Chapter 11: Analysis Flashcards
______ looks at company specifics, balance sheet and income statement, and is concerned with alpha, financial, or bankruptcy risk. It is economics based, monetarism driven, and Federal Reserve Board directed.
Fundamental Analysis
If the Fed buys, the money supply ______, interest rates ______, yield curves become ______, prices ______ … prosperity is nearing.
- Grows
- Decline
- Normal
- Rise
If the Fed sells, the money supply ______, interest rates ______, yield curves become ______, short-term rates become ______ than bond yields … a recession is coming.
- Shrinks
- Rise
- Inverted
- Higher
______ is concerned with four major issues:
- Monetary policies as implemented by the Federal Reserve Board (FRB) through its open market committee.
- Fiscal vs. Monetary policy
- Economic indicators: leading, lagging, and coincident.
- Specific company information: balance sheet and income statement.
Fundamental Analysis
______ is our total national output of goods and services.
Gross Domestic Product (GDP)
The ______ gauges inflation by measuring costs in constant dollars.
Consumer Price Index (CPI)
______ is defined as too many dollars chasing too few goods and services.
Inflation
The economic cycle starts with the ______ phase.
Expansion
______ is a common symptom of the expansion phase.
Inflation
The expansion phase culminates at the ______.
Peak
If the cycle lingers too long at the peak, we sometimes experience ______, which is a period of rising prices with no economic growth.
Stagflation
______ is a slowing of the economy over a prolonged period of time.
Stagnation
______ follows the peak, and is sometimes accompanied by ______.
- Decline
2. Deflation
______ is a period of falling prices; too few dollars chasing too many goods and services.
Deflation
A recession is defined as ______ (______ months) of a decline in GDP.
- 2 Consecutive Quarters
2. 6 Months
A depression is defined as ______ (______ months) of a decline in GDP.
- 8 Consecutive Quarters
2. 24 Months
The decline phase ends when the economy bottoms out, which is called the ______.
Trough
After the ______, the economy begins to expand again, and the cycle starts over.
Trough
______ involves the president and Congress passing bills and appropriations that influence economic activity. ______ and ______ are its primary tools.
- Fiscal Policy
- Federal Taxation
- Spending
Congress can ______ to increase economic activity or ______ to decrease economic activity.
- Lower Taxes
2. Raise Taxes
The federal government can increase spending on ______ (i.e., roads and bridges), ______, and/or ______ to stimulate the economy. It can also increase ______, such as social security or tax rebate programs.
- Capital Projects
- Military
- Social Programs
- Transfer Payments
Congress not only has the ability to spend money, but, if needed, can authorize ______ to stimulate the economy.
Borrowing Funds
______ is the economic theory that advocated using fiscal policy to jump-start the economy to “full employment”.
Keynesian
______ is the use of government spending and taxation to influence the economy.
Fiscal Policy
______ believes that the economy runs at an “equilibrium” level that is determined by income and spending, and aggregate demand. In other words, if people are out of work, they do not consume or spend money
Keynesian Theory
______ believes that is the government’s responsibility to stimulate the economy to “full employment” by increasing spending.
Keynesian Theory
______ doctrine says that as long as the government does not meddle with the economy, business will take care of itself.
Supply Side Economics
______ states that stable interest rates, money supply, and low inflation achieved through ______ will enable business to drive the economy to full employment.
- Supply Side Economics
2. Monetary Policy
In ______, growth is promoted through tax cuts and deregulation.
Supply Side Economics
Monetary policy is controlled by the ______ or “______”.
- Federal Reserve Board (FRB)
2. The Fed
The main ______ is in New York, and it controls a system of member banks in major cities across the U.S.
Federal Reserve Bank
The ______ is the Federal Reserve System’s top monetary policy-making body.
Federal Open Market Committee (FOMC)
______ refers to actions taken to influence the money supply and credit in the economy, which in turn affects interest rates.
Monetary Policy
By raising or lower short-term interest rates, it indirectly controls ______ and ______.
- Inflation
2. Employment
The primary focus of ______ is to promote price stability and full employment.
Monetary Policy
If the FRB believes that the economy is growing too quickly (which might cause ______), it will ______ the money supply to slow the economy, which makes money scarcer and causes interest rates to ______.
