Review Sheet for Exam 4 - Family Financial Management | AHRM 2304, Study notes of Financial Management

Download Review Sheet for Exam 4 - Family Financial Management | AHRM 2304 and more Study notes Financial Management in PDF only on Docsity! AHRM 2304: Family Financial Management Review Sheet for Exam 4 Chapter 14: Bonds General characteristics of Treasury, municipal and corporate bonds (e.g., risk, tax implications, purchasing) What is the difference in revenue and general obligation municipal bonds? General Obligation Backed by the full faith and credit of the issuer. Taxes used to pay back principal and interest. Example: School district builds new school, taxes used to pay back the lenders. Revenue Bonds Derive funds to pay interest and repay principal from a designated project. Example: Bond finances a new toll road, revenue from tolls pay back lenders. How are risk and return related for bonds? The riskier the bond, the higher the interest rate it will have. What factors affect the pricing of bonds? (I.E., selling at par, premium, discount) As the available rate of return increases, the value of a lower rated bond decreases and an investor would pay a discount. As the available rate of return drops, the value of a higher rated bond increases and an investor would pay a premium. Advantages and disadvantages of including bonds in a portfolio? Advantages If interest rates drop, bond prices will rise. Bonds reduce risk through diversification. Bonds produce steady current income. Bonds can be a safe investment if held to maturity. Disadvantages If interest rates rise, bond prices will fall. If the issuer experiences financial problems, the bondholder may lose. If interest rates drop, rather than experiencing price appreciation, the bond may be called. Chapter 15: Mutual Funds (refer to the chapter outline handout for general study) Categories of mutual funds…what are the characteristics or objective? Risk? Money Market Mutual Funds (MMMFs) Invest in short-term securities with maturities of less than 30 days Trade at a constant net asset value of $1 per share Stock Mutual Funds Aggressive growth funds – maximize capital appreciation while ignoring income; wider price swings than other funds. Small-company growth funds – similar to aggressive growth funds but limited to investments in small companies. Invest in undiscovered companies with unlimited growth potential. Growth funds – similar to aggressive growth funds but invest in stronger firms with dividends, which reduce price swings. Growth-and-income funds – provide a steady stream of income with the potential for increasing value. Less risky, stable dividends, less price movement. Sector funds – specialized mutual fund investing 65% of its assets in securities from a specific industry. Less risky than an individual stock, but more risky than a traditional mutual fund. Index funds – try to track a market index, such as the S&P 500, by buying stocks in that index; diversification at a low cost. International funds – concentrate on securities from other countries, may have political and currency risks. Balanced Mutual Funds Try to balance objectives of long-term growth, income, and stability of the capital invested Invest in common stock, preferred stock, and bonds Less volatile than stock funds Ratio of stocks to bonds varies Aimed at those needing income to live on and moderate stability in their investment Asset Allocation Funds Life-Cycle and Target Retirement Funds Bond Funds Exchange Traded Funds (ETFs) First issued in 1993 Hybrids between a mutual fund and an individual stock or bond Trade on an exchange and can be bought or sold throughout the day Prospectus...what is it? What information is included? The fund’s goal and investment strategy The fund manager’s past experience and tenure Any limitation on investments that the fund may have Any tax considerations of importance to the investors The redemption and investment process for buying and selling shares in the fund Services provided investors Performance over the past 10 years or since the fund has been in existence Fund fees and expenses The fund’s annual turnover ratio What are the steps to choosing/investing in mutual funds? Step 1: Determine your investment goals. Step 2: Identify funds that meet your objectives. 2