Economic Factors and Business Information (Units 8-11) Flashcards
What industries are defensive?
Least effected by normal business cycles like nondurable consumer goods like food, tobacco, energy, pharmaceuticals. They tend to have less risk, thus less reward.
What is inertial inflation? And what is inflation inertia?
a) Inertial Inflation: The persistent rate of inflation that does not change until an economic shock leads to a change.
Inertial inflation means that a change in the inflation rate is not expected until some kind of economic event “shakes things up” and causes the rate to move up or down.
b) Inflation Inertia: The concept that the rate of inflation does not immediately react to unexpected changes in economic conditions. Rather it lags behind before there is an effect.
What are the major schools of economics?
Keynesian:
Recognizes the importance of government intervention. For example to recover from a recession, the government increases spending and lowers levels of taxation.
Classical and Supply Side Economics:
Lower taxes and less government regulation benefits consumers through a greater supply of goods and services at lower costs. Supply side economics holds that supply creates demand by providing jobs and wages. Prices of goods with excess supply fall and prices of goods with low supply and excess demand will rise.
Monetarist Theory:
The quantity of money or money supply determines overall price levels and economic activity. Too many dollars chasing too few goods leads to inflation. And too few dollars chasing too many goods leads to deflation.
A securities analyst's approach is to look at the overall economy and try to forecast which industry will outperform. Then, the analyst searches for those individual companies within that industry that appear to have the best expected return and add those to the recommended list. In so doing, this analyst is using A) the bottom-up approach. B) the business cycle approach. C) the optimal portfolio approach D) the top-down approach.
D
This is the basic approach of top-down analysis—start with the “big picture” and narrow it down to the most attractive individual stocks.
It’s an inverted triangle, broad on top and point on bottom. The top is broad.
BOTTOM UP is the opposite where the analyst looks at a specific company first and works her way up to the broader picture of the economy.
What is liquidity with regard to a company?
measures the company’s ability to pay the expenses associated with running the business
Which of the following would appear as assets on a corporation's balance sheet? --Prepaid expenses --Deferred tax credits --Notes payable --Notes receivable A) I and IV B) I, II, and IV C) I and III D) II and III
A
Prepaid expenses, such as advertising, rent, or insurance, are listed as assets on the balance sheet. All receivables are assets, while payables are liabilities. Under current accounting practice, deferred tax credits are treated as a liability.
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What are growth industries?
Most industries pass thru 4 phases: introduction, growth, maturity, decline. When in growth phase, if growing faster than the economy as a whole because of technology, new products, or consumer changes in taste. Growth stocks usually retain earnings and pay little or no dividends.
What are cyclical industries?
Industries that are highly sensitive to business cycles and inflation. Most produce durable goods like machinery and autos as well as raw materials like steel
Beta is most frequently measured against which of the following? A) Nasdaq Composite Index B) S&P 500 C) S&P 100 D) Dow Jones Industrial Average
The index most commonly used to analyze the beta of an individual security or portfolio is the S&P 500. Companies (portfolios) with a beta of 1.0 would be expected to move in tandem with the market, while companies with a beta greater than 1.0 would be more volatile than the market as a whole. Companies with a beta less than 1.0 should show a rate of change less than that of the market as a whole.
What are these Market Price related ratios:
Price to Earnings Ratio (P/E)
Price to Book Ratio
What is book value in general
Price to Earnings Ratio (P/E) = Current market price of common share/EPS. Compares the relationship of the price of a share to the earnings of the share. Growth companies have higher PE ratios than do cyclical companies
Price to Book Ratio = the market price of common stock to its book value per share.
Book value is the company’s theoretical liquidation value expressed on a per share basis.
Explain rule of 72
72/int rate = years to double. 72/years to double = int rate. Or 72/years = interest rate needed to double in that time.
A simple tool for PV and FV
what is the yield spread or credit spread?
The term spread, always signifies a difference. Therefore, the correct choices have to reflect some kind of difference. One way is when the quality (rating) of the bonds is the same, but the length to maturity is different. A very common example of this is the U.S. 2-year Treasury note plotted against the 10-year Treasury note. The other method is to take bonds of different quality (ratings) having the same maturities. An example might be comparing two bonds with a 20-year maturity: one has a AAA rating and the other a BBB rating.
What is: Current Ratio Quick Asset Ratio (Acid Test Ratio) Debt to Equity Ratio Book Value per Share Earnings per share (EPS) Current Yield (Dividend yield) Dividend payout ratio
- –Current Ratio = current assets/current liabilities (the higher the ratio the more liquid the company.
- –Quick Asset Ratio = (current assets - inventory)/current liabilities. A stricter test of liquidity than current ratio.
- –Debt to Equity Ratio = debt/total capitalization (long term debt + equity (stocks, etc.))
- –Book Value per Share = (tangible assets - liabilities - par value of preferred stock)/shares of common stock outstanding.
- –Earnings per share = Earnings available to common (after the preferred div have been paid)/#shares outstanding. RELATES TO COMMON STOCK ONLY
- –Current Yield = annual div per common share/market value per common share
- –Dividend payout ratio = annual div per common share/EPS. measures The proportion of earnings paid out as dividends.
What are the tools of the Fed Reserve Board as they control/monitor money supply?
- Changes in reserve requirement. By raising amount of funds banks need to leave on deposit with the Fed, the amt of $ the banks have to lend is decreased. The shrinkage of the money supply leads to increased interest rates. The reverse is true when the requirements are eased.
- Changes in discount rate. This is the rate the Fed charges member banks when lending them money. Higher rates discourage borrowing, reducing money supply. And lower rates have opposite effect.
- Open Market operations. The Fed buys and sells Treasuries in the open market under the direction of the Federal Open Market Committee FOMC. When treasury securities are purchased, it adds to the money supply because they buy these securities from banks causing them to have greater reserves. When FOMC sells Treasuries, the money supply is reduced because funds are pulled out of banks reserves to pay for the securities. This is the most actively used Fed tool.
- The Fed Funds Rate is not set by FRB but influenced by it. It’s the rate FRB member banks charge each other for overnight loans of $1M or more. It is considered a barometer of the direction of short term interest rates.
- The Prime Rate is the most preferential rate on large corporate loans. Influenced by FRB because banks lower prime rate when Fed eases money and raise when Fed contracts money supply.
What is duration?
Duration measures the sensitivity of a debt security in response to changes in interest rates. (It’s basically a calculation of how long it takes the cash flow (interest payments) to repay the invested principal.
The bond with the longest duration will have the greatest sensitivity to change in interest rates. We examine two factors: the coupon rate and the length to maturity. When the coupon rates are the same, as they are for three of these bonds, the one with the maturity date farthest into the future will have the longest duration.
