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Personal Finance Chapter 11

Types of Bonds:
-Debenture
-Mortgage Bond
Debenture:
A bond that is backed only by the reputation of the issuing corp
-If corps fail to make payments debenture bondholders become general creditors
Mortgage Bond/Secure Bond:
A corporate bond secured by various assets of the issuing firm
-interest rates on mortgage bonds are lower than interest rates on unsecured debentures
Convertible Bond:
A bond that can be exchanged at the owners option for a specified number of shares of the corporations common stock
Emergency Fund:
An amount of money you can get quickly in case of an immediate need
Relationship of Interest Rates and Values of Bonds:
As one increases the other decreases
3 Advantages that corporations have by issuing convertible bonds are:
-Attracts investors who are interested in speculative gain
-Interest rates are lower
-If the bond is converted, it no longer has to be redeemed at maturity
Inflation:
Is the rise in the general level of prices
Revenue Bond:
A municipal bond that is repaid from the income generated by the project it is designed to finance
Government Bond:
Written pledge of government or a municipality to repay a specified sum of money, along with interest
Municipal Bond:
Debt security issued by a state or local govt
General Obligation Bond:
A bond backed by the full faith, credit, and unlimited taxing power of the government that issue
Interest Rate:
Risk in the result of changes in the interest rates of the economy
Bond Indenture:
A legal document that details all of the conditions relating to a bond issue
Sinking Fund:
A fund in which annual or semiannual deposits are made for the purpose of redeeming a bond issue
Serial Bonds:
Bonds of a single issue that mature on different dates
Corporate Bond:
Corporations written pledge to repay a specified amount of money along with interest
For Investment Incomes you should choose:
-Municipal Bonds
-Corporate Bonds
-Preferred Stocks
Liquidity:
The ability to buy or sell an investment quickly without affecting the investments value
Line of Credit:
A short-term loan that is approved before the money is actually need
Steps to Investing:
1. Establishing Goals
2. Performing a Financial Checkup
3.Work to Balance Your Budget
4. Manage Your Credit Card Debt
Call Feature:
Allows the corporation to buy outstanding bonds from current bondholders before the maturity date
Business Failure Risk:
Associated with investments in stock and corporate bonds
-Bad management, unsuccessful products, competition, or other factors with cause the business to be less profitable than originally anticipated or experience loss.
-The business could fail and become worthless
Market Risk:
Rapid expansion is followed by a period of recession
-the nation is still experiencing economic problems that are affecting the value of investments
Inflation Risk:
Risk that the financial return on an investment will not keep pace with the inflation rate
Interest Rate Risk:
Associated with preferred stocks or govt corp bonds is the result of changes in the interest rates in the economy
Investors Purchase Bonds because:
-Interest income
-Repayment at maturity
-Interest income
Relationship of companies with potential dividends:
-Growth company; no dividend
-Non-Growth company; better chance of receiving a dividend
Municipal Bonds are used to finance:
-Airports
-Schools
-Toll Roads
Trustee:
Financially independent firm that acts as a bondholders’ representative
Maturity Date:
For a corporate bond, the date on which the corporation is to repay the borrowed money
Speculative Investment:
High-Risk investment made in the hope of earning a relatively large profit in a short time
Current Yield:
Determined by dividing the annual interest amount by the bond’s current price

Current Yield= Annual Interest Amount/Current Price

the lower the yield the less interest you will pay

Corporations who prefer debt financing over equity financing choose:
Bonds
One Disadvantage of investing in U.S. treasuries is:
They have low interest rates
A disadvantage of selling bonds is that in the event of bankruptcy, bondholders:
Have a claim to the corporations assets
Face Value:
The dollar amount the bondholder will receive at the bond’s maturity
Asset Allocation:
The process of spreading your assets among several different types of investments to lessen risk;

