Economic factors

Question 1

Significance

Answer 1

• Affect consumer spending, export opportunities, human resource availability, input costs
• Measures per capita income, unemployment, exchange rate, inflation rate

Question 2

Elements

Answer 2

• Inflation/deflation
• Interest rates
• Employment rates
• Exchange rates

Question 3

Consumer Price Index (CPI)

Answer 3

avg. change over time in prices paid by urban consumers for market basket of consumer goods & services; measures inflation

Question 4

Financial Systems & Finance Sources

Answer 4

• Banks (& Alternate Banks (credit unions, trust companies))
  Make deposits, borrow
• Specialized lending/saving intermediaries
  Mid-large
• Private equity financing/borrow
  Investment dealer
  Large & established
  Going public; stocks & bonds

Question 5

Line of Credit

Answer 5

for day-to-day purchases (no collateral typically)
Personal guarantee for small or start-up businesses (more risk)
Some loans unsecured

Question 6

Debt

Answer 6

borrow money; retain control
Must be repaid
too much debt can be a bad thing but debt is good

Question 7

Equity

Answer 7

give up ownership
No interest or repayment
Share control & profits

Question 8

Bonds

Answer 8

Company/government borrows money from you (investor). They pay interest (coupon) each year and pay off the debt (face value) on an agreed date (maturity date)
Better for larger firms

Question 9

Face Value

Answer 9

amount which is being borrowed/must be returned; written on “face” of bond
Assume $1 000 in BU111

Question 10

Stocks

Answer 10

Represent ownership
Preferred shares have stated face value & dividend rate → firm planning to pay certain % on face value to shareholders annually (not guaranteed though)

Question 11

Yield

Answer 11

capital gain (what you made) ÷ investment (what you paid)
What you made = interest, capital gain, dividends, profits
What you paid = what you put out of pocket to make transaction possible (investment)

Question 12

Expected Yield

Answer 12

risk-free return + risk premium

Question 13

Risk-Free Return

Answer 13

what the bank pays on your deposits
Driven by Bank of Canada (“E” in PEST)

Question 14

Risk Premium

Answer 14

“extra” return expected for riskiness of investment
Driven by company choices, strategies, likelihood of success

Question 15

Capital Gain

Answer 15

Stocks: Yield of an Investment
what you make on a stock
= SELLING PRICE - PURCHASE PRICE - RELEVANT EXPENSES

Question 16

Bonds: Approximate Yield to Maturity

Answer 16

= [(COUPON RATE*FACE VALUE) + (FACE VALUE - PRICE PAID) ÷ YEARS TO MATURITY] ÷ [PRICE PAID FOR BOND]