- Inflation
- Tight
- Rise
If the FRB wishes to stimulate the economy, it will ______ the money supply, which causes interest rates to ______, and speeds economic growth.
- Ease
2. Drop
The most powerful tool the FRB has is the ______, which is an overnight cash reserve that each Federal Reserve member bank must maintain each night.
Reserve Requirement
The FRB will raise the reserve requirement to ______ the money supply and lower it to ______ the money supply.
- Tighten
2. Increase
The reserve requirement is the most powerful tool which the FRB has, because it has a(n) ______ throughout the economy.
Multiplier Effect
Each night, every member bank calculates its ______. If the member is short, it must borrow cash from another member bank or from the main Federal Reserve Bank in New York.
Reserve Requirement
The fed also sets the ______, which is the rate the main Federal Reserve Bank charges member banks for loans to meet their overnight loan requirement.
Discount Rate
When a member bank borrows from the main Federal Reserve Bank at the ______, the member is said to borrow at the ______. This is an indication that the borrower is experiencing financial trouble, because the main Federal Reserve Bank is considered the lender of last resort.
- Discount Rate
2. Discount Window
If a member bank is short funds to satisfy its reserve requirement, it will first attempt to borrow from another ______.
Member Bank
When member banks lend to each other, the interest rate they assess is called the ______. This rate is not set by the ______; it is the average of all interest rates charged by member banks for these overnight loans.
- Fed Funds Rate / Federal Funds Rate
2. Federal Reserve Board
The ______ charged by member banks for overnight loans is extremely volatile because it can literally change overnight.
Fed Funds Rate
The most often used FRB tool is the ______, which is where the ______ buys or sells treasuries in the secondary market to slow or stimulate the economy.
- Federal Open Market Operations
2. Federal Open Market Committee (FOMC)
If the Fed is ______ treasuries, they are putting money into the economy. This ______ the money supply and ______ the economy.
- Buying
- Increases
- Stimulates
If the Fed is ______ treasuries, they are pulling money out of the economy. This ______ the money supply and ______ the economy.
- Selling
- Shrinks
- Slows
The FOMC operation has the greatest effect on ______, which is a measure of the money supply.
M1
______ equals cash and demand deposits such as checking accounts. ______ equals the previous plus savings accounts and some money market funds. ______ equals the previous plus institutional investors and money markets.
- M1
- M2
- M3
On a global level is the ______, which is an international, decentralized unregulated, market. Consequently, the ______ is a high risk market.
Interbank System
The major participants in the ______ are central banks and large multi-national corporations.
Interbank Market
In the ______, foreign currencies are traded in large blocks. Generally, these are blocks of ______.
- Interbank Market
2. $1 to $5 Million
When the U.S. dollar is ______, foreign currencies are ______. This makes foreign goods ______, so U.S. imports ______ and dollars flow out of the U.S., creating a(n) ______ trade balance. This outflow also ______ the dollar.
- Strong
- Weaker
- Cheap
- Increase
- Deficit
- Weakens
As U.S. dollar ______, foreign currencies by comparison are ______. This makes American products ______ abroad, and U.S. exports ______. As money flows into the U.S. due to exports, the dollar grows ______.
- Weakens
- Stronger
- Cheaper
- Increase
- Stronger
The balance of trade is ______. In other words, when the dollar is strong, imports go ______, causing the dollar to get _____. When the dollar is weak, exports ______, causing the dollar to get ______.
- Cyclical
- Up
- Weaker
- Increase
- Stronger
If interest rates rise,
- Bond and yields ______.
- The U.S. dollar is ______ as the FRB is attacking ______.
- Imports ______ because of the ______ dollar’s purchasing power.
- Exports ______ because the ______ U.S. dollar means ______ foreign currencies.
- Rise
- Strengthened, Inflation
- Rise, Strong
- Rise, Stronger, Weaker
______ interest rates cause the FRB to pursue a tight money policy by ______ government securities to banks and broker/dealers. This sometimes causes a(n) ______, with short-term rates rising above bond yields.
