Concept 5 Flashcards
If an analyst who have big influence on a stock, change his recommendation to “sell” and only inform his clients, does he violate standard?
No, Material information applies to the issuer of the security, the analyst who covers the security is free to issue recommendation only to his clients
If the analyst receives an recommendation, can he act on his own account and on his client’s account at the same time?
No Standard VI(B) Priority of Transactions. Client transactions must take precedence over members’ or candidates’ trades.
One stock grows from 4000 to 6520 in 4 years with monthly compounding, what is the effective annual interest rate?
(6520/4000)^(1/4) -1 = 12/99%
Since it is asked about the effective annual interest rate, the monthly compounding is not relevant
Central Limit theorem, what is the sample mean distribution?
Normal distribution with mean = population mean , variance = population variance / n
Does Central Limit theorem apply to skewed distributions?
Yes
Crowding out effect
An economic concept where increased public sector spending replaces, or drives down, private sector spending.
What happens to the interest rate and corporate investment project profitability if government borrows lots of money?
Borrow money -> interest rate increase -> decrease profitability (since increased required rate of return
Tariff
A tariff placed on an imported good increases the domestic price, decrease quantity imported and increases quantity supplied domestically.
Domestic government collect all the tariff revenue
Quota
Restriction of the quantity of a good imported to the quota amount. Import license are gained by domestic government
Voluntary export restraint
Voluntary agreement by a government to limit the quantity of a good that can be exported
Forward discount/premium
if (Forward/spot -1 )
> 0 it’s forward discount
< 0, it’s forward premium
Non arbitrage value for forward spot
Forward/spot = (1 + interest rate num)/(1 + interest rate denominator)
If EUR/USD, then EUR int rate in num
Given spot rate S, 180 day interest rate of A and B, what’s forward rate?
F = S * (1 + A/2) / ( 1+ B/2)
note it’s 180 day, thus divide by 2
Objective of financial market regulation according to International Organization of Securities Commission (IOSCO)
- Protect investors
- Ensure the fairness, efficiency, and transparency of markets.
- Reduce systemic risk
What is “prior service costs” in defined benefit pension plan?
present value of the increase in future pension benefits from a change in the terms of the pension plan.
How does operating lease affect fixed charge coverage and interest coverage ratio?
Decrease fixed charge coverage, since paying more lease.
Increase interest coverage ratio
Accrued wage
It’s a liability, wages payable
Given fixed operating expense of 2, break even of 5, what is the operating income when sales = 7
Variable cost at 5 = 5 - 2 =3 = 60% of 5
Thus at 7, variable cost is 4.2
Operating income = 7 - 4.2 - 2 = 0.8
What is accounts receivable aging schedule?
A listing of different maturity accounts receivable over time (usually in months)
It identify trends in how well the firm is doing at collecting receivables and converting them to cash
Can a board member use the company’s asset, even to align the incentives of the Board members with those of the firm
no, it would compromise the independence of the board member
Considering dividend, what’s the effect of share repurchase versus paying dividends?
Assuming the tax treatment of the two alternatives is the same, a share repurchase results in the same shareholder wealth as a cash dividend payment of an equal amount.
Profitability index
PI = PV of future cash flows / CF0
Strategic asset allocation
Correlations of returns within an asset class should be relatively high, indicating that the assets within the class are similar in their investment performance. Low correlations between asset classes reduce risk through diversification.
