ITS THE FINAL COUNTDOWN *da, da, da, dooo* *da, da, da, do, doooo* Flashcards
LOS 6. f: Demonstrate the use of a time line in modeling and solving time value of money problems.
Constructing a time line showing future cash flows will help in solving many types of TVM problems. Cash flows occur at the end of the period depicted on the time line. The end of one period is the same as the beginning of the next period. For example, a cash flow at the beginning of Year 3 appears at t = 2 on the time line.
LOS 55. a: Calculate and interpret the sources of return from investing in a fixed-rate bond.
Sources of return for a bond investment include:
- Coupon and principal payments.
- Reinvestment of coupon payments.
- Capital gain or loss if bond is sold before maturity.
Changes in yield to maturity produce market price risk (uncertainty about a bond’s price) and reinvestment risk (uncertainty about the income from reinvesting coupon payments). An increase (a decrease) in YTM decreases (increases) a bond’s price but increases (decreases) its reinvestment income.
LOS 55. f: Calculate the duration of a portfolio and explain the limitations of portfolio duration.
There are two methods for calculating portfolio duration:
- Calculate the weighted average number of periods until cash flows will be received using the portfolio’s IRR (its cash flow yield). This method is better theoretically but cannot be used for bonds with options.
- Calculate the weighted average of durations of bonds in the portfolio (the method most often used). Portfolio duration is the percentage change in portfolio value for a 1% change in yield, only for parallel shifts of the yield curve.
Portfolio duration = W1D1 + W2D2 + … + WNDN
Where:
Wi = full price of bond i divided by the total value of the portfolio
Di = the duration of bond i
N = the number of bonds in the portfolio
LOS 8. g: Calculate and interpret 1) a range and a mean absolute deviation and 2) the variance and standard deviation of a population and of a sample.
The range is the difference between the largest and smallest values in a data set.
Mean absolute deviation (MAD) is the average of the absolute values of the deviations from the arithmetic mean:
Variance is defined as the mean of the squared deviations from the arithmetic mean or from the expected value of a distribution.
Standard deviation is the positive square root of a variance and is frequently used as a quantitative measure of risk.
MAD = Σ |Xi - X| / n
Population variance = σ2 = Σ (Xi - µ)2 / (N)
Population variance = s2 = Σ (Xi - µ)2 / (n - 1)
LOS 11. g: Identify and describe desirable properties of an estimator.
Desirable statistic properties of an estimator include unbiasedness (sign of estimation error is random), efficiency (lower sampling error than any other unbiased estimator), and consistency (variance of sampling error decreases with sample size).
LOS 12. e: Distinguish between a statistical result and an economically meaningful result.
Statistical significance does not necessarily imply economic significance. Even though a test statistic is significant statistically, the size of the gains to a strategy to exploit a statistically significant result may be absolutely small or simply not great enough to outweigh transaction costs.
LOS 11. c: Distinguish between simple random and stratified random sampling.
Stratified random sampling involves randomly selecting samples proportionally from subgroups that are formed based on one or more distinguishing characteristics, so that the sample will have the same distribution of these characteristics as the overall population.
LOS 16. d: Compare GDP, national income, personal income, and personal disposable income.
The four components of gross domestic product are consumption spending, business investment, government spending, and net exports. GDP = C + I + G + (X – M).
National income is the income received by all factors of production used in the creation of final output.
Personal income is the pretax income received by households.
Personal disposable income is person income after taxes.
LOS 20. g: Calculate and interpret forward discount or premium.
To calculate a forward premium or forward discount for Currency B using exchange rates quoted as units of Currency A per unit of Currency B, us the following formula:
(forward/spot) – 1
LOS 17. c: Describe theories of the business cycle. Describe Monetarists economics;
Monetarists believe inappropriate changes in the rate of money supply growth cause business cycles, and the money supply growth should be maintained at a moderate and predictable rate to support the growth of real GDP.
LOS 26. e: Describe how the cash flow statement is linked to the income statement and the balance sheet.
Operating activities typically relate to the firm’s current assets and current liabilities. Investing activities typically relate to noncurrent assets. Financing activities typically relate to noncurrent liabilities and equity.
Timing of revenue or expense recognition that differs from the receipt or payment of cash is reflected in changes in balance sheet accounts.
LOS 26. b: Describe how non-cash investing and financing activities are reported.
Noncash investing and financing activities, such as taking on debt to the seller of a purchased asset, are not reported in the cash flow statement but must be disclosed in the footnotes or a supplemental schedule.
LOS 39. a: Describe primary and secondary sources of liquidity and factors that influence a company’s liquidity position.
Primary sources of liquidity are sources of cash a company uses in its normal operations. If its primary sources are inadequate, a company can use secondary sources of liquidity such as:
- asset sales
- debt renegotiation
- bankruptcy reorganization
LOS 26. h: Analyze and interpret both reported and common-size cash flow statements.
An analyst should determine whether a company is generating positive operating cash flow over time that is greater than its capital spending needs and whether the company’s accounting policies are causing reported earnings to diverge form operating cash flows.
LOS 26. h: Analyze and interpret both reported and common-size cash flow statements.
A common-size cash flow statement shows each item as a percentage of revenue or shows each cash inflow as a percentage of total inflows and each outflow as a percentage of total outflows.