- Raising
- Selling
- Inverted Yield Curve
An inverted yield curve often leads to ______, which is large-scale investor movement into long term debt instruments. This causes long-term yields to drop as greater demand drives long-term bond prices up.
Disintermediation
Inverted Yield Curve = Tight Money Policy
Rates: \_\_\_\_\_\_ Yields: \_\_\_\_\_\_ Imports: \_\_\_\_\_\_ US $: \_\_\_\_\_\_ Stock/Bond Prices: \_\_\_\_\_\_ Exports/For $: \_\_\_\_\_\_
Rates: RISE Yields: RISE Imports: RISE US $: RISE Stock/Bond Prices: FALL Exports/For $: FALL
Normal Yield Curve = Loose Money Policy
Rates: \_\_\_\_\_\_ Yields: \_\_\_\_\_\_ Imports: \_\_\_\_\_\_ US $: \_\_\_\_\_\_ Stock/Bond Prices: \_\_\_\_\_\_ Exports/For $: \_\_\_\_\_\_
Rates: FALL Yields: FALL Imports: FALL US $: FALL Stock/Bond Prices: RISE Exports/For $: RISE
FRB through its Open Market Committee (OMC) is SELLING Government/Agencies. Money is removed from the Money Supply. The discount rate ______, then is followed by ______ in the Fed Funds rate, then T-Bill rate, then Repo and CD rates, then Prime rate, Broker Call Loan Rate (Bank charging B/Ds), then Margin Loan Rate (B/Ds charging customers).
- Rises
2. Increases
Inverted Yields means ______ rates are higher than ______ yields.
- Short-Term
2. Long-Term
When the FRB sells securities, it ______ money from the money supply, which causes rates to ______. As rates start ______, yield curves turn from normal, positive, and upward sloping to inverted and negative. This means that ______ rates rise higher than ______ debt yields.
- Removes
- Rise
- Rising
- Short-Term
- Long-Term
A(n) ______ money supply draws investors from equities and bonds to money market. Soon, a(n) ______ provides the cure for inflation.
- Inverted
2. Recession
Rates begin to ______ during prosperity, and ______ becomes a real problem during expansion.
- Rise
2. Inflation
During recovery we can have a period (hopefully brief) of ______, no growth with inflation still present and high interest rates.
Stagflation
The ______ rate is the lowest, and is set by the FRB to be charged to any member bank for borrowing.
Discount
The ______ rate is slightly higher than discount for overnight borrowing between Federal Reserve member banks. Obviously ______, the most sensitive money market indicator, are the first rates to be affected by changes in the discount rate.
Fed Funds
______ are bank-to-bank loans, so they are not money market securities.
Fed Funds
______ have nothing to do with the FRB (the FED) directly. They are overnight loans banks make to other banks with funds they access by dipping into their excess Federal Reserve monies.
Fed Funds
______ rates are usually slightly higher than fed funds. The banks earn ______ rates when they invest short-term.
Money Market
______ rates include the repo rate (especially the overnight rep rate), commercial paper, bankers’ acceptance, and CD rates.
Money Market
______ are created when a bank dealer sells collateralized securities with a promise to buy them back.
Repurchase Agreements / Repos / Buy Backs / Matched Sales
Other money market instruments are ______, which is unsecured corporate notes with maturities ranging from 30 to 270 days, and ______, which are import/export paper.
- Commercial Paper
2. Bankers’ Acceptances
______ (for this test) are the jumbos, requiring a minimum investment of $100,000.
Certificates of Deposit (CDs)
Higher than money market rates that banks earn are the ______ rate and ______ rates, which banks charge. The ______ rates are charged to their best customers, and ______ rates are charged to broker/dealers for customer margin purchases.
- Prime
- Broker Call Loan
- Prime
- Broker Call Loan
Of the call loan, discount, fed funds, money market, and prime rates, ______ has the lowest rate and ______ has the highest.
- Discount
2. Call Loan
______ estimate future economic activity in a business cycle.
Leading Indicators
______ Indicator: Average weekly hours, manufacturing.
Leading
______ Indicator: Average weekly initial claims for unemployment insurance.
Leading
______ Indicator: Manufacturers’ new orders, consumer goods and materials.
Leading