based on %
diversifying

For treasury securities, most investors are willing to accept the interest rate determined at auction so they are using:
Noncompetitive bids
Reasons Why Corporation Sell Bonds:
-They find it difficult to sell stock
-They use interest as a tax break
-They need money to finance ongoing activities
Advantages of Purchasing US Treasuries:
-Decreased risk of default
-safe investment
-Backed by the government
Safe investments:
-Certificates of Deposit
-Government bonds
-Select mutual funds
Emergency Fund:
Should be how much you spend a month times 3 months
When evaluating bonds:
Business periodicals and federal agency publications are 2 additional sources of information that can be valuable
Bond Ratings Range:
AAA (highest) to D (the lowest)
As the common stock value increase:
The market value of the convertible bond
Safety:
An investment means minimal risk or loss
Risk:
An investment means a measure of uncertainty about the outcome
A speculative investment or one that stresses immediate returns should not be considered for long term growth
Taxable equivalent yield is equal to tax-exempt yield divided by X minus your tax rate. X is equal to:
1.0
Rule of thumb for consumer credit payments:
Limit consumer credit payments to 20% of after-tax income
With a lower risk of a bond and the possible high return of a stock, investors may choose which investment option?
Convertible bonds
Maturity of a Treasury Bond takes:
30 years
Treasury inflation-protected securities pays:
Interest twice a year at a fixed rate
Bond Quotations:
Are given as a percentage of face value
Speculative investments:
Should not be considered for long-term growth

A high risk investment made in the hope of earning a relatively large profit in a short time

The advantage for an investor to trade bonds through an online broker is discounted commissions on trades
True
Yield is:
The Percentage Rate of Interest earned by an investor who holds Bonds for a state period of time
Dollar amount of annual interest formula:
dollar amount of annual interest = face value x interest rate
Yield:
The rate of return earned by an investor who holds a bond for a stated period of time
If the corporation fails to make either interest payments or repayment at maturity, debenture bondholders become:
General Creditors
If you are a young married couple with no children, you will most likely choose investments:
With higher risks
Inflation Formula:
($10,000 x 3.5%) – ($10,000 x 4%)
$350 – $400 = $50
To calculate the current price for a bond:
Current price = bond price quotation x face value
Interest paid on U.S. government securities is:
Taxable for federal income tax purposes, but is exempt from state and local taxation
Bonds paying 10% in an economy where the average is 5% are advantageous for the investor, and the investor would prefer for the bond:
Not to be called
Guaranteed municipal securities usually carry a slightly:
Lower interest rate than uninsured bonds
When a company calls a bond when the current interest rates are lower than the bond’s interest rate, this is:
unfavorable for inestors
Conservative Investments with Less Risk
-People with no financial training or investment background
-Old investors
-Lower-income investors
-Families with children
-Employees worried about job loss
Speculative Investments with High Risks:
-Investors with financial training and investment background
-Younger investors
-Higher-income investors
-Married couples with no children or single individuals
-Employees with secure employment positions
False:
General obligation bonds are repaid from income generated by the project that the bond issue is financing
Captain Gain:
Results when you sell a municipal bond before maturity and at a profit may be taxable just like gains on other investments sold as a profit
The risk associated with bad news that a company may bring to the public is the risk in decreased…
value
Registered Bonds:
A bond that is registered in the owners name by the issuing company.
-tracked electronically
Registered Coupon Bond:
Is registered for principal only, not interest
When evaluating if a bond is a good investment, you can use:
-reports provided by the federal reserve system
-reports on corporations by the SEC
-business periodicals at your libs
Government Bonds:
a written pledge of a government or a municipality to repay a specified sun of money along with interest
Which is a better bond buyer?
-Stagger your bond holdings to receive interest each month
-the most useful yield calc is yield to maturity
-realize that commission on existing bonds are usually higher than on new bond issues
Capital Gains Tax:
This is enforced if you sold the bond for more than you paid it.
Callable Bonds:
-The money for calling bonds comes from profits, a new bond issue, or the sale of addition stock
-Companies usually cannot call bonds for 5 to 10 yrs
-Companies will often call bonds to reissue bonds with lower interest rates
TRUE
Revenues bonds are repaid from income generated from project the bonds are financing
Bonds:
-Govt and corporate bonds are often seen a safer than stocks
-considered a safe harbor in tough economic times
-a way to diversify your portofolio

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