ChFC HS 328 Flashcards
P/E Ratio
Price per Share / Earnings per Share = P/E ratio
Vo represent’ s
Vo = today’s Value
What is the formula to find d1 when your given do?
d1 = do (1 + g)
What is d1?
next year’s dividend;
What is do?
current dividend; clues i.e. the dividend just paid was….
What is the formula to find Do when your given D1?
do = d1 (1 - g)
Write Gordon’s Growth Model formula
Vo = d1 / (R - g)
a type of AI (alternative investment) Examples of Collectibles?
coins, stamps, art, oriental rugs, they have a active market, the existence of a Demand Curve
a type of AI (alternative investment) Examples of Non-Collectibles?
race horses, sport teams, unique items, jewelry (based on style not metal), Broadway shows, vineyards, the existence of a Demand Curve
a type of AI (alternative investment) Examples of Natural Resources?
timber, oil and gas right’s,
What is unique to AI for Natural Resources?
a depletion allowance of 15% on oil; tax advantage only applies to minerals NOT timper
What a three types Economic Indicators?
Leading, Lagging and co-Incidence indicators
What are the 4 Business Cycles?
Trough, Expansion, Peak, Contraction (Recession)
How many Leading Indicators are there? examples
10 indicators i.e. stock market, S&P 500, Leading Credit Index, Building Permits, Avg. weekly hours manufacturing,
Which Economic indicator gives us a current statues?
co-Incidence Indicator
How many Co-Incident Indicators are their?
4 i.e.
What is a problems / issue with Leading Indicators?
False Signals
How many Lagging Indicators are their? examples
7
Who controls Fiscal Policy?
Congress and the President
What are the two forms of Fiscal Policy? (tools)
Government Spending and Government Income (Tax revenue)
Who controls Monetary Policy?
The Federal Reserve (the Fed)
How are members selected?
by appointment; they serve at the pleasure of the President
What is one of the goals of Monetary Policy?
control the rate at which the money supply expands or contracts
What tools does Monetary policy provide to the Fed? (The Fed’s Policy Tools)
Open-market operations (sales of securities-daily) Discount rate (decreasing signals greater willingness to grant loans by making them cheaper; done Occasionally) Reserve requirement (Increasing the required percentage reduces the amount of deposits that a given reserve base can support - extremely infrequent)
Reserve Requirements set by the Fed do NOT apply to __________, ________ .
credit unions, savings and loans
When a concern of a run on the bank would occur would the Fed increase or decrease the reserve requirement?
increase the reserve requirement
Where can a Bank borrow from to meet the Federal Reserve Bank?
other member banks or the Fed itself
What is the price a bank is charged when borrowing from the Fed as it pertains to Monetary Policy? (to meet the reserve requirement)
the discount rate
What is the price a bank is charged when borrowing from another member bank as it pertains to Monetary Policy? (to meet the reserve requirement)
the fed funds rate (this is usually slightly higher then the discount rate)
What is the Fed’s intended outcome from changing the Discount Rate? Increase or Decrease
increasing the rate will reduce the banks willingness to borrow money from the fed; and vice versa
What is the Fed’s intended outcome from changing the Reserve Requirement? Increase or Decrease
increases in the reserve requirement percentage potentially reduces a banks lending practices and vice versa
What is a primary goal of Fiscal and Monetary Policy?
Price Stability
How is Price Stability measured?
CPI (consumer price index)
What happens in a time of Inflation?
cost goes up
What happens in a time of Disinflation?
cost goes up but has slowed from where it was
What is the target inflation rate the Fed shoots for?
3% (typically a economy does not do well in a 1% to 2% inflation period)
What is Deflation? typically during economic contraction
costs goes down, (including home values etc.)
What is Stagflation?
it is the worst of everything, deflation during economy stagnation
Another Goal of Fiscal and Monetary Policy is ___ .
Full Employment (< 5% is considered full employment); or the Environmental, or Higher Living Standars
What is an effect from Full Employment?
the employer will need to pay higher wages (wage pressure)
Wage Pressure can be a indicator of what?
inflation (the fed may step in and change interest Rates)
Two primary goals of Fiscal and Monetary Policy are?
The two primary goals are price stability and full employment
What are some secondary goals for Fiscal and Monetary Policy?
Exchange Rate (balance of trade), Higher Standard of Living, Economic Growth, Environment Protection
What are some problems with Fiscal and Monetary Policies?
Takes time for impact to occur; subject to political intervention;
What are Micro Analysis Ratios used to look at a Firm?
Liquidity, Activity, Debt and Profitability
What is listed on the Left side of a firms Balance sheet?
Assets
What are considered current assets? how long?
assets that will be utilized in less than a year
What items are included in Current Assets?
cash (dollar for dollar), AR ( Account receivables; not dollar for dollar not everyone pays), Inventory (not dollar for dollar)
Run through a Income Statement ledger? the pecking order of flows
Net Sales - cost of Goods Sold = Gross Profit (income) - cash - depreciation expenses = EBIT (earnings before interest and taxes) - Interest Payments = Taxable Income - Taxes = Net Profit (or Income)
What two documents will you use to start your Ratio Analysis?
