Presentation Transcript

1. CH 12, Section 2, p. 318, Terms: Risk 318 a situation in which the outcome is not certain. Probabilities for each possible outcome can be estimated Financial assets are “risky” Prices may go up OR down. Agency issuing bond, note, or bill, may not redeem and investor loses all investment Higher risk means higher interest rates demanded by investors.
2. 401(k) Plan 320 an investment and savings plan that acts as a personal pension fund for employees tax-deferred (reduces annual income = reduces annual income tax)
3. Coupon 321 the stated interest on a bond debt
4. Maturity 321 the life of a bond
5. Par value 321 the principal or the total amount initially borrowed that must be repaid to the lender at maturity
6. Current yield 321 the annual interest divided by the purchase price of the bond.
7. Municipal bonds 323 aka “munis” Bonds issued by state and local governments Finance for…. Highways State buildings Schools Parks libraries Public works Considered safe because governments have low chance of going out of business power to tax And they are …..
8. Tax-exempt 323 the federal government does not tax the interest paid to investors owning municipal bonds.
9. Savings bonds 323 low-denomination, non-transferable bonds Issued by the US government Through payroll savings plan Low risk Easy to obtain Bought at a lower price than the face value, Owner must wait for term to expire to collect that amount Ex: $50 bond is bought for $25, but recipient must wait a number of years before the bond is actually worth $50.
10. Treasury Notes 325 US obligations with maturity of two to ten years.
11. Treasury Bonds 324 US obligations with maturity of ten to thirty years. Smallest denomination is $1000
12. Treasury Bills 324 aka “T-bill” Short-term obligation with a majority of 13, 26, or 52 weeks Minimum denomination of $1000 Sold on a “discount” basis, at auction.
13. Individual Retirement Account 324 aka “IRA” Long-term time deposit Set up for retirement Tax-sheltered Convenient for married couples Taxable when used at maturity.
14. Roth IRA 325 an IRA whose contributions are made after taxes so that no taxes are taken out at maturity Tax already paid each month.
15. Capital market 325 a market where money is loaned for more than one year. Long-term CDs Corporate and government bonds
16. Money market 325 A market where money is loaned for periods of less than one year. CD with maturity of one year or less Mutual funds
17. Primary market 326 a market where only the original issuer can repurchase or redeem a financial asset Government savings bonds IRAs Small CDs
18. Secondary market 326 market in which existing financial assets can be resold to new owners Liquidity to investors Can be bought and sold faster More competitive
19. Section 3, p. 328 Terms: Equities 328 stocks that represent ownership shares in corporations Large number of buyers and sellers Well informed
20. Efficient Market Hypothesis 329 aka “EMH” Argument that stocks are always priced about right that bargains are hard to find because they are followed closely by so many investors
21. Portfolio diversification 329 the practice of holding a large number of different stocks Increases in some will offset unexpected declines in others. Popular strategy
22. stockbroker 329 a person who buys or sells equities for clients. Arranges stocks or bonds to be bought on the exchange floor by a trader Also supplies the securities from an inventory Buys them from some other broker
23. Securities exchange 329 place where buyers and sellers meet to trade securities Members pay fee to join Trades can only take place on the floor of the exchange. NYSE AMEX
24. seats 330 membership on an exchange Ex: NYSE has 1400 seats Only seat holders may trade on the exchange floor Larger brokerage companies have more seats because they can afford them. Each seat may cost several million dollars….. Fees vary with market Bidding process
25. Trading floor of NYSE
26. Over-the-counter market 331 aka: OTC Electronic marketplace for securities that are not traded on an organized exchange. NASDAQ
27. Dow-Jones Industrial Average 332 the most popular and widely publicized measure of stock market performance on the NYSE. Covers 30 major stocks Various industrial/business sectors Value of “point” varies due to value of money traded and volume of stock Better way to evaluate performance is to look at percentage gained or lost Some criticize that 30 companies are not enough to judge the performance of thousands of companies being traded
28. Standard and Poor’s 500 332 uses the price changes of 500 representative stocks as an indicator of overall market performance. Total of all sales reduced to an easy to understand “index” number. Covers stocks on more than NYSE AMEX OTC
29. Bull market 332 A “strong” market with the prices moving up for several months or years in a row. At time of text publishing, the DJIA peaked at 12,000 points, in 2000. Current DJIA is 11,000 A brief history of the DJIA Charging Bull, which is sometimes referred to as the Wall Street Bull or the Bowling Green Bull, is a 3,200 kilograms (7,100 lb) bronze sculpture by Arturo Di Modica that stands in Bowling Green Park near Wall Street in Manhattan, New York City.
