A dividend is a direct payment that a corporation makes to its shareholders, usually out of its profits.
Missing Word
dividend
A dividend is one of the two ways shareholders earn a return; the other is a capital gain from selling shares for more than they cost.
Category: Corporate Stock
Question 2
A mortgage is a loan used to buy a home, in which the home itself serves as security for the debt.
Missing Word
mortgage
A mortgage lets a household buy a house with a small down payment, and the lender can claim the home if the borrower does not repay.
Category: Housing and Assets
Question 3
A bond's issuer must repay its face value to the bondholder at maturity, the date on which the bond's term ends.
Missing Word
maturity
Maturity is the end of a bond's term, when the borrower repays the face value. Until then, the bondholder receives interest payments set by the coupon rate. The specific day is called the maturity date.
Category: Bonds and Borrowing
Question 4
A private company run by one individual is called a sole proprietorship, while one run by a group of owners is called a partnership.
Missing Word
partnership
A partnership is a private business run by a group of owners who share in its profits, while a sole proprietorship has a single owner. Neither form has sold stock that investors can buy and trade. A private company can also be organized as a corporation without selling stock to the public.
Category: Sources of Capital
Question 5
The original amount of money borrowed or deposited, on which interest is calculated, is called the principal.
Missing Word
principal
The principal is the base amount of a loan or deposit. Simple interest is computed only on the principal, while compound interest is computed on the principal plus past interest.
Category: Building Wealth
Question 6
Raw goods such as oil, coffee and copper, which investors may buy hoping to sell later at a higher price, are called commodities.
Missing Word
commodities
Commodities are standardized raw goods. Investors usually hold contracts for ownership rather than the physical goods, and they profit only if the price rises.
Category: Housing and Assets
Question 7
In the United States, bank deposits are insured up to a set limit per depositor by the FDIC, a federal agency funded by fees that banks pay.
Missing Word
FDIC
The FDIC, or Federal Deposit Insurance Corporation, insures bank deposits, so savers are repaid up to the insured limit even if their bank fails. This insurance is a main reason bank accounts are a low-risk place to keep money. Banks pay fees to the FDIC based on the size of their deposits.
Category: Investment Tradeoffs
Question 8
Part of the interest rate a lender charges is an adjustment for inflation, the general rise in prices that reduces the buying power of the money repaid.
Missing Word
inflation
Inflation means a dollar repaid in the future buys less than a dollar lent today, so lenders build expected price increases into the interest rate they charge.
Category: Bonds and Borrowing
Question 9
In September 2008, the investment bank Lehman Brothers filed for bankruptcy after its board failed to rein in excessive risk-taking.
Missing Word
bankruptcy
Bankruptcy is the legal process a firm enters when it cannot pay its debts. The Lehman Brothers collapse is a classic example of weak corporate governance.
Category: Corporate Governance
Question 10
A bond that pays interest semiannually makes 2 interest payments each year.
Missing Word
2
Semiannual means twice a year, which is how often many bonds pay interest. Each payment is half of the yearly amount: a $1,000 bond with a 6% coupon rate pays $60 a year, made as two payments of $30.
Category: Bonds and Borrowing
Question 11
The full collection of stocks, bonds and other assets that an investor holds is called a portfolio.
Missing Word
portfolio
A portfolio is everything an investor owns. Spreading a portfolio across many different assets lowers the risk that any one loss will be severe.
Category: Investment Tradeoffs
Question 12
Spreading savings across the stocks or bonds of many different companies, so that one firm's losses do less damage, is called diversification.
Missing Word
diversification
Diversification is the idea of not putting all your eggs in one basket. Mutual funds offer it by pooling many investors' money into a wide range of companies.
Category: Investment Tradeoffs
Question 13
When a firm issues new shares, the ownership stake of each existing shareholder shrinks, an effect known as dilution.
Missing Word
dilution
Dilution is a cost of raising money with stock: each original owner holds a smaller fraction of the company and has less say over its decisions.
Category: Corporate Stock
Question 14
A borrower that fails to make the payments it promised on a loan or bond is said to be in default.
Missing Word
default
Default is a failure to make promised payments. Lenders demand a higher interest rate, a risk premium, from borrowers more likely to default.
Category: Bonds and Borrowing
Question 15
Outside auditors are accountants hired to review a company's financial records and confirm that they are accurate.
Missing Word
auditors
Auditors are part of corporate governance. By checking the books, they help give outside investors trustworthy information about the firm's finances.
Category: Corporate Governance