Personal Finance Final ExamI. Investments1. This class is NOT enough for you to begin investing on your own!(1) (but it is useful because going over pension plans or mutual funds that you will be presented by your employer)2. Investing is all about FUTURE EXPECTATIONS! Remember NO ONE KNOWS THE FUTURE WITH CERTAINTY3. Liquidity- the ability to convert an asset to cash quickly (how easy is it to get your money now; think that commercial its my money and I want it now!)4. Default risk- probability that the firm will be unable to meet is contractual obligations (basically the odds that they cannot pay their bills)5. Interest Rate risk- the the probability that interest rates move against you (upward if you are borrowing; *see laddering strategy later in guide to help avoid this!6. Timea) As investment characteristic- maturity example bonds you know the exact % interest and when the bond is matureb) As length of time to invest? How long until you need your money? Retirement coming up? Etc. Investment horizon7. Equity= ownership (stocks) of earningsa) Get returns from capital gains (difference between selling and purchasing price) or dividends (explained later in guide!)8. Interest= is the cost of money9. Debt= lending money, a fixed amount; gets paid FIRST (before equity)[cds, bonds, treasuries] (get returns from capital gains (selling bonds for example for more than you paid for them!) & interest!a) For example if company goes bankrupt they pay those they are indebted to first, and those with equity(stocks) last andthere usually is never enough for stock holders to get paid!10.ALL TRANSACTION COTS REDUCE RETURN!11.Bond Typesa) Corporate bonds: (1) Face price dollar amount firm borrows; amount to be paid @ maturity; tradable; and can be publicly tradedb) Treasury Securities :(1) Bonds, notes or bills, issued by the government; safer than corporate bonds very liquid unlike corporate bondsc) US Savings Bond: cannot be tradedd) ** A bonds face price goes up and down not always its purchase price (this has to do with interest rates expected in future etc.)12.Bullets from this section to remember...13.Money Market Deposit accounts(MMDA)- are like bank accounts they are very liquid, but low return; (depository account)14.Money Market Mutual Funds (MMMF)- mutual funds MUCH MORE RISKY THAN MMDA!15.* See “DEPOSITORY” MEANS BACKED BY GOVT!16.Stock has no maturity date, because you can keep it as long as you want.17.If you want to sell your bond to someone when market interest rates are lower, you have to decrease the price.18.If you want to sell your bond to someone when market interest rates are higher, you have to increase the price.19.When buying a corporate bond, check the solvency rate of company you're buying from. Since some companies go bankrupt, that's why government bonds are less risky than corporate bonds.II. Common Stocks1. Debt holders entitled to:a) Pay for lending the money (interest)b) Returns of the money lent (principal)c) Returns are NOT related to how well firm doesd) Can force a firm or person in bankruptcy if payments are not made2. Shareholders (stock) : is residual ownership (it can can be a profit or a loss)a) No entitlement can loose entire sum of investment!b) Debts must be paid before stock holders get any $ (when company goes into bankruptcy this is especially important)c) Share in firms profits 2 ways(1) Capital gains- buying and selling stocks for less than what you paid for them [what something sells for - what you paid for it](2) Dividends- if it is a relatively mature company they will give out a portion of their profits determined per share, and how ever many shares you have you get (#shares X dividend per share)= the dividends you receive (actual check) *determined amount per share is determined by BOARD OF DIRECTORS(3) With dividends if they think they can reinvest $ rather than make more they wont pay dividends (ex: early microsoft vs microsoft today); if they think are relatively mature and not expanding to much they will pay dividends to keep share holders happy and to keep a hold of their money!(4)3. Current income= dividends and/or interest(if dealing with debt securities)4. Bull Market= optimisitc; rising asset prices; economic expansions just remember that bulls gore UPWARDS!5. Bear Market= pessismitc; falling asset prices; economic slowdown just remember that bears slash DOWNWARDS!6. Stock Market Prices: are a) Based on firms anticipated FUTURE EARNINGSb) Determined by a large # of tradesc) Expectations of future changes with supply and demand and 2 important factors(1) New Info(2) Investor Psychology7. Info that you hear on public circuit already is already OLD INFO. It has be included in the current price of the stock! Think back to the super computer traders they are faster thanyou can possibly be!8. The Market Value is based ona) Supply and demandb) Firm market value= (#stocks) X share price9. Listed firms trade on exchangesa) Example: NYSE, NASDAQ etc.10.Even more firms are unlisted thousands of risky usually very small firms, with limited number of shares illiquid!a) Have a small share price usually under $5b) And a low trading volume which makes prices move easily making it risky!11.Penny stocks are very risky you can make a lot or loose it all as simple as that!12.*In order to be an Exchange it needs to be reasonably large firm and have lots of trading to be considered an exchange. NYSE is most famous!13.Stockbrokers?a) Simply a salesperson who work for brokerage houses; and they find those that can either buy or sell depending on which point you are at (either buying a stock or selling it so you need to find someone doing the opposite!)(someone can simply go on CNBC and brag about a certain stock people go buy it makes price go up because demand went up and now he can sell his stock for more does not make him an expert remember no one knows future!)b) They make a profit from sales commissions(you pay for every transaction) doesn’t matter if you make or loose money you still pay!c) Online brokers - usually cheaper, because they have a flat rate (about $7 per transaction)d) Information on stocks in plentiful so brokers are somewhat becoming obsoletee) If it looks to good to be true it probably is!14.Stock Performancea) No investment type beats stock returns for the long run(that means that stocks have the highest return, but recall they are also the riskiest)b) Diversification (buying a wide variety, not putting all eggs in one