30. Bear market 332 A “weak” or “mean” market with the prices falling sharply for several months or years in a row. 2001-2003 market lost 30+% of it value
31. How things rose and fell:
32. Spot market 332 transactions are made immediately at the prevailing price. “spot” denotes the current price in the city where the trade takes place, not a world average. The current price at the moment of purchase, not in the future.
33. Futures contract 333 agreement to buy or sell at a specific price at a specific date in the future. Regardless of market price at the specific date. Ex: airline buys aviation fuel at $3 a gallon, to be collected 1 year from now. Market price of aviation fuel climbs to $5 a gallon in the course of that year. Airline saves $2/gallon Aviation fuel seller makes good money now and had got rid of stock of aviation fuel.
34. Futures market 333 marketplace where futures contracts are bought and sold. Ex.: Chicago Board of Trade/Chicago Mercantile Exchange/New York Mercantile Exchange (CME) Intercontinental Exchange (ICE)
35. option 333 contract that provides the right to purchase or sell commodities or financial assets at some point in the future. At an agreed upon price today. Either party may choose to back out.
36. Call-option 333 the right to buy a share of stock at a specified price some time in the future. Later price lower than purchase price, you can buy BELOW the call-option price. If later price higher than purchase price, you can buy AT the call-option price. Ex.: p. 333
37. Put option 333 the right to sell a share of stock at a specified price some time in the future. If you pay a price for the right to sell at a specified higher price and the actual future price is lower than that target price, you can require the buyer to pay the target price. You get back your initial fee And you get the difference If the market price exceeded the target price, you could ignore the agreement with the other buyer and sell it yourself. You would get profit from the higher market price minus your initial fee. Ex.: p. 333
38. Options market 333 the markets where options are bought and sold.
39. Investment Analyst This is a small investment company My older brother’s one of them. Can you guess which one? It is in New Jersey
40. Hwk Assessments, Class Work, to Know
41. Assessments: Checking for Understanding 1 Invest wisely Analyze the risk and return
42. Assessment 3 Risk and return Personal investment goals Consistency simplicity
43. Assessment 4 Coupon Maturity Par value
44. Assessment 5 Ex: CDs cost as little as $100 and are a safe investment Investors select the length of maturity
45. Assessment 6 A capital market grants longer-term loans than does a money market. A primary market, the issuer only can redeem a financial asset A secondary market, previously owned securities are sold.
46. Assessments: Checking for Understanding 1 Quantity demanded greater than quantity supplied
47. Assessment 3 Where buyers and sellers meet Members pay fees Trades can take place only on the exchange floor
48. Assessment 4 Both DJIA and the S&P 500 use price changes of representative stocks to measure stock performance.
49. Assessment 5 Futures are contracts to buy or sell in the future at a price set today Options are similar, but include the right to back out
50. Image, p. 319 Question To compensate for greater risk
51. Image, p. 320 Question $439
52. Image, p. 321 Question Approximately $42,000
53. Image, p. 322 Question Bonds prices are determined by supply and demand. Because low-rated bonds probably would be in less demand, prices would be lower.
54. Image, p. 325 Question Because they may have various long-term and short-term maturities
55. Image, p. 326 Question A capital market is a market where money is loaned for periods of more than one year. A money market is a market where money is loaned for periods of less than one year.
56. Image, p. 329 Question Number of outstanding shares to be traded Company profitability expectations
57. image, p. 330 Question Ford Motor
58. Image, p. 332 Question The Dow-Jones Industrial Average and the Standard & Poor’s 500