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integrative > finance and risk > Flashcards

finance and risk Flashcards

1
Q

stock market-liquidity

A

ability to sell asset for close to the price you can currently buy it for

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2
Q

stock market- primary vs secondary market

A

primary: issue shares and sell to investors
secondary: shares trade between investors

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3
Q

bid ask spread

A

sell share at bid price and buy share at ask price: the difference is the transaction cost (for the market maker)

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4
Q

market vs book value

A

market to book ratio:

  • market value of equity / book value of equity
  • low: payout dividend but low growth
  • high: not much dividend but high g

enterprise value:
-market value of equity + debt-cash

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5
Q

profitability ratios (ohne gross profit)

A

operating margin
=operating income:sales
-how much you earn before interest and tax from each euro of sales

net profit margin=net income:sales

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6
Q

cash ratio

A

liquidity ratio

cash:current liabilities

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7
Q

interest coverage ratio

A

ebit/interest expense

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8
Q

net debt

A

total debt-excess cash

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9
Q

valuation principle

A

value of benefits>value of costs

evaluated using market price

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10
Q

time value of money

A

difference in money today and money in the future

-caused by inflation or deflation

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11
Q

net present value

A

difference between PV of cash inflows and cash outflows

npv decision rule (always choose the one with the higher npv)

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12
Q

arbitrage

A

take advantage of price difference arising from buying and selling equivalent goods in different markets

arbitrage opportunity: any situation where it is possible to make profit without risk (not in competitive market)

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13
Q

three rules of time travel

A

rule 1: only possible to compare and combine values at the same point in time
rule 2: moving cashflows forward in time with the interest rate factor
rule 3: moving cf backwards in time

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14
Q

perpetuities vs annuities

A

perpetuity:

  • regular interval and lasts forever
  • cash flow at end of period

annuity:
-regulae interval witz fixed end

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15
Q

internal rate of return

A

interest rate that sets the net present value of ghe cash flow to zero
-break even point for investments

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16
Q

EAR and APR

A

effective annual rate
-total amount of interest that will be earned at the end of the year

annual percentage rate

  • simple interest earned in one year or period
  • without effect of compounding
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17
Q

yield curve

A

term structure: relationship between investment term and interest rate

yield curve: graph of a term structure

  • normal: the longer you invest the higher return
  • flat: no difference in long lr shortterm
  • inverted: higher rate for shorter period (forerunner for recession)
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18
Q

what are bonds

A

liabilities (sources of debt financing)
„Bonds are investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments. Once the bond reaches maturity, the bond issuer returns the investor’s money.“

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19
Q

coupon bonds

A

coupond bond:
-pay face value ar maturity and regular coupon interest payments

YTM:
-single discount rate that equates pv of bonds remaining cashflow to its current price

20
Q

zero coupon bonds

A

zero coupon:

  • always sell at discount
  • do not make coupon (interest rate) payments

YTM (yield to maturity): discount rate that sets the PV equal to the current market price
-=risk free interest rate

21
Q

dynamic behaviour of bond prices

A

discount: price less than face value
par: equal
premium: price higher than face value

22
Q

interest and bond prices

A

high interest rate low prices

23
Q

internal rate of return

A
  • take the investment where the IRR exceed the cost of captial
  • problem with multiple or no IRR
24
Q

payback rule

A

reject project if the pay back period (amount of time it takes to pay back initial investment) is more than a pre specified length of time

25
Q

mutually exclusive products

A

rather select the projext with the higher NPV as the IRR can be mistaken because of differences in time scaling and risk

26
Q

incremental IRR

A

IRR of the additional cashflow that results from replacing one project with the other
-tells us discount rate at which it makes sense to switch from one project to the other

27
Q

profatibility index

A

identify optimal combination of projects and resources

28
Q

capital budgeting

A

captial budget: list of investments company plans to do

incremental earnings: amount by which the company’s earnings are expected to change as a result of an investment decision

29
Q

analyzing a project

A

break even: level of input that causes NPV to equal zero

sensitivity: how npv varies with change in one od assumptions
scenario: change of simultaneously changing multiple assumptions

30
Q

how to increase dividend

A

increase net income
increase dividend payout rate
decrease shares outstanding

31
Q

total payout model

A

values all of the companys equity

  • repurchase shares with excess cash
  • less money to pay dividends
  • decrease in shares outstanding
  • increase in earnings per share and dividend per share
32
Q

discounted free cashflow modell

A

is a valuation method used to estimate the value of an investment based on its expected future cash flows

33
Q

common and independent risk

A

common:

  • due to market wide news
  • market risk

independent:

  • company specific news
  • firm specific risk
34
Q

capital asset pricing model

A
  1. investors can buy and sell all securities at competitive market prices and can borrow and lend at risk free interest rate
  2. investors hold efficient portfolios of traded securities that yield max expected return for a given level of volatility
  3. investors have homogeneous expectations regarding volatilities correlations and expected returns
35
Q

risk- 4 Ts

A

tolerate risk
treat risk
transfer risk
terminate activity that generates risks

36
Q

basel 3/4

A

equtiy ratio
-banks need to have higher capital ratio
liquidity buffer (30 days)

37
Q

abs and mbs

A

asset based and mortgage based

38
Q

collateralized debt obligation

A

summarize mbs and sell of as different tranches (waterfall principle)

39
Q

subprime crisis

A
  • refinance mortgages with existing once
  • give them out to customers they did not know
  • customers did not pay, bank got houses
  • prices dropped after banks tried to sell them again
40
Q

lehman

A
  • credit flow stopped because all banks had liqudity problems
  • moved to market risk after credit risk

consequences:

  • interest rate cuts (make money cheaper)
  • emergency funds
  • basel 3
41
Q

types of risks

A

market risk

  • exchange rate, prices, insurance, liquidity
  • to minimize transfer but not everything!

credit risk:

  • loans (not paid back)
  • minimize: insurance, collateral

operational risk

  • human error
  • fraud
  • minimze: insurance, train employees
42
Q

insurance

A

pay more than fair value

  • because insurance needs liquidity buffer to cover expenses
  • moral hassard: people handle things less carefull when have insurance
  • biased information: you know more than insurance
43
Q

efficient portfolio

A

firm specific risk diversified out and only market risk

44
Q

beta

A

your stocks behaviour in relation to market
-market moves up 1% yours does beta percent

beta of one: stock moves like market
(everything oil related, very big companies)

high beta: luxury goods

low beta: people use it no matter what happens (walmart, mc donalds)

45
Q

yield

A

compare different maturities with the same risk

  • price goes up yield goes down
  • negative yield: return of bond negative e.g. with negative interest rates and high prices)

types:
-steep: expect high interest rates because of inflation
-inverse: low interest rate and deflation
-helpful because people wont buy
bonds but invest in something else
and loans are cheap to get so it is easy
it invest

46
Q

QE

A

quantitative easing

-CB buys longterm bonds, prices for them increase, yield decreases, inverse yield curve

integrative (15 decks)

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