should a need arise, you won’t dip into permanent, long-term investments to pay for temporary short-term needs.

3. 11.1 Check Your UnderstandingP. 264 #2 • Investors seek investments for the long term that will grow faster than the prices of goods and services, or the rate of inflation

4. 11.1 Check Your UnderstandingP. 264 #3 • Diversification is the spreading of risk among many types of investments. Diversification reduces overall risk because not all of your choices will perform poorly at the same time.

5. 11.2 Check Your UnderstandingP. 272 #1 • Sources of inflation information include: • Newspapers • Investor services and newsletters • Financial magazines • Brokers • Financial advisers • Annual reports and • Financial statements • Online investor education

6. 11.2 Check Your UnderstandingP. 272 #2 • Beginning investors, who are inexperienced in terms of their knowledge and experience, should consider fairly safe investments.

7. 11.2 Check Your UnderstandingP. 272 #3 • Stocks generally carry more risk than choices with fixed interest because a stockholder’s earnings can go up or down, depending on the company’s fortunes.

8. Review Facts and IdeasP. 276 #1 List the stages investors usually go through as their excess income increases over time. The stages are: • Put-and-take account • Beginning investing • Systematic investing • Strategic investing • Speculative investing

9. Review Facts and IdeasP. 276 #2 Explain the difference between temporary and permanent investments. • Temporary investments are set aside for short-term needs. Permanent investments represent money set aside “permanently,” for retirement or some other long-term need, rather than for a short time.

10. Review Facts and IdeasP. 276 #3 List three reasons for investing • People invest their money to • Provide supplemental income • Make profits • Provide a hedge against inflation • Minimize tax burdens now and in the future • Provide income for the future

11. Review Facts and IdeasP. 276 #4 What can you use the Rule of 72 to estimate? • The Rule of 72 is used to estimate the number of years or, • The rate of return required to double your money.

12. Review Facts and IdeasP. 276 #5 How does risk relate to potential return? • The greater the risk you are willing to take, the greater the potential returns.

13. Review Facts and IdeasP. 276 #6 How does inflation affect an investment’s return? • Inflation reduces your investment’s true rate of return. • For example, if make 6% on your investment, but inflation increases by 4% in the same time period, you’ve gained only 2% of true value.

14. Review Facts and IdeasP. 276 #7 Identify criteria can you use to evaluate an investment. • Safety • High liquidity • High dividends or invest • Growth in value that exceeds the inflation rate • Reasonable (low) purchase price or cost • Tax benefits

15. Review Facts and IdeasP. 276 #8 What are seven wise investment practices? • Define your financial goals • Go slowly • Follow through • Keep good records • Seek good investment advice • Keep your investment knowledge current • Know your limits

16. Review Facts and IdeasP. 276 #9 Name at least six main sources of financial information • Newspapers • Investor services and newsletters • Financial magazines • Brokers • Financial advisers • Annual reports and financial statements • Online investor education

17. Review Facts and IdeasP. 276 #10 What advantages and disadvantages of investing through a discount broker rather than a full-service broker? Discount broker Pro - Reduced commission Con - Buyer must be well informed (do own research) Full-Service broker Pro – Well known, will provide research Con – Costly commission

18. Review Facts and IdeasP. 276 #11 Where can you find investment information online? In addition to websites of print publications and brokers, the Internet offers many educational sites for new investors.

19. Review Facts and IdeasP. 276 #12 Distinguish between t-bills, Treasury notes, and Treasury bonds. • Treasury bills (t-bills) are short-term (one year or less) debts of the US government. • They are sold at a discount, in denominations of $10,000 and increments of $5,000 thereafter. • Treasury notes are issued in $1,000 or $5,000 denominations and mature between two and ten years.

20. Review Facts and IdeasP. 276 #12 Distinguish between t-bills, Treasury notes, and Treasury bonds. • Treasury bonds mature in 10 to 30 years, are issued in $1,000 denominations, and pay the highest interest rates.

21. Review Facts and IdeasP. 276 #13 Explain the difference between stocks and bonds. • Stocks represent equity or ownership interests in a company. Stocks have no guaranteed rate of return. Stocks have more risk and more potential earnings. • Bonds represent debt or the loaning of money to a company. Bonds have a specified rate of return.

22. Review Facts and IdeasP. 276 #14 What are some advantages of investing in mutual funds? • Two major advantages of mutual funds for an investor: • Professional management • Diversification

23. Review Facts and IdeasP. 276 #15 Why are futures and options risky investments? • With futures and options, the investor is betting that price of the commodity or stock will rise over time.