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Ch12 – Investing in Stocks and Bonds

approximate yield formula
a formula that allows you to calculate the returns that future investments could provide you with
US Treasury Bond
risk-free bond that has the absolute best rate of return (for being risk-free); used as basis to determine how much risk you should do on other investments; interest exempt from state and local taxes; minimum denominations of $1,000
15%
the amount of tax you pay on your dividends and capital gains from common stock; regardless of what tax bracket you’re in
dividend yield
the amount of dividends received compared to the market price of stock
stock dividend
when you are not paid in cash for your dividends, but are actually paid with more stocks
book value
a measure of stock performance that indicates the amount of stockholder funds that are being used to finance the firm; firm assets – firm liabilities – preferred stocks = x
net profit margin
a ratio that relates firm’s net profits to its sales; the higher the margin, the more a company is earning
earnings per share
shows annual earnings available to stockholders; (Profit after taxes – dividends paid)/number of shares of common stock
price/earnings ratio
also known as PE ratio; measure of investor confidence; market price of share/annual earnings per share; the higher the number, the more confidence there is
beta
a number that tells what the price volatility is of a stock, aka how responsive it is to market changes; 1.0 is Good, less than 1.0 is better because that means lower price volatility, but a high number is risky; ex. a stock with 1.8 will change 1.8x as fast as the market
blue-chip stocks
stocks that include all the best stocks and best companies; Walmart, IBM, Microsoft; companies leading in their industries
growth stocks
stocks that are expected to experience consistently high rates of growth; doesn’t pay much in dividends, mainly used for capital gains
tech stocks
stocks from technology-based companies; offer potential for amazing returns but also high risk
income stocks
stocks that are known for their high dividends
speculative stocks
stocks that are usually new business ideas that might work out to be awesome or bomb; high risk
cyclical stocks
stocks whose price movements consistently follow the business cycle
defensive stocks
stocks that remain stable no mater what; usually public utilities, like Proctor and Gamble
large-cap
stocks that have over $10 billion in shares available; usually big well known companies, so pretty low risk
mid-cap
stocks that have $2 to $10 billion shares on the market; medium risk, medium sized companies
small-cap
stocks that have less than $2 billion shares on the market; usually smaller startup companies with chance of high return, but also high risk
bonds
a type of investment that offers fixed income and has a low risk, but can’t be sold for capital; but eventually you get paid back the principal in full and you get your fixed interest on top of it
opposite
interest rates and bond prices move in ____________ directions
coupon
the part of a bond that defines the annual interest that the issuer will pay; multiple the percentage by the amount of principal; buuut when interest rates in the market change, your bond still has the same coupon rate, for better or worse
discount bond
a bond that is sold at a lower price because the current market interest rate is higher than what the bond’s original interest rate was
premium bond
a bond that is sold at a higher price because the current market interest rate is lower than what the bond’s original interest rate was
senior bonds
bonds that are backed by secured things, like property; include mortgage bonds and equipment trust certificates
junior bonds
bonds that are backed by only a promise; unsecured
sinking fund
a specific type of bond that is paid off over time and has a specified annual repayment schedule (rather than paying the principal back all at once)
call feature
these are features on bonds that say whether a bond can be retired early and under what conditions; 3 types; callbacks are done with an issuer wants to call back a bond so he can change the coupon price
freely callable
one of three types of call features; says that an issuer can call back a bond at any time
noncallable
one of three types of call features; says that an issuer can’t ever call back the bond
deferred call
one of three types of call features; says that the issuer can only call back the bond after a certain length of time has passed
agency bond
a type of bond you can buy that’s issue by the federal gov, but not treasury; has a higher return than treasury bonds with no increase is risk and is usually backed by securities like Fannie Mae
municipal bond
a type of bond you can buy that’s issue by state and local govs; interest is totally tax-free from fed and state taxes, but capital gains are still taxed; returns are lower; use fully taxable equivalent yield formula to find out if you save more with this bond or other bonds
fully taxable equivalent yield
formula that tells you how much of a yield you’d have to get on a fully taxable bond in order to get the same yield you’d get from a tax-free municipal bond
corporate bond
a type of bond you can buy that’s nongovernmental; issued by industries instead; tend to have higher returns
convertible bond
a type of bond you can buy that’s a hybrid of corporate bonds and common stocks; it starts as an IOU, but it can later be turned into shares
rating agencies
Moody’s and Standard & Poor’s are two examples of ________ ________
AAA BBB
ratings of investment grade bonds; financially strong companies
Ba
junk bonds; payments are being met, but risk of default is high
CCC
zombie bonds; poor quality
bond point
1 point = $10

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