Chapter 6.2, Problem 1R

To determine

To explain: The importance of the terms mentioned in the question.

Explanation of Solution

The significance of each phrase is mentioned below:

Stockholders: Since the shareholders are ultimately the owners of a company, they reap the benefits of the success of a corporation. These incentives come in the form of improved stock valuations or in the form of financial gains distributed as dividends.

Capital gain: Capital gain is an increase in the value of a capital asset. It is considered to have been realized when you sell the asset.

Capital loss: A capital loss is a loss that occurs when the value decreases of a capital asset, such as an investment or real estate. This loss is not acknowledged until the asset is sold at a price below the original purchase price.

Tax-exempt bonds: Tax-free bonds are an ideal option for investors looking for fixed incomes like senior citizens. As government corporations usually issue these bonds for a longer period of time, the default risk of these bonds is much smaller and you are assured of a guaranteed return for a longer period of time, generally ten years or more.

Savings bonds: Savings Bonds are the U.S. distributed debt securities. The Treasury Department helps pay for the U.S. government’s borrowing needs. Since they are backed by the total confidence and protection of the U.S. government, U.S. savings bonds are considered one of the strongest investments.

Treasury bills: Investments in TB are highly protected, as the government ensures the payment of interest and the repayment of the principal. They bear zero default risk as they are released by the RBI for and on behalf of the Central Government.

Treasury notes: Treasury notes are available from the government with either a competitive or non-competitive bid. With a competitive bid, investors decide the return they want, at the risk that their bid will not be accepted; with a non-competitive bid, investors accept whatever return is decided at the auction.

Treasury bonds: T-bonds are guaranteed by the U.S. government, and the U.S. government will increase taxes and raise revenue to ensure maximum payments. These investments are also considered benchmarks in their respective fixed-income groups as they offer a risk-free base rate of return on investment with the minimum return categories.

Broker: A broker is a person or firm working between the investor and the stock exchange as an interpreter. Since securities markets only accept orders from companies or individuals that are members of such exchanges, the help of exchange members is required by individual investors and traders. Brokers offer this service and, either through commissions, fees or through the exchange itself, are paid in different ways.

Over-the-counter market: OTC trading helps to encourage stock and financial instruments that would otherwise be inaccessible to investors. Companies with OTC shares can raise capital through the sale of shares.

Stock market indexes: The stock market index serves as a barometer that displays the overall market conditions. They make it easier for investors to recognize the general market trend. Investors use the stock market as a guide to determine which stocks to invest in.

Mutual fund: Mutual funds are a cost-effective way of diversifying the portfolio across different types of assets and companies. Instead of buying and monitoring potentially thousands of stocks, you might buy a few mutual funds at a fraction of the cost to achieve great diversification.

Money market fund: A money market fund aims to provide the highest short-term profits by holding a well-diversified portfolio of money market instruments. Investors with a limited investment period of up to one year may invest in these funds.