Economic Factors Flashcards
purchase commission, sales commission, interest
2%
four pillars
- bank and alternate banks
- specialized lending/ saving intermediates
- investment dealer
pillar 1 and 2
- 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
pillar 3
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
pilar 4
Investment Dealer
Large and established
Going public- stocks and bonds (make it available to the public)
- want to issue public shares and bonds
bond
- characteristics
Represent debt to a company
Legal, binding agreement → committing to pay money back
fixed rate of return
- coupon
- paid semi-annually
fixed term
- principal paid at maturity date
- maturity date
priority over stock holders
- company has to liquidate bonds to get paid off first and then whatever is left over stockholders get paid
priority of creditors
- debt holders (bonds, banks)
- preferred stockholders
- common stockholders
what impacts the coupon rate at bonds issue
- prevailing interest rates
- credit of issuer
- features
what impacts bond price when traded
- coupon rate
- changes in credit rating
- economic/ market risk
- inflation
calculating yield to maturity
- 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
what you made
- interest
- capital gain
SunLife 5.3 of 2021 at 91.75
sunlife = company 5.3 = coupon rate (paid semi-annually) 2021 = year bond matures 91.75 = bond price --> percentage of face value
why bonds
- less risky
- return is a more predictable investment than index
- lower return
face value
compounded
always assumed $1000
always assumed semi-annually
bond prices and interest rates
- bond prices vary with interest rates
price at discount
pay less than face value for the bond
- expected yield is greater than the coupon rate
price at premium
pay more than face value for the bond
- coupon rate is greater than expected yield
priced at par
pay face value (1000) for the bond
interest rates rise
- 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
interest rates fall
- 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
common stocks
- represent ownership
characteristics
- 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)
factors that impact a stock price
- demand/ supply (perceptions of the stock)
- primary factors (earnings, general market conditions, economy, interest, speculation
- price of security
- undervalued issue
market conditions
- bear market
- bull market
bear market
- 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)
bull market
- 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)
investments
- going long
- margin buying
going long
- 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
margin buying
- 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
interest expense
= loan x interest rate x (# of months loan is held/12)
advantage to margin buying
- advantage is leverage –> you are able to increase your buying power (buy more with the same investment) therefore increasing potential profits
difference between going long and buying on margin
- buying on margin means they are borrowing part of the investments purchase price from the broker
margin requirement of 80%
- the investor must deposit 80% of the total cost and securities
- loan value is 20%
margin buying rules
- 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
margin buying costs and risk
- interest expense and margin call
- magnifies the risk if the price falls
margin call
- get a call from your broker requesting that they give them more money in order to reduce the value of the loan
calculating margin
= (current market value of the investment - loan)/current market value of the investment
calculating margin call requirement
=[current market value of investment- (loan-margin call amount)] / current market value of investment
margin buying gains
- infinte
benefits
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)
calculating interest on margin loans
- 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
calculating capital gain and yield
- going long = purchase and selling commission
- margin- interest and commission
leverage
- 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
time value of money
$1 is worth less than $1 in the future because
- real interest
- risk
- inflation
principal paid
= original amount- amount outstanding
- outstadning by using PVoa
interest paid
= (monthly pmt x number of payments made x yrs) - principal paid