Income Statement and the Balance Sheet
What is the Current Liquidity Ratio formula?
Current Liquidity = current assets / current liabilities
Is a large Liquidity Ratio good or Bad?
Good (less than 1 is very bad)
What is the Quick Ratio (ACID Test) Formula?
Quick Ratio = (current assets - inventory) / current liabilities (think about the banana farmer)
What could a high Current Liquidity Ratio and a low Quick Ratio?
to much inventory
What do Activity Ratios examine?
examines the quality or effectiveness of a particular assets
How many Activity Ratios are used?
4 (Inventory Turnover Ratio, Average Collection Period Ratio , Total Asset Turnover Ratio , Fixed Asset Turnover Ratio
What is the Inventory Turnover Ratio formula?
Inventory Turnover Ratio = cost of goods sold / average yearly inventory
What is the Average Collection Period Ratio formula?
Average Collection Period Ratio = net accounts receivables / daily sales
What is the Total Asset Turnover Ratio formula?
Total Asset Turnover Ratio = net Sales / total assets (the larger the number the better)
What is the Fixed Asset Turnover Ratio formula?
Fixed Asset Turnover Ratio = net sales / net fixed assets
What do Debt Ratios measure?
measure the impact of debt on a business and its profitability
How many Debt Ratios are their?
2
What is the Debt - Asset Ratio formula?
Debt - Assets Ratio = total debt / total assets
What is the Equity Multiplier Ratio formula?
Equity Multiplier Ratio = total assets / total equity
How many Profitability Ratios are there?
2 basis types
What is the Return on Equity Ratio (ROE) formula?
Return on Equity Ratio = net income / equity
What is the DuPont System?
ROE - ROA (Equity Multiplier)
What is the Return on Assets Ratio (ROA) formula?
Return on Assets Ratio = net income / total assets
What is an example of a Savings Bond?
Series EE (pure discount instrument) or Series I (Inflation adjusted yield)
What a the Debt Instrument is covered on the exam?
CD’s traditional NOT brokerage CD’s
Characteristic of Money Market Debt Securities?
highly liquid, yields move together, available in large denominations
How long are T-Bills for? (Treasury Bills)
less than one year
How long is a T-Note? (Treasury Note)
> than one year < ten years
Characteristic of Commercial Paper?
max maturity is 9 mts. (270 days) issued by large corporations
Characteristic of Negotiable CD’s?
minimum of > 1MM; mature < 1 Year; trading ceases when within 14 days of maturity; FDIC covered on first $250K;
Characteristic of Banker’s Acceptance?
two name paper (liability of both parties) this obligation becomes a banker’s acceptance once it is accepted (guaranteed) by the bank pg 8.10
Characteristic of Eurodollar Deposits?
are Dollar-denominated liabilities of banks usually located outside of the US pg 8.10
What does BAN’s stand for?
Bond Anticipation Notes (to start a project ie construction)
What does RAN’s stand for?
Revenue Anticipation Notes (i.e. stadium ticket sales)
What does TAN’s stand for?
Tax Anticipation Notes (school districts)
What is the Prime Rate?
used to price loans pg 8.12
What is the Federal Fund Rate?
used to borrow from member banks to meet reserve requirements
What is the Discount Rate?
the rate the Fed charges member banks
What is LIBOR used for (London InterBank Offered Rate)?
used to price loans
What are two types of Intermediated and Long-Term Debt Instrument?
T-Notes issued with maturities from 1 to 10 years and T-Bonds issued with maturities greater than 10 years
How are Treasury Notes and Bond Quoted?
32nds (any thing after : is divided by 32) i.e. 110:02 is 2/32 = 0.0625 added to 110 = 110.0625
What are the two types of Municipal Bonds?
Revenue Bonds and General Obligation Bonds (General Obligation Bonds are the safer of the two)
What kinds of Bonds have Collateral?
Mortgage Bonds (equipment or real estate i.e. plants) Equipment Trust Certificates (rolling stock as collateral i.e. trains, plans, automobiles, buses) Collateral Trust Bonds (Securities as collateral i.e. stocks)
Mortgage Bonds (plants, equipment or real estate) Equipment Trust Certificates (rolling stock as collateral i.e. trains, plans, automobiles, buses) Collateral Trust Bonds (Securities as collateral i.e. stock) are all examples of......
these are all types of Collateral Bonds
What is the best account type to hold a Zero - Coupon Bond?
qualified accounts i.e. IRAs
What can Convertible Bonds convert to?
into shares of stock
Why are Income Bonds scary?
issued by companies in bankruptcy, may never pay
What are Callable Bonds?
have a callable date that the issuer can call the bond back to re-finance their debt
How are Serial Bonds (only issued by Municipals) paid?
they are paid sequentially
What are Sinking Fund provision on a bond?
the company is setting profits as side to make sure funds are available at the time the Bonds Mature
What is an investment grade bond rating?
any rating above BBB i.e. AAA
What is another name for a Junk Bond?
High Yield Bond
What are the two most common Corporate Bankruptcy fillings?
