Chapter 1 True or False Flashcards
American exports are hurt by a strengthening US dollar / euro exchange rate
True. When the U.S. dollar/euro exchange rate strengthens, the dollar rises in value relative to the euro. This makes it more difficult for American exporters to sell their goods to Europeans because Europeans will have to pay more in euros for the same American goods.
ADRs are not subject to currency risk
False. Since payments from ADRs are made in a foreing currency that must be converted to US dollars, ADRs are subject to currency risk
In an inflationary environment, a LIFO assumption results in a lower valued inventory than FIFO.
True
During an economic downturn, investors are more likely to purchase bonds because they are perceived to be safer investments than stocks.
True. Bonds, largely because they come with regular interest payments and a return of investment principal, bonds are perceived as safer investments than stocks. As a result, during times of economic uncertainty investors are increasingly likely to purchase bonds.
When a stock is heavily shorted, a technical analyst would be likely to recommending buying the stock.
True. Technical analysts assume that a stock’s price will rise after there has been a large amount of short selling on that stock. This is because short sellers will eventually have to buy shares to close out their positions, and that should lead to an uptrend in the stock’s price.
Federal funds rate is a higher interest rate than the prime rate
False. The federal funds rate, which is the rate that banks charge each other to borrow funds overnight, is lower than the prime rate, which is the rate banks charge their best customers to borrow money.
When a country has a trade surplus, there is less demand for that country’s currency.
False. A country that has a trade surplus is a country with more exports than imports. When a country has a trade surplus, there is a high demand for its products, and this leads to more demand for the country’s currency because foreign purchasers must use that currency when paying for purchased goods.
When performing a net present value calculation the present values of future cash inflows are included in the calculation, but the present values of future cash outflows are not included.
False. In an NPV calculation, the present values of both future cash inflows and cash outflows are part of the calculation .
Publicly traded companies must file Form 10-K with the SEC no later 30 days after the end of the calendar year.
False. Most public companies are required to file Form 10-K within 90 days after the end of their fiscal years, though “accelerated filers” must file the report within 75 days of the end of their fiscal years
When the Federal Reserve wants to stimulate the economy it purchases U.S. Treasuries.
True. When the Fed wants to stimulate the economy it purchases U.S. Treasuries. In doing so, the Fed releases more money into the economy, which helps to lower interest rates. Lower interest rates allow consumers to borrow more money and spend more money, in turn growing the economy.
define federal funds rate
the rate that banks charge each other to borrow funds overnight
define interest rate risk
the risk that when interest rates rise, the price of bonds or preferred stock will fall
To protect herself against currency risk, an investor in foreign securities can buy put options on the currency of the country in which her securities were issued.
true. an investor in foreign securities can buy puts on the issuing company’s home currency to protect against currency risk
when spread between lt and st interest rates narrows, it signals that
when the liquidity spread narrows, it’s a sign that an economic contraction may occur. An increase in this spread may signal an expansion
hedging can protect an investor from systematic risk
true. an investor for example can protect from mkt decline by purchasing puts on a broad-bnased index
inflation and interest rates rise together
true. this is bc lenders need to offer higher int rates to keep up w inflation
A company’s market capitalization is equal to its stock price times the number of all shares issued.
A company’s market capitalization is equal to its stock price times the number of all shares issued.
Company Logo
False. Market capitalization is equal to stock price times the number of outstanding shares. Treasury stock are issued shares that are no longer outstanding, and thus are not included in the calculation for market capitalization.
inverterd yield curve predicts what
recession
when FRB wants to reduce inflation, it might raise the discount rate
True. When it raises the discount rate, it makes it harder for banks to borrow money, tightening the money supply. More limited supply of money yields reduced infaltion
Countries with trade deficits experience currency decline
true. with a trade deficit, it imports > exports. This means there’s reduced foreign demand for the country’s products and currency which causes the value of that currency to decline
stocks with higher p/e ratios tend to be riskier investments
true. EPS measures how much of a comp’s earnings belong to each share of stock and EARNINGS PER SHARE indicates a comp’s profitability
Investors typically like to invest in bonds during a contraction because as the contraction phase progresses, yields generally increase.
False. B hyields are generalyl high in the early and middle stages of a contraction; however, they gneerally drop during the latter stages of a contraction
Callable bonds are subject to greater call risk when int rts are declining
true. When rates decline, callable bonds are more liely to be called by issuer.
How do bonds interact w interest rts
bond yields typically follow interest rate patterns. Thus when rates are high, bond yields are also highe
the safest invs in terms of principal risk also tend to be the safest in terms of inflation risk
false. safest in terms of principal risk tend to have highest risk of not outpacing inflation
EBIT is equal to what
the sum of operating income and non-operating income
credit spread
the difference bw a b’s yield and the yield of a low risk benchmark
liquidity spread
diff bw the yields of long and short term T securities
3 types of systematic risk
market, inflation, interest rate
when credit spreads widen, the value of junk bonds decreases more than the value of AAA rated corp bonds
true. when cred spreads widen, the value of lower grade bonds decreases more than the value of higher grade
when credit spreads widen, the value of junk bonds decreases more than the value of AAA rated corp bonds
true. when cred spreads widen, the value of lower grade bonds decreases more than the value of higher grade
While initial claims for unemployment typically help to predict which phase of the business cycle will occur in the future, the unemployment report typically shows which phase of the business cycle the economy just experienced.
True. Initial claims for unemployment is a leading indicator that is used to predict future economic performance. On the other hand, the unemployment report indicates the economy’s performance in the recent past, and thus, is a lagging indicator.
three categories of shareholder’s equity
paid-in capital, retained earnings, and treasury stock
A rise in business spending indicates that the economy will likely grow in the future.
False. Business spending is a lagging indicator, meaning its performance often shows economic developments that have already occurred. A rise in business spending would likely show that the economy has been expanding, but it is not necessarily a sign that it will expand in the future.
Depreciation and amortization are considered to be operational expenses.
True. Operational expenses are the costs of running a business that are not directly related to the production of goods and services. They include selling, general, and administrative expenses; research and development; and depreciation and amortization.
Form 144 must be filed with the SEC when any investor sells more than 5,000 shares or $50,000 worth of a company’s stock.
False. Form 144 must be filed when an insider sells more than 5,000 shares or $50,000 of a company’s stock. An insider is someone who is an officer, director, or someone who owns more than 10% of the company. The form does not need to be filed if the sale is made by a non-insider.
