EXAM 3 (General Terminology) Flashcards
Savings for children
Section 529
What does a Section 529 consist of?
variable annuites & debt issues
What does Morning Star sell?
They sell stars securities
Mutual Fund
The investment pool is managed by a manager and there are multiple investors
Are Mutual Funds liquid?
They are not that liquid
Do stars have value for mutual funds? And Why?
No, because stars are based on historical risk-adjusted performance which has no relationship to future-adjusted performance
Do stars have value for stocks?
Yes
The best predictor of mutual funds performance according to morning star?
Management Operating expense as a percent of net asset value
Call provision
gives the company the right to buy bonds back at a predetermined price prior to the maturity date
What is the rule of 72?
How long it takes for an investment to double
Perpetuity
An annuity in which the cash flows continue forever
Consol
A type of perpetuity
Website for why rule of 72 works
www.moneychimp.com
Relationship between Future rate and Present value
Inverse
Present Values
The current value of future cash flows discounted at the appropriate discount rate
Discount
Calculation of the present value of some future amount
Discount rate
The rate used to calculate the present value of future cash flows
Website for a downloadable windows-based financial calculator
www.calculator.org
Website for using Excel for the time value of money and other calculations
www.studyfinance.com
When is the Call provision exercised?
When the rates drop and the company will refinance
The Call Provision is at the Advantage and Disadvantage of who?
Advantage - The company
Disadvantage - Investor
How do companies refinance
By selling new bonds to pay off old bond
Mortgaging refinancing dropped what percentage?
90%
YTM
Yield to Maturity
What is mortgage refinancing?
buying new bonds at a lower rate extinguishing the debt
Will interest rates drop, and is yes or no then why?
Yes because of historical evidence due to recessions in the past
Why did the feds raise the rates
They believed it will slow inflation
Where is the raising price of energy coming from?
Ukraine War & Opec
What is Opec?
Organization of the Petroleum Exporting Countries
What company said they will cut petroleum by 2 million barrels a day?
Opec
Characteristics of a bubble
- everyone is happy
- Feds created it
- always end badly
- interest rates are low
Relationship between rate & price
Inverse
You want a risk-free rate with buying what?
A bond
Credit Risk
liability to pay back what was borrowed, and a lot is based on the financial ratios
What is a Risk Free Rate
Compensation for credit risk and buying the bond
What is a Risk Free rate based on
the treasury bill rate
Why does the treasury have zero default risk?
Because they create the money & raise taxes
TMCC Bonds
Toyota Motor Credit Corporation
Examples of an annuity
- mortgage
- car payment
Types of Annuity
- Regular/ Ordinary
- Annuity Due
Regular Annuity
series of equal periodic payments
Annuity Due
Due at the beginning of each period
Difference between an Annuity due and a Regular annuity
When the payments are due
Difference between stocks and bonds
Bonds - pays interest (always paid first)
Stocks - pays dividends (residual)
Why do people buy stocks?
Fixed interest doesn’t change but common stock has room for growth
Relationship between time and rate of discount
direct
1st step to any problem
having the correct table
Market value = Price per share (true or false)
True
What does the Market Value Ratio measure
Deals with market price per share of the stock
What are all the Market Value Ratios
- Price to Earnings ratio
- Price to Sales ratio
- Market-to-book ratio
- EBITDA ratio
EBITDA
Earnings before interest taxes, depreciation, and amortization
What is the Price-Earnings (PE) Ratio
shows how much investors are willing to pay per dollar of current earnings
What does high PE show
shows prospects for future growth
Why PE varies
Differences in the expected future earnings growth
Do we want PE to be low or high
We want it to be low, because price is what you pay, earnings is what you get
Growth rate and PE ratio relationship
direct
Interest rates and PE ratio relationship
inverse
Earning yield
Inverse of the PE and it is the amount you get back per dollar you invest in a stock
Market to book Ratio
Compares the market value of the firm’s investments to their costs
(a value of less than 1 could mean the firm has not been successful overall in creating value for its stockholders)
What is M1?
The money supply
Since when has M1 been going down?
March of 2022
M1 annual increase
30%
Why is Inflation coming down?
because M1 is going down
What is the Simplest form of loan?
Pure discount loan
Perpetuities are called what in Canada and the United Kingdom?
consols
About the 2% target inflation rate
- feds came up with it
- They said you need to have inflation to favorable growth
- 2012
Yield to maturity
How much an investor gets compensated
The YTM has to be higher to compensate for what?
“Risk of Call”
EAR
Effective annual rate
The relationship between PVSS and r
inverse
The relationship between PVSS and t
inverse
The relationship between FVSS and r
direct
The relationship between FVSS and t
direct
What do we mean by discounted cash flow, or DCF, valuation?
calculating the present value of a future cash flow to determine its worth today
Retroactive interest
Interest put on the original payment price even though the amount left to pay off is less at that point
Future value of annuity (fva)
value of periodic payments at the end of a specified period
Net future value depends on 2 factors
- Time (number of periods)
- Rate of return
Monetary expansion is the same as what?
quantitative expansion
What are the determinants of interest are
-inflation
-credit risk
-monetary policy
-expanision monetary policy
What do we mean by compound interest? How does is differ from simple interest
Interest on interest is compound, simple interest is interest on the principle
Fun Fact about Wayne
Wayne is a company that went bankrupt because they had debt they couldn’t pay off
2 types of interests rates
- compound
- simple
Fun Fact about Benjamin Franklin
- Benjamin Franklin funded student loans
- it was in the trust agreement that the money had to be used for student for loans
- he set up a trust that stated that for the first 100 years it had to be used for this purpose
- he used compound interest
APR
annual percentage rate