Chapter XI (11) (reorganization) and Chapter VII (7) (liquidation)
What is the term Securitization mean?
involves taking assets that were not easily traded in a secondary market (poor marketability) and structuring a marketable security or group of securities from them.
How are Mortgage Backed Securities sold?
they are sole in Tranches
What is par value at maturity of a Bond?
$1,000
How to calculate a Coupon Rate on a Bond?
Annual Interest payment / by Par Value
Sample Problem: What is the Price of the Bond today if held to maturity? What is PV of the bond? Term to Maturity: 6 years Coupon Rate: 2.5% annual Par: $1,000 Discount Rate: 4%
keystrokes: Shift , C ALL;
6 N , 4 I/YR, 25 PMT, 1000 FV, PV
Display -921.37
Note: coupon rate gives you the payment amount for the year; and PAR is your FV if held to maturity
Sample Problem: What is the Price of the Bond today if held to maturity? Term to Maturity: 29 years Coupon Rate: 6% annual Par: $1,000 Discount Rate: 5%
keystrokes: Shift , C ALL;
29 N , 5 I/YR, 60 PMT, 1000 FV, PV
Display -1,151.410
Note: coupon rate gives you the payment amount for the year; and PAR is your FV if held to maturity
If the Coupon Rate of a Bond is Greater than the Discount Rate the Bond would be priced at a _____ of Par?
a premium of Par i.e. $1,010.00
Sample Problem: What is the Price of the Bond today if held to maturity? Term to Maturity: 29 years Coupon Rate: 6% semi-annual Par: $1,000 Discount Rate: 5%
keystrokes: Shift , C ALL;
58 N , 2.5 I/YR, 30 PMT, 1000 FV, PV
Display -1,152.24
Note: coupon rate gives you the payment amount for the year so you need to divided it by 2 to get the semi-annual payment amount; then you will also need to take HALF of the Discount Rate also and double the number of periods; and PAR is your FV if held to maturity;
Sample Problem: What is the Price of the Bond today if held to maturity? Term to Maturity: 25 years Coupon Rate: $40 annually Par: $1,000 Discount Rate: 5%
keystrokes: Shift , C ALL;
25 N , 5 I/YR, 40 PMT, 1000 FV, PV
Display -859.06
Note: coupon rate gives you the payment amount for the year; and PAR is your FV if held to maturity
Sample Problem: What is the YTM for a Bond if....? What is the I/YR? Term to Maturity: 6 years Coupon Rate: $40 annually Par: $1,000 Current Price: $950
keystrokes: Shift , C ALL;
6 N , 40 PMT, 950 +/-PV, 1000 FV, I/YR
Display 4.98 (4.98%)
Note: the money going into the bond is coming out of your wallet and should be a negative number, the future value is coming back into your wallet will be a positive
Sample Problem: What is the YTM for a Bond if….? What is the I/YR?
Term to Maturity: 6 years
Coupon Rate: $40 per year, Paid Semi-annually
Par: $1,000
Current Price: $950
Callable: in 3yrs at $1,040
keystrokes: Shift , C ALL;
12 N , 20 PMT, 950+/-PV, 1000 FV, I/YR times 2
Display -4.97 (4.97%)
Note: coupon rate gives you the payment amount for the year so you need to divided it by 2 to get the semi-annual payment amount; then you will also need to take HALF of the Discount Rate also and double the number of periods; and PAR is your FV if held to maturity;
Sample Problem: What is the YTM for a Bond if….? What is the I/YR?
Term to Maturity: 6 years
Coupon Rate: $40 per year, Paid Semi-annually
Par: $1,000
Current Price: $950
Callable: in 3yrs at $1,040
keystrokes: Shift , C ALL;
12 N , 20 PMT, 950+/-PV, 1000 FV, I/YR times 2
Display -4.97 (4.97%)
Note: coupon rate gives you the payment amount for the year so you need to divided it by 2 to get the semi-annual payment amount; then you will also need to take HALF of the Discount Rate also and double the number of periods; then double the I/YR
Sample Problem: What is the YTM for a Bond if....? Term to Maturity: 20 years Coupon Rate: $60 per year, annually Par: $1,000 Current Price: $1,050
keystrokes: Shift , C ALL;
20 N , 60 PMT, 1050 +/-PV, 1000 FV, I/YR
Display 5.58 (5.58%)
Note: the money going into the bond is coming out of your wallet and should be a negative number, the future value is coming back into your wallet will be a positive
Sample Problem: What is the YTC for a Bond if....? Term to Maturity: 6 years Coupon Rate: $40 per year, annually Par: $1,000 Current Price: $950 Callable: in 3yrs @$1,040
keystrokes: Shift , C ALL;
3 N , 40 PMT, 950 +/-PV, 1040 FV, I/YR
Display 7.152 (7.15%)
Note: the money going into the bond is coming out of your wallet and should be a negative number, the future value is coming back into your wallet will be a positive
A longer maturity bond has what effect on the bonds volatility?
Longer Maturity = more volatile bond
What effect does a low coupon have on the volatility of a bond?
Lower Coupon Rate = more volatile bond