Investing and Financial Bonds Quiz

Investments

• Investments are current commitments of money in expectations of future returns
• Financial assets are claims in real assets
• Real assets provide net income; when these assets and liabilities are cancelled out, real assets are the only true wealth of the economy
• Fixed income assets provide a stream of income based on a specific formula, these can vary on different maturities and payment provisions
• Money market debt is short term, highly marketable, and low risk (T-bills, CDs)
• Capital market securities are treasury bonds and junk bonds and are riskier and longer term
• Equity assets are an ownership share in a firm and performance is directly tied to the firm's performance
• Derivatives are securities whose value depends on the performance of other assets
• Investors also trade real assets such as commodities
• Stock prices measure the general opinion of investors on firms
• Financial assets are used to store excess income
• Firms acting in the best interest of the shareholders encourage proper allocation

Financial Intermediaries

• Financial intermediaries have almost all financial assets and a diversified portfolio of investments
• Investment companies pool, research, and invest money into portfolios
• Investment bankers sell securities to the public through public offerings
• Venture capital and private equity firms invest in private and startup companies
• The 2008 financial crisis was caused by a boom in the housing market which fueled mass securitization by Fannie and Freddie
• Insurance for these called credit default swaps also came
• Financial assets determine how the ownership of real assets is distributed among investors.

The Money Market

• The money market is a subsector of the debt market and is traded in large quantities so it's out of reach to retail investors
• Treasury bills are the safest and most marketable money market securities
• Investors buy these at a discount to maturity and get the face value at maturity
• The maturities are 4, 13, 26, 52 weeks and are highly liquid
• Certificates of deposit are time deposits in banks and cannot be withdrawn until the period is over and pay interest

Broking and Trading

• Brokers call are funds borrowed from banks
• Federal funds are the bank deposits with the federal reserve
• Banks lend to meet reserve requirements
• Money market securities are usually safe havens for investors
• T bonds are government securities that have maturities from 10 to 30 years
• T notes have maturities up to 10 years

Investment Fundamentals

• Transactions are conducted on primary and secondary markets
• Private transactions are done through private placement
• A firm commitment is the typical underwriting agreement, where the investment bank buys the securities and sells them to the public
• Shelf registration is the gradual sale of securities to the market
• Bankers go on roadshows and engage in book building by trying to attract investment interest
• Dealer markets have a go between person called a dealer
• Direct search markets are unregulated and OTC
• Brokered markets have brokers that act as agents

Essentials of Investment

• Unit investment trusts are unmanaged fixed portfolios
• These trusts have a life
• Comingled funds are investors who pool their money together and give it to a manager
• Mutual funds are at a pass through status in that taxes are paid by the investor
• ETFs are portfolios that are traded like stocks
• Bonds are IOUs and periodically pay interest payments called Coupon Payments
• Bonds are typically sold in denominations of 1000
• Accrued interest is crucial for the actual price of the bond and is added to the stated price
• Most bonds are bought through a computer quotation system
• Bonds with high bond ratings have lower YTMs
• Callable bonds give issuers the option to repurchase bonds
• Convertible bonds have the ability to convert to shares and lower interest rates and YTMs
• Puttable bonds allow bondholders to extend or exchange bonds
• Floating rate bonds have interest rates tied to market conditions
• Preferred stock is a fixed income investment that provides a fixed dividend

Risk Management and Insurance

• Risk is the defined uncertainty concerning the occurrence of a loss
• Objective risk is how much the actual loss varies from the expected loss
• Investment terminology covers two key domestic exchanges: NYSE and American Stock Exchange
• Five regional exchanges for stocks include: Boston, Chicago, Cincinatti, Pacific, Philadelphia stock exchanges
• Specialists or designated market makers determine bid/ask prices for each security
• Market makers usually focus on OTC markets
• Securities firms can act as agents or principals when trading on an exchange

Investment Fundamentals: Savings

• Savings are what is left after expenditures in disposable income
• People can invest or save with savings bonds
• These are bonds guaranteed by the US Treasury
• They are not subject to State or Local Taxes
• There are guaranteed to double in value
• Another type is Series I Bonds that are non-marketable and have variable inflation rate
• Investment fundamentals cover stages of investing
• Put and Take is when you put your money in a checking account
• Accumulation is when you gather money
• Strategic investing is when the investor slowly funds his account with an amount periodically

Financial Information

• There are many and good sources for financial information
• One good source is the SEC with forms like 10-K, 10-Q, and forms 3, 4, and 5
• Another place is company websites that store earnings and news
• Analysts also provide reports

Individual Savings Accounts

• Retirement Accounts can either be sponsored by an employer or it can be sponsored by an individual investor, these accounts are usually tax deductible.
• People can invest up to 5500 or 6500 dollars in an IRA per year
• IRA withdrawals have penalties in most circumstances unless it is for financial hardship, the withdrawals can only be made when terminating an IRA or financial hardship

Pensions

• Two types of pensions are defined benefit and defined contribution
• Defined benefits are increasingly rare

Taxes

• Many investment wrappers are tax deferred
• When withdrawing income from a pension, 25% of the money is tax-free.
• The main taxes include income tax, savings tax, and capital gains taxes

Loans

• Debt is an investment security and those securities are called bonds
• Corporate debt can be secured or unsecured.
• Mortgages are secured by a house

Mortgages

• Mortgage backed securities are mortgages
• They securitize it and place it in its own corporation

Life Insurance

• Life insurance protects the dependents of someone in the case of an expected death.

Unit Investment Trusts

• Unit investment trusts are hybrids of closed and open investment companies
• They have a date in which they will dissolve.

Opened-ended investment companies

• These do not have restrictions on the number of shares that can be issued.
• Shares are bought and sold based on NAV
• A board of directors defines the funds offered to the public.
• A custodian is responsible for the possession of the securities purchased.
• An investment advisor invests the money in the fund.
• A transfer agent manages share issuance.
• Dealer actually do the work of the sponsors.
• Funds can be specialized in different ways.

Pricing, Dealing, and Settlement

• Open mutual funds are usually priced based on NAV.
• Closed mutual funds are priced based on supply and demand

Investment Trusts/Closed-ended Funds

• Closed Ended funds are another option in investing
• Their price moves with supply and demand
• They can trade at premiums or discount.
• They can use leverage.
• They are often designed for income.
• These usually have higher fees
• Closed end funds have initial public offering of shares
• They have specialized portfolios.
• The shares of a fund are not redeemed by the fund.
• They are managed by an investment advisor

Stock Market

• The stock market is one of two main ways for companies to raise money.
• The stock market allows the public to get higher returns.
• Stock market boosts the economy with companies using the capital.

Stock Tables

• Stock tables are read for investment information

Interest (Compound and Simple)

• You can find the number of years it takes to double your money using compound interest
• Compound interest makes the stock market different from other markets in that it compounds
• Other investments do not compound other than bonds, currency, commodity markets

Financial Services and Markets

• After the crash of 1929, the federal government increased financial regulations
• The Securities Act of 1933
• The Securities Exchange Act of 1934
• The Investment Advisors Act of 1940

Financial Crime

• Many common types of financial crime include insider trading, embezzlement, tax fraud, insurance fraud, identity theft, money laundering, and credit card fraud
• Market manipulation
• Market abuse