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Conceptual Questions

1. Stocks vs. Bonds

• Stocks: Ownership in a company; returns come from price appreciation and dividends.
• Bonds: A loan to a government or company; returns come from interest coupons and repayment of principal at maturity.

2. Risk vs. Return

• Higher risk = higher expected return (and higher possibility of loss). Investors demand a premium for taking on uncertainty.

3. Diversification

• Mixing different assets/sectors to reduce specific risk.
• Example: 60% S&P 500 ETF + 30% U.S. bond fund + 10% international stock ETF.

4. Mutual Funds vs. ETFs

• Mutual funds: Priced once a day (NAV), often have higher minimums, usually come with more fees.
• ETFs: Trade all day like stocks, usually have lower costs.

5. Main Advantage of a Roth IRA

• Tax-free withdrawals in retirement (if rules are met). Ideal if you expect to be in a higher tax bracket later.

6. Liquidity

• Ease of converting to cash without significant loss. Generally: stock > corporate bond > house.

7. Growth vs. Value

• Growth: High expectations for expansion, reinvests profits (e.g., growing tech companies).
• Value: Trades “cheap” relative to fundamentals, often pays dividends (e.g., mature companies).

8. Rebalancing

• Maintain your target risk profile by selling what has grown overweight and buying what has lagged.

9. Role of Indexes

• Serve as market benchmarks and form the basis for index funds/ETFs that offer instant diversification.

10. Importance of Estate Planning

• Defines who receives your assets, reduces costs/time (avoids or simplifies probate), and minimizes conflicts.

Problem-Solving

1. 1. Stock Growth

• • • 20 shares × $25 = $500 (cost).
    • Value at $40 = 20 × $40 = $800.
    • Gain = $800 – $500 = $300.

1. 2. Bond Yield (at par)

• • • Annual coupon = $60; face value = $1,000.
    • Yield = 60 ÷ 1,000 = 6%.

1. 3. Compound Growth

• • • FV = 2,000 × (1.08)^15 ≈ $6,344.

1. 4. Mutual Fund vs. ETF Cost (20 years)

• • • o Mutual fund net: 8% – 1.5% = 6.5% → FV ≈ 10,000 × (1.065)^20 ≈ $35,236.
    • o ETF net: 8% – 0.1% = 7.9% → FV ≈ 10,000 × (1.079)^20 ≈ $45,754.
    • o ETF wins by ≈ $10,518.

1. 5. Roth Advantage

• • • Roth IRA with qualified withdrawals: $45,000 taxable = $0.

1. 6. Rebalancing (70/30 → 80/20)

• • • Sell part of stocks (excess 10%) and buy bonds to return to 70/30. (No amounts needed; the correct action is reduce stocks and increase bonds.)

1. 7. Index Fund Growth (monthly contribution)

• • • PMT = $200/month, r = 7%/12, n = 360.
    • FV ≈ 200 × [((1+0.07/12)^360 – 1) ÷ (0.07/12)] ≈ $244,000.

1. 8. Dividend Income

• • • 100 shares × $2 = $200/year.

1. 9. Risk Check (concentration)

• • • Main risk: concentration (unsystematic risk).
    • Solution: diversify across multiple companies/sectors/assets.

1. 10. Estate Planning (probate 5%)

• • • 5% of $500,000 = $25,000.
    • Heirs receive = $475,000.

Interactive Challenge

1. 1. Quick Quiz: Stock or Bond?

• • Loan to the government → Bond
    
  • Ownership in a company → Stock
    
  • Pays dividends → Stock
    
  • Pays a fixed coupon → Bond
    

1. 2. Risk Spectrum (lowest to highest risk)

• • Savings account → U.S. Treasury bond → S&P 500 index fund → Cryptocurrency

1. 3. Diversify or Not?

• • More diversified: a friend with 10 companies (reduces firm-specific risk).

1. 4. Growth vs. Value

• • Hot startup tech company: typically growth (high potential/high valuation, little or no distributions).

1. 5. Liquidity Check (most to least liquid)

• • Checking account → Corporate bond → House

1. 6. Mistake Hunt (delaying retirement until 40)

• • Mistake: ignores the power of compound interest; requires much larger contributions to reach the same goal.

1. 7. Case Study Snapshot (Emily vs. Mark)

• • Emily (starts earlier) will likely have more at retirement: more time in the market > higher monthly contribution starting later.

1. 8. Estate Plan or Not?

• • Without a will: delays, costs, possible family conflict, and distribution decided by the state (not your wishes).