Chapter 1 Vocabulary Capital Expenditures facilities such as schools hospitals public housing and highways Long term project related to the construction of public o In general government is a net demander of funds o In general business firms are net demanders of funds o In general individuals as a group are net suppliers of funds Mutual fund Preferred Stock Convertible Security Money Market Mutual Funds Investment professionals paid to manage other people s Short term vehicles Common Stock Institutional Investors money each share represents a fractional ownership interest in the firm Dividends Capital Gains purchase price periodic payments made by firms to their shareholders Lives or maturity of one year or less provide liquidity Equity Investments that represent ownership in a corporation The amount by which the sale price of an asset exceeds its original Fixed Income Securities investment vehicles that offer a fixed periodic return Bonds Long term debt instruments IOUs issued by corporations and mutual funds that invest solely in short term Ownership interest in a corporation has stated dividend rate Securities that give the investor an opportunity to sell or buy another legally binding obligations stipulating that the sellers of such contracts governments that offer a known return of the bond s face value a maturity payment of which is given preference over common stock dividends of the same firm A fixed income obligation bond or preferred stock with a feature permitting conversion into a specified number of shares of common stock a company that raises money from sale of its shares and invests in and professionally managed a diversified portfolio of securities investment vehicles security at a specified price over a given period of time will make delivery and the buyers of the contracts will take delivery of a specified commodity or financial instrument at some specified date at a price agreed on at the time the contract is sold reducing one s tax ability Investment Goals investing portfolio to increase returns or reduce risk are less than its original purchase price 3 000 of net losses can be applied against ordinary income in any year entities such as residential homes raw land and income property Investment assets other than real estate that can be seen or touched The amount by which the proceeds from the sale of a capital asset The amount by which Capital losses exceed capital gains up to the inclusion of a number of different investment vehicles in a The financial objectives that one wishes to achieve by investment vehicles and strategies for legally Real Estate Tangibles Tax advantaged Investments Diversification Capital Loss Net Losses Options Futures Tax Planning The development of strategies that will defer and minimize an individual s level of taxes over the long run Involves looking at your earnings both current and projected and developing strategies that will defer and minimize the level of taxes The levels of both return and risk need to be viewed in light of their tax effects o It is the after tax return and associated risk that matters o Tax Plans should also reflect Form of returns current income capital gains or tax advantaged income The timing of loss recognition and profit taking Market Timing The process of identifying the current state of the economy market and assessing the likelihood of its continuing on its present course security below its redemption value the difference is the interest earned A method of earning interest on a security by purchasing it at a Discount Basis Passbook Savings Account A Savings account offered by banks that generally Accrual type Securities Series EE Savings Bonds Asset Management Account Money Market Deposit Accounts MMDAs NOW negotiated order of withdrawal Account pays a low rate of interest and has no minimum balance A bank checking account that pays interest has no legal minimum balance but many banks impose their own A bank deposit account with limited check writing privileges has no legal minimum balance but many banks impose their own A comprehensive deposit account that combines checking investing and borrowing activities it automatically sweeps excess balances into short term investments and borrows to meet shortages Savings bonds issued by the U S Treasury and sold at banks and through payroll deduction plans in varying denominations at 50 of face value pay a variable rate of interest tied to U S Treasury security market yields and calculated every six months in May and November Securities for which interest is paid when the bond is cashed on or before maturity rather than periodically over the life of a bond basis and having varying short term maturities regarded as the safest of all investments on deposit for a specified period withdrawals prior to maturity incur interest penalties Certificated of Deposit sold by stockbrokers offer slightly higher yields than other CDs and typically can be sold prior to maturity without incurring a penalty corporations with very high credit standings Short term low risk investment vehicles arising from bank guarantees of business transactions are sold at a discount from their face value and generally provide yields slightly below those of CDs and commercial paper Short term unsecured promissory notes IOUs issued by Obligations of the U S Treasury sold on a discount Savings instruments in which funds must remain Commercial Paper Banker s Acceptances Certificates of Deposit CDs U S Treasury Bills T Bills Brokered CDs Money Market Mutual Fund MMMF A mutual fund that pools the capital of a large number of investors and uses it to invest exclusively in high yielding short term securities Steps in Investing 1 Meeting Investment Prerequisites 2 Establish Investment Goals a Common Investment Goals Include i Accumulating Retirement Funds ii Enhancing Current Income iii Saving for Major Expenditures iv Sheltering Income from Taxes 3 Adopting an Investment Plan 4 Evaluating Investment Vehicles 5 Selecting Suitable Investments 6 Constructing a Diversified Portfolio 7 Managing the Portfolio Basic Sources of Taxation 2 Major Types Federal Government State and Local Governments Income taxes at the federal state and local levels have the greatest impact on security investments whose returns are in the form of dividends interest and increases in value Property taxes can have a sizable impact on real estate and other forms of property investment Types of Income Individual Income Classified
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