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Final Flashcards

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1
Q

Income Statement steps

A 
net sales
cogs
gross income
ops exp
ebit
interest
ebt
income tax
net profit
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2
Q

How long are short term interest rates

A

security rates less than one year

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3
Q

How long are long term interest rates

A

security rates greater than one year

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4
Q

Who sets short term interest rates

A

The Fed

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5
Q

Who sets long term interest rates

A

by the bond market based on expectations of inflation

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6
Q

define interest

A

the cost of borrowing money

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7
Q

define spread

A

difference between 2 interest rates

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8
Q

define basis point

A

one hundredth of a percentage point (bips)

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9
Q

define money market securities

A

debt securities maturing in less than one year

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10
Q

define risk

A

uncertainty about the outcome

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11
Q

define inflation

A

an increase in prices over time

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12
Q

define real

A

value adjusted for inflation

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13
Q

what is the length of time for interest accrual payment

A

standard is a year

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14
Q

do interest rates change over time?

A

yes

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15
Q

define bonds

A

debt securities with an original maturity greater than one year

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16
Q

define common stock

A

equity securities

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17
Q

what is the CPI and who releases it

A

consumer price index measures inflation at the store / the government

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18
Q

what is PPI and who releases it

A

product price index measures inflation at the middleman level - between manufacturers and sellers eludes to what consumer price will be / the government

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19
Q

how does demand increase interest rates

A

more demand, less supply, rates goes up

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20
Q

what is core CPI and who releases it

A

CPI minus food and energy / the government

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21
Q

what is a debt security

A

bonds

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22
Q

what is an equity security

A

stocks

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23
Q

positive real interest rate

A

interest rate is greater than inflation rate

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24
Q

negative real interest rate

A

interest rate is less than inflation rate

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25
Q

risk return trade off

A

the greater the risk the greater the potential return

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26
Q

what are investors to risk

A

risk averse, must be compensated for them to invest

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27
Q

3 types of yield curves

A

short, intermediate, long

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28
Q

flattening of yield curve

A

a decrease in the difference between maturity rates

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29
Q

steepening of yield curve

A

an increase in the difference between maturity rates

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30
Q

what does a negative yield curve signify

A

a recession

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31
Q

alt name for yield curve

A

term structure of interest rates

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32
Q

what is a flat yield curve

A

interest rates remaining the same regardless of maturity length

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33
Q

what is a negative yield curve

A

when short term interest rates are higher than long term

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34
Q

what is nominal rate

A

total rate, with inflation, doesn’t differentiate what you’re earning compared to inflation

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35
Q

positive real interest rate

A

interest rate is greater than inflation

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36
Q

negative real interest rate

A

interest rate is lower than inflation

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37
Q

difference between nominal and real risk free rate

A

US Treasuries use nominal risk free, meaning that it is a risk free investment but without adjustment for inflation

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38
Q

Types of US debt securities

A

bills - less than 1 year
notes - 2-10 years
bonds - 10+ years

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39
Q

examples of default risk

A

a borrower failing to pay, an institution going bankrupt

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40
Q

alternate name of default risk

A

credit risk

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41
Q

default risk

A

possibility that the borrower may not be able to make scheduled interest or principal payments

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42
Q

why are US securities the safest

A

can just increase taxes to pay for it and never go bankrupt

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43
Q

inflation premium

A

average projected annual inflation rate over the life of the investment.

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44
Q

liquidity risk

A

how easily something is able to be converted to cash, greater the longer it has until maturity

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45
Q

maturity risk behavior

A

bond price fluctuation due to interest rates is weaker the closer it gets to maturity

