• Read 575-580
1. What is a bond?
A certificate showing that that someone owes you money. It is an an IOU. It says how
much that entity owes you, when they will pay you back, and how much money they will
pay you each year for lending them that money. (The interest rate)
2. What is a stock?
Represents ownership of a company. If the company sells some of these shares to the
public, they can be traded on a stock exchange.
3. How are stocks and bonds similar?
With both stocks and bonds you are investing in a company. Either way, you want the
company to succeed.
4. How are they different?
With a stock, you own part of the company and the value of your stock reflects the future
profitability of the company. With a bond, you have lent the company money. If the
company runs into trouble, a bondholder will be paid first. Bonds are less risky, which
means there isn’t as much potential to make money as well.
5. How does a bank make money?
Banks pay depositors interest and charge people to whom they lend money interest. The
money they make is the “spread” in between. For example, if the bank pays me 2%
($2,000) on the money I deposited with them ($100,000) and charges you 6% ($6,000)
for money they lent you to buy a house($100,000), they are making 4% ($4,000) a year
6. How does a mutual fund make money?
Mutual funds charge around 1% on any money you invest with them. For example, if I
were to give a mutual fund $20,000. They would generally buy stock and charge me
$200 a year for their service. Hopefully, I would make much more than that $200 that I
would have to pay off of the stocks going up in price and in the dividends I would receive.
7. Name three large companies with which you have some familiarity. For example, I
might pick Whole Foods because I shop there a lot. (Sorry, you can't pick Whole Foods
as well because I am going to use them as an example)