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BU111 FINAL > Economic Factors > Flashcards

Economic Factors Flashcards

1
Q

purchase commission, sales commission, interest

A

2%

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2
Q

four pillars

A
  • bank and alternate banks
  • specialized lending/ saving intermediates
  • investment dealer
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3
Q

pillar 1 and 2

A
  • Bank and Alternate Banks
  • Used by individuals and all businesses
  • Make deposits, borrow
  • SME (small and medium enterprise)- primary lending source
  • credit union or bank for a loan
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4
Q

pillar 3

A

Specialized lending/ saving intermediates

Mid-large 
 Private equity financing/borrow
Selling shares privately 
No small businesses 
Pension funds and insurance companies

major investments, venture capitalist pension finds
- dragons den

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5
Q

pilar 4

A

Investment Dealer
Large and established
Going public- stocks and bonds (make it available to the public)
- want to issue public shares and bonds

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6
Q

bond

- characteristics

A

Represent debt to a company

Legal, binding agreement → committing to pay money back

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7
Q

fixed rate of return

A
  • coupon

- paid semi-annually

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8
Q

fixed term

A
  • principal paid at maturity date

- maturity date

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9
Q

priority over stock holders

A
  • company has to liquidate bonds to get paid off first and then whatever is left over stockholders get paid
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10
Q

priority of creditors

A
  • debt holders (bonds, banks)
  • preferred stockholders
  • common stockholders
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11
Q

what impacts the coupon rate at bonds issue

A
  • prevailing interest rates
  • credit of issuer
  • features
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12
Q

what impacts bond price when traded

A
  • coupon rate
  • changes in credit rating
  • economic/ market risk
  • inflation
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13
Q

calculating yield to maturity

A
  • rate of return per year that the bond is held to maturity
  • approx yield is higher than coupon rate because investor receives interest income and capital
  • only used to find approx –> need to use tvm to find actual price of bond
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14
Q

what you made

A
  • interest

- capital gain

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15
Q

SunLife 5.3 of 2021 at 91.75

A 
sunlife = company 
5.3 = coupon rate (paid semi-annually)
2021 = year bond matures 
91.75 = bond price --> percentage of face value
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16
Q

why bonds

A
  • less risky
  • return is a more predictable investment than index
  • lower return
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17
Q

face value

compounded

A

always assumed $1000

always assumed semi-annually

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18
Q

bond prices and interest rates

A
  • bond prices vary with interest rates
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19
Q

price at discount

A

pay less than face value for the bond

- expected yield is greater than the coupon rate

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20
Q

price at premium

A

pay more than face value for the bond

- coupon rate is greater than expected yield

21
Q

priced at par

A

pay face value (1000) for the bond

22
Q

interest rates rise

A
  • expected yield on bond increases
  • since coupon is fixed, the only adjustment than can occur to generate the higher expected yield is for the capital gain to increase
  • the price drops to create a larger capital gain
23
Q

interest rates fall

A
  • expected yield on bond decreases
  • since the coupon rate is fixed the only adjustment that can occur to deliver the expected yield is if the capital gain also decreases
  • price of bond increases –> becomes closer to face value or higher than face value
24
Q

common stocks

A
  • represent ownership
25
Q

characteristics

A
  • voting rights (board of directors)
  • no fixed term (as long as the company exists)
  • variable return (capital gain upon selling)
  • discretionary payment (dividends), no promise
  • higher risk than corporate bonds (do not know the return/ value when you sell it)
26
Q

factors that impact a stock price

A
  • demand/ supply (perceptions of the stock)
  • primary factors (earnings, general market conditions, economy, interest, speculation
  • price of security
  • undervalued issue
27
Q

market conditions

A
  • bear market

- bull market

28
Q

bear market

A
  • pessimism, fear
  • prices fall
    -Sell short if you are at the start of the bear market formation (ex- the transition point from bull to bear)
    Buy stocks if you are at the market bottom (ex- the market is about to turn from a beat into bull market)
29
Q

bull market

A
  • optimism
  • prices rise
  • margin buy if at the transition point from bear to bull
  • sell if at top of the market (market about to turn from a bull into a bear market)
30
Q

investments

A
  • going long

- margin buying

31
Q

going long

A
  • investor has purchased security
  • expecting to earn a profit
  • using only their money –> they paid the full price of the investment
  • get commission but no interest
32
Q

margin buying

A
  • using your own money + brokers money to buy sticks
  • need to maintain margin requirements or else you get a margin call
  • greatest potential loss = what you invested
  • greatest potential gain = infinite
  • get commission and interest
33
Q

interest expense

A

= loan x interest rate x (# of months loan is held/12)

34
Q

advantage to margin buying

A
  • advantage is leverage –> you are able to increase your buying power (buy more with the same investment) therefore increasing potential profits
35
Q

difference between going long and buying on margin

A
  • buying on margin means they are borrowing part of the investments purchase price from the broker
36
Q

margin requirement of 80%

A
  • the investor must deposit 80% of the total cost and securities
  • loan value is 20%
37
Q

margin buying rules

A
  • qualify from a margin account (minimum margin requirement)
  • sign hypothecation agreement (pledging securities as collateral)
  • investors % equity must be greater than or equal to the minimum margin requirement
38
Q

margin buying costs and risk

A
  • interest expense and margin call

- magnifies the risk if the price falls

39
Q

margin call

A
  • get a call from your broker requesting that they give them more money in order to reduce the value of the loan
40
Q

calculating margin

A

= (current market value of the investment - loan)/current market value of the investment

41
Q

calculating margin call requirement

A

=[current market value of investment- (loan-margin call amount)] / current market value of investment

42
Q

margin buying gains

A
  • infinte
43
Q

benefits

A

Investing (also known as using a form of leverage) is that you are able to increase your buying power (buy more with the same amount of personnel investment, and therefore increase your potential profits)

44
Q

calculating interest on margin loans

A
  • interest is compounded annually
  • interest expense = loan x interest rate x portion of the year the loan was held
  • interest expense is deducted from capital gain
45
Q

calculating capital gain and yield

A
  • going long = purchase and selling commission

- margin- interest and commission

46
Q

leverage

A
  • engaging in a transaction whose value is greater than the actual dollars that you have available
  • creates potential to make a large return or loss than indicated by the investment you have made
47
Q

time value of money

A

$1 is worth less than $1 in the future because

  • real interest
  • risk
  • inflation
48
Q

principal paid

A

= original amount- amount outstanding

- outstadning by using PVoa

49
Q

interest paid

A

= (monthly pmt x number of payments made x yrs) - principal paid

BU111 FINAL (5 decks)

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