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46
Q

interest rate risk

A

the amount prices change due to interest rates

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47
Q

do risk premiums remain constant over time

A

no, can change

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48
Q

risk premium

A

measures the minimum amount of return required for investors

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49
Q

what do bond ratings measure

A

measure of the borrowers ability to repay creditors

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50
Q

2 bond ratings agencies, are they government

A

Moodys
Standard and Poors
no

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51
Q

can bond ratings change over time

A

yes

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52
Q

cut off of investment vs junk bond ratings

A

BBB- is the lowest investment grade

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53
Q

alternate names for junk bonds

A

high yield / speculative

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54
Q

what does S&P mean

A

Standard and Poors

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55
Q

what kind of securities are bonds

A

debt, long term

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56
Q

difference between debt and equity securities

A

debt is an instrument to get money, equity a claim of ownership,

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57
Q

which financial statement tells if bonds have been issued

A

balance sheet

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58
Q

par value corporate bond

A

1000

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59
Q

can par value change over time

A

no

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60
Q

coupon rate

A

rate of interest that a bond pays on its par value

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61
Q

par value

A

the amount issuers agree to repay upon maturity

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62
Q

alt name for par value

A

principal value / maturity value / face value

63
Q

how do interest rate changes relate to value

A

market value is inversely related to interest rates

64
Q

type of capital bond holders provide to issuer

A

debt

65
Q

two reasons why bond market value changes

A

bond rating and coupon rate

66
Q

what component of total return is interest

A

income

67
Q

what is total return

A

combination of income and growth for investments

68
Q

municipal bond differences

A

interest they pay is federal income tax-free to investors

69
Q

secured bond

A

bond back with collateral (mortgage)

70
Q

unsecured bond (name)

A

debentures

71
Q

zero-coupon bonds

A

pay no interest but are issued at a significant discount

72
Q

convertible bonds

A

may be exchanged for the issuer’s common stock, at the bondholder’s option

73
Q

when can a callable bond be called since issue

A

may be redeemed at the issuer’s option prior to maturity

74
Q

refunding operation

A

paying off old high interest bonds with new lower interest rate bonds
borrowing money to pay off a debt that has a higher interest rate

75
Q

who does the call feature favor

A

borrowers, allows ability to pay less interest on low new bonds

76
Q

who does call protection period favor

A

investor

77
Q

reinvestment rate and risk

A

putting money from one investment to another is riskier, but generally pay higher interest

78
Q

call premium

A

an amount above the par value that is paid to the bondholders if called

79
Q

alt names for fundamental value

A

intrinsic / theoretical

80
Q

required rate of return

A

minimum amount of return required for investors to invest

81
Q

yield to maturity

A

compound annual total return you would earn if you hold the bond until it matures

82
Q

what components does YTM measure

A

income and growth, covers all of total return

83
Q

what does YTM reflect/indicate

A

current market rate of interest of similar rated bonds

indicates investors’ required rate of return for the bond

84
Q

what variable is YTM for Vbond

A

i

85
Q

discounted cashflow analysis

A

calculates present value of expected future cashflows

86
Q

do you use YTM or coupon rate to determine interest payment of a bond

A

coupon rate

87
Q

do you use YTM or the coupon rate for interest rate when calculating Vbond

A

YTM

88
Q

interpretations of the results of Vbond

interpret Vbond

A

if you invest x today and recieve i yearly with an end result of v you must invest y today

89
Q

current yield of a bond formula

A

annual coupon interest in $ / current market price of the bond

90
Q

how to calculate Vbond with semi annual payments

A

divide total Vbond by half

91
Q

what does it mean to interpret

A

write out sentences explaining what happened

92
Q

Yield to call (YTC)

A

compound annual total return assuming the bond is called on the next call date

93
Q

2 things that YTC reflects

A

current market rate of interest for the callable bond
the required return for the callable bond
both also include similarly rated bonds

94
Q

what variable is YTC used for for V callable bond

A

i

95
Q

call premium formula

A

call price - par value

96
Q

yield to maturity formula

A

1

97
Q

when should an investor expect to earn YTC or YTM

A

1

98
Q

if coupon rate is lower than market rate,

A

1

99
Q

when are callable bonds called

A

when interest rates drop

100
Q

Corporate Charter / Articles of Incorp.

