Flashcards: Chapters 9 & 10

What is interest income?

Interest income is the money earned from deposit accounts or bonds, where interest is paid at a predetermined rate for the use of deposited or loaned funds. Example: A bond paying 5% annual interest on a $10,000 investment yields $500 per year.

What are dividends?

Dividends are payments made to shareholders from a corporation's earnings. They provide a return on investment in the company’s equity. Example: Owning 100 shares of a company that pays $1 per share annually results in a $100 dividend payout.

What are capital gains?

Capital gains refer to the profit earned when an investment is sold for more than its purchase price. Example: Buying a stock at $100 and selling it at $150 results in a $50 capital gain per share.

How do stocks differ from bonds?

Stocks represent equity ownership in a corporation and can provide high returns with high risk. Bonds are debt investments where the investor loans money to an entity in exchange for periodic interest payments and principal repayment, offering lower risk and returns.

What is an index fund?

An index fund is a type of mutual fund that replicates the performance of a market index, such as the S&P 500. It provides diversification with low operating costs.

What are Exchange-Traded Funds (ETFs)?

ETFs are investment funds that trade on stock exchanges like individual stocks. They provide diversification, liquidity, and low expense ratios compared to actively managed mutual funds.

What is the primary purpose of insurance?

The primary purpose of insurance is to provide financial protection against potential future losses by transferring risk from an individual to an insurance company in exchange for a premium.

What are the key types of insurance?

Key types of insurance include health insurance (covers medical expenses), life insurance (provides financial support for beneficiaries), auto insurance (covers vehicle damage and liabilities), homeowners insurance (protects against property damage), and liability insurance (protects against legal claims).

What is a premium in insurance?

A premium is the amount of money paid periodically (monthly, quarterly, or annually) to an insurance company to maintain coverage.

What is a deductible?

A deductible is the amount a policyholder must pay out-of-pocket before the insurance company covers the remaining costs of a claim. Example: If an auto insurance policy has a $500 deductible and repairs cost $2,000, the insured pays $500, and the insurer covers the remaining $1,500.

What is the difference between actual cash value and replacement value?

Actual cash value (ACV) considers depreciation when determining reimbursement, while replacement value covers the cost of replacing the item with a new one of similar kind and quality without factoring in depreciation.

What is liability insurance?

Liability insurance provides financial protection against claims of injury or property damage caused to others. It is essential for businesses, homeowners, and vehicle owners to protect against lawsuits and financial losses.

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