63 terms

Financial Planning-TERMS 1

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
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
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
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
-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
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
-part of the otc market is a dealer market
buy and sell securities for customers
-they do this for a fee called commission
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
uncertainty or lack of predictability, such as to loss that a person or property, covered by insurance, faces
the cause of possible loss, such as fire, windstorm, robbery, disease, or death
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
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