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Fin 320F
Exam 4
45
Finance
Undergraduate 4
05/07/2009

Additional Finance Flashcards

 


 

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Term
short term financial objectives
Definition
1-3 years: finishing school, getting a job, building up a cash reserve, cleaning up or establishing a credit rating, getting out of debt
Term
$35,000-$64,000
Definition
starting salary for people graduating this semester (SP 09)
Term
$4,860
Definition
annual cost of health insurance for a single employee
Term
3-6 months worth of expenses
Definition
cash reserve
Term
medium term financial objectives
Definition
3-10 years: getting married, going on a big vacation, buying a house, having kids
Term
$23,657
Definition
average cost for a 150 person wedding in the US
Term
$244,000
Definition
the average existing home price in Austin in 2008
Term
$298,680
Definition
current cost of raising a kid from birth through age 17
Term
long term financial objectives
Definition
10 or more years: paying for your child's tuition, retiring
Term
college costs
Definition
public 4 year $57,332, private $136,528
future public $229,100, private $545,600
Term
firm specific risk
Definition
the risk of losing money because of events that occur in a single firm; mitigate this risk by DIVERSIFYING. hold of portfolio of 40 randomly selected stocks.
Term
economic risk
Definition
the risk of loss during overall economic downturns. to mitigate this risk DIVERSIFY OUTSIDE OF THE US.
Term
inflation risk
Definition
the risk of losing the purchasing power of your capital because it gets eaten up by inflation. mitigate this risk by investing in stocks that return profits above inflation
Term
3.2%
Definition
the average inflation rate over the last 20 years
Term
7.4% above inflation
Definition
from 1926-1996 average annual returns of large cap stocks
Term
9.2% over inflation
Definition
average annual return on small cap stocks form 1926-1996
Term
interest rate risk
Definition
the risk that interest rates will rise above your bond coupon rate, therefore the bond price will fall, and no one will want to buy your bond when you want to sell it. mitigate this risk by NOT BUYING LONG TERM BONDS.
Term
liquidity risk
Definition
the risk that you will be unable to sell your investment at the time you need to, for the price that its worth. mitigated by matching the TIME HORIZONS of your investments with the time horizons of your financial objectives.
Term
short-term investments
Definition
savings accounts; money market accounts; money market mutual funds; Certificates of Deposit (CDs), short-term treasury bills
Term
medium-risk investments
Definition
short-and intermediate-term bonds; short-and intermediate-term bond mutual funds; conservative stock mutual funds, individual blue chip stocks, Employee Stock Purchase Plan (ESPP)
Term
higher-risk investments
Definition
stock mutual funds, intermediate-term bonds, intermediate- and long-term bond funds, individual stocks, real estate
Term
48%
Definition
the percentage of US households who held at least 1 mutual fund in 2003
Term
growth funds
Definition
invest in firms that are growing faster than their industries in order to earn above-average capital gains (especially during bull markets)
Term
aggressive growth funds
Definition
invest in IPOs and small firms that are growing faster than their industries. These funds attempt to earn significantly above-average returns
Term
value funds
Definition
invest in firms they consider to be undervalued, in the hope of earning above average returns. If the analysts determine that the "true" value of the firm's stock is more than the current price, they consider the firm to be undervalued by the market, and they add it to their fund. Value funds attempt to reap above average, long-term capital appreciation, as well as dividend income.
Term
small cap funds
Definition
invest in firms with market caps with less than half-a-billion dollars in an attempt to earn above average capital gains. Perform extremely bad during bear markets.
Term
growth-and-income funds
Definition
invest in steadily growing blue chip companies that pay dividends. They attempt to earn long-term capital appreciation with higher current income (from the dividends) than growth funds earn
Term
income and equity-income funds
Definition
invest in firms that pay high dividends in order to ensure that current income stays ahead of inflation. They do not earn significant capital appreciation. They are for investors who need income.
Term
sector funds
Definition
invest in firms that are all within a particular industry. Lots of eggs in one basket.
Term
International funds
Definition
invest in firms outside the US. They are useful for diversifying beyond the US stock market, and can mitigate losses from US economic downturns
Term
emerging market funds
Definition
invest in funds that are in developing economies. In terms of performance and risk, they are similar to US-based aggressive growth funds (that is small caps)
Term
mutual funds
Definition
invest in bonds. Bond funds focus on earning income while preserving the invested capital. Diversify. Risk is that their values can fall as interest rates rise.
Term
index funds
Definition
can own either stocks or bonds. Passively managed. Meant to mirror a particular stock or bond index. Very low expense ratios.
Term
full service broker
Definition
provides investment information, analysis, and advice.
Term
discount broker
Definition
executes transactions according to your instructions
Term
market order
Definition
an order to buy or sell a stock or bond as soon as your order reaches the market. This is the most common kind of trade
Term
stop order
Definition
when you specify the exact price at which to execute the market order
Term
limit order
Definition
an order to buy or sell at no worse that the specified price
Term
buying on the margin
Definition
borrowing money from your broker. magnifies any gains or losses.
Term
selling a stock short
Definition
borrowing stock from an investor, then selling in the hope that the price will fall. Thus, when its time for you to repay the stock. you have to repay a lesser amount.
Term
Dow Jones Industrial Average (DJIA)
Definition
the oldest index. It tracks the cost to purchase stocks of the largest 30 US companies. Fell 33.8% in 2008.
Term
Standard & Poor's 500
Definition
an imaginary collection of stocks from the 500 largest and most reputable US firms. It declined 38%% in 2008.
Term
Russell 2000
Definition
tracks the performance of 2000 small US firms. Year to date its down 46.9%
Term
Russell 3000 and Wilshire 5000
Definition
track the total stock market
Term
difference between traditional 401K and Roth IRA
Definition
401K is taxed at withdrawal, IRA is taxed at contribution. Neither are taxed on earnings.
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