A

Registered with the secretary of state, establish the existence of a corp in the US outlining objectives

101
Q

Authorized Stock

A

max shares a corp is allowed to issue, stated in articles of incorp

102
Q

Issued Stock

A

The amount of shares registered and either held in treasury or sold

103
Q

Treasury Stock

A

Stock not sold or sold stock bought back

104
Q

Pre-emptive Right

A

Clause to buy new shares first to maintain percentage owned

105
Q

formula for shares outstanding

A

issued shares - treasury shares

106
Q

Corporation

A

a legally incorporated business entity, owners are shareholders

107
Q

Incorporation

A

the process of becoming a business entity

108
Q

Company

A

a business whose owners are members of the business, not legal entity

109
Q

what type of capital is common stock

A

equity

110
Q

dividend

A

distribution of earnings to shareholders

111
Q

how often are stock dividends paid

A

quarterly

112
Q

which shares do not receive dividends

A

treasury

113
Q

what rate is Tbill

A

nominal risk free

114
Q

how is market risk affected when there is higher perceived risk

A

goes up

115
Q

Beta

A

how risky an investment is

116
Q

Beta of a portfolio

A

multiply percentage owned times beta then add together

117
Q

TTM

A

trailing 12 months

118
Q

proceeds

A

the amount you receive from selling something

119
Q

Dividend discount model variables

Present future value of all dividends

A

P0 = D1/rs-g
P0 = V at time 0
D1 = dividend at end of year 1
(dollar amount + growth rate ^ # terms)
rs = required rate of return on the stock (expected return)
g = annual growth rate

120
Q

goal of financial management steps

A

max present value of companys expected future free cashflows
max value of common stock
max wealth of business owners

121
Q

alt names for shareholder wealth

A

shareholder value /

122
Q

alt names for EBIT

A

earnings before interest and tax / operating profit

123
Q

2 variables that impact free cashflow

A

EBIT and Tax Rate

124
Q

Value of a firm

A

PV of expected future cashflows

125
Q

V Firm Formula

A

Freecashflow 1 / (1+WACC)^1 + FCF 2 / (1+WACC)^2 + etc

126
Q

WACC

A

Weighted Average Cost of Capital

127
Q

WACC meaning

A

weighted average of the required returns on the corps securities

128
Q

2 variables that impact Vfirm

A

freecashflow / WACC

129
Q

how do variables impact value of the firm

A

if FCF goes up V goes up

if WACC goes up V goes down

130
Q

which security is riskiest to invest in

A

common stock

131
Q

which security is least risky to invest in

A

bonds

132
Q

capital budget

A

used to determine which long term investments are worth pursuing

133
Q

optimal capital budget

A

amount of investment toward goals that optimizes shareholder investment

134
Q

capital rationing

A

placing a limit on the amount of new projects undertaken by a company

135
Q

independent project

A

funding of one project does not affect another

136
Q

NPV formula

A

Cash Flow / (1+i)^t - initial investment
i = rate
t = periods

137
Q

accept or reject a project based on IRR

A

internal rate of return

138
Q

MIRR

A

Modified internal rate of return

139
Q

2 types of equity capital

A

shareholder equity

paid in capital

140
Q

role of board of directors

A

protects the interests of the shareholders

consists of execs, large shareholders, officers

141
Q

3 uses for free cashflow

A

Distribute dividends
Buy back stock
pay off debt

142
Q

expenditure

A

a cash outflow, but not an expense

143
Q

goal of financial management

A

maximize wealth of stockholders

max value of stock/company

144
Q

benchmark

A

ratios used for industry standards

145
Q

gross margin

A

gross profit/net sales

146
Q

net profit margin

A

net income/net sales

147
Q

leverage

A

potential increase on investment returns
decreases amount owners must invest
increases risk

148
Q

common equity

A

the amount that all the investors have put into the company

149
Q

calculate interest

A

Principle * interest * fraction of a year

150
Q

calculate return in dollars

A

amount received - amount invested

151
Q

calculate return in %

A

Return in $ / amount invested

152
Q

ordinary annuity

A

payments at the end of each period

153
Q

annuity due

A

payments at the beginning of each period

Finance (7 decks)

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