Financial Planning-TERMS 1

Created by jrburk08 

Upgrade to
remove ads

63 terms

Treasury Bonds

-Long term in nature (mature 10-30 yrs)
-units of $1,000 or higher
-taxable for IRS
-tax exempt for state and local

Inflation risk

rising prices cause loss of buying power

interest rate risk

costs of borrowing money and the required rate of return

personal risk

health, safety, or costs

liquidity risk

higher return may mean less liquidity

public market

-securities can be sold to anyone
-all securities must be registered which is handled by the SEC
-exchanges are usually public markets

private markets

-if you don't have to register securities you save time and money
-go to investors of a selected group
-very in-liquid

Market order

buy or sell at best price currently available
-most common

limit order

buy or sell at stated limit or better
-second most common

stop order

once it hits the limit you set, it becomes a market order
-least common

The setting of investment objectives

-risk and safety of principal
-current income versus capital appreciation
-liquidity considerations
-short term vs. long term oriented
-tax factors
-ease of management
-retirement, estate planning

creditor claims

-savings accounts
-money market funds
-commercial paper
-treasury bills
-corporate bonds

Derivatives

securities whose value derive from something else

spot markets

right now; pay what the market value is right now

future markets

price determined later; not going to pay not but in the future

Short term

one year or less

intermediate term

1-10 years

long term

over 10 years to maturity

Liquidity

measured by the ability to convert an investment quickly into cash at fair market value

Current Income

objective: Income NOT growth
-bond interests and stock dividends
-high yielding utilities, mature industries

Capital Appreciation

objective: price gains NOT income
-increase in value- no cash dividend
-High growth industries

Treasury Bills

-maturities 91 and 182 days
-trade on a discount basis
-minimum units of $1,000
-active secondary market

Investment

commitment of current funds in anticipation of receiving larger future flow of funds

Long term transaction

buy something in the hopes that it will go up in value and then sell it

short transactions

sell first then buy
-sell at a higher price and buy back when value goes down

2 way to short

1. short and own securities
2. short and NOT own securities
- when someone is wanting to get back their stock they bought, we borrow the money to pay them back

Money markets

-Securities less than 1 year
-debt
-governments, corporations, various off shoots

capital markets

-Securities longer than a year
-debt and equity
-same players

Valuing a Bond

the price of a bond represents the present value of future interest payments plus the present value of the par value of the bond at maturity

Growth Funds

-pursuit of capital appreciation
-invest primarily in common stock

Aggressive Growth Funds

Growth funds that frequently use financial leverage and concentrate on:
-speculative issues
-emerging small companies
-hot sectors of the economy

Regular Growth Funds

growth funds that invest in more stable firms
-not fully invested in stocks during market decline and rarely use leverage

Advantages of Personal Financial Planning

1) increased effectiveness in obtaining, using, and protecting financial resources
2) increase control of financial affairs
3) increased personal relationships
4) freedom from financial worries

Personal Financial Planning

process of managing money to achieve personal economic satisfaction

Money Market Funds

Invest in short-term securities
-U.S. Treasury Bills, commercial paper, Jumbo C.D.s, repurchase agreements
-No load
-Maturities range 20-25 days
-Yield tracks short-term market interest rates

Bond

Long term contractual obligation of the firm to pay interest to the bondholder as well as the face value of the bond at maturity

Four Types of Taxes

1. Taxes on purchases
-sales tax and excise tax
2. taxes on property
-real estate property tax and personal property tax
3. taxes on wealth
-federal estate tax, state inheritance taxes
4. taxes on earnings
-income and social security taxes

Income subject to taxation

1. Earned income- wages, salary, commission, tips, bonuses
2. Investment Income-money from dividends, interest, or rent from investments
3. Passive Income- from business activities you do not directly participate in
4. Alimony

Investment Companies

organizations which sell their own securities to investors and invest and manage the funds based on selected objectives or types of investments

Closed-End Investment Company

-There is fixed capitalization
-the # of shares sold initially are it
-you sell shares to secondary investors, not back to the company
-shares are traded among investors
(once the company has sold the shares, they are out)

Open-End Investment Company

(Mutual Funds)
-capitalization is not fixed
-# of shares is determined by whether money is flowing in or flowing out
-the market is the fund, NOT other investors
-if you want to buy or sell shares, you go to the fund within the company

Exchange traded funds (ETF)

mutual funds that trade in the market
-trade daily and the price can change
start out as some kind of index fund
-then trade like other stocks
called mutual funds
-technically mutual funds are open-end investments
95% are open-end, 5% are closed-end

Net Asset Value (NAV)

Assets-Liabilities/# of shares outstanding
-this is normally book value of shares
-for open-end mutual funds, the NAV is the price
-for closed-end funds, price is based on demand
(Most sell below NAV)

Load Fund

sales charge
-an open-end company with a sales charge; they hire people to sell their funds for them (bankers, brokerage firms)
-sales charge is called a "load"
-normally a one time charge of 2%-8% which compensates people selling these funds

Federally Sponsored Credit Agencies

government units that issue their securities on a separate basis from those securities sold directly by U.S. Treasury

Investment Banker

job of investment banker is to raise capital by selling new securities on the primary market

primary market

securities sold for the first time

dealing in securities

-Trading
-part of the otc market is a dealer market

brokerage

buy and sell securities for customers
-they do this for a fee called commission

insurance

protection against possible financial loss
-an insurance company, or insurer, is a risk-sharing firm that assumes financial responsibility for losses from an insured risk

Pure risk

-personal risk, property risk, and liability risks
-insurable, chance of loss, not gain
-accidental, unintentional
-nature and financial loss of the risk can be predicted

Speculative risk

-chance of loss or gain, such as starting a business
-un-insurable

risk

uncertainty or lack of predictability, such as to loss that a person or property, covered by insurance, faces

peril

the cause of possible loss, such as fire, windstorm, robbery, disease, or death

Hazard

increases the likelihood of a loss, such as driving drunk, or defective house wiring

risk management

organized, planned strategy to protect your assets and family; insurance

4 ways to manage risk

risk avoidance- chose not to engage in risky activity
risk deduction- take measures to reduce ris
risk assumption- having insurance
risk shifting- put it on to something else

Liability

legal responsibility for cost of another person's losses or injuries

4 steps for planning and insurance program

1. set your insurance goals and prioritize them
2. develop a plan to reach your goals
3. put your plan to action
4. review results

Types of Insurance

1. Property and liability insurance
2. health, disability, and long-term care insurance
3. life insurance

Life insurance

purchase policy; insurance company promises to pay a lump sum at the time of the policy holder's death or sometimes while they are still alive

purpose of life insurance

to protect someone who depends on you from financial loss related to your death
-other reasons:
1. to leave as a part of your estate
2. to save money for retirement or for income or education for children
3. to pay off a mortgage or debts at the time of death

Two types of Life Insurance

1. Stock life insurance- insurance company owned by the shareholders
-95% are of this type
-sell non-participating policies
2. Mutual life insurance companies
-owned by policy holders

Please allow access to your computer’s microphone to use Voice Recording.

Having trouble? Click here for help.

We can’t access your microphone!

Click the icon above to update your browser permissions above and try again

Example:

Reload the page to try again!

Reload

Press Cmd-0 to reset your zoom

Press Ctrl-0 to reset your zoom

It looks like your browser might be zoomed in or out. Your browser needs to be zoomed to a normal size to record audio.

Please upgrade Flash or install Chrome
to use Voice Recording.

For more help, see our troubleshooting page.

Your microphone is muted

For help fixing this issue, see this FAQ.

NEW! Voice Recording

Click the mic to start.

Create Set