PEST: Economic factors Flashcards
PEST: economic factors elements
inflation/deflation
interest rates
employment rates
exchange rates
what are the pillars of the Canadian financial system
banks and alternate banks
specialized lending/saving intermediaries
investment dealer
banks and alternate banks
-make deposits, borrow money
-small and medium enterprises (SMEs) primary lending source
-primary source for businesses and SMEs
specialized lending/saving intermediaries
-for mid-large businesses
-private equity financing and borrowing
-offers more money then a bank
-private
-for investing in businesses
investment dealer
-for large and established companies
-for going public; stocks and bonds
-for large organizations
-for businesses who are willing to give up privacy
debt
borrow money
retain control
must be repaid
must pay interest(tax deductible)
legally binding
equity
give up ownership
no interest or repayment
share control and profits
whats capital gain
what you make on a stock
how do you calculate capital gain
selling price-purchase price-relevent expenses
whats yield
percentage return expected or recieved on investment
why use yield
enables comparison of investment returns and pricing of investments
whats expected yield
risk free return+risk free premium
risk free return
what the bank pays on your deposits
risk free premium
extra return expected for riskiness of investment
YIELD formula
coupon rate x face value + (FV-price paid/time to maturity)
__________________________________________
price paid
characteristics of bonds
legal, binding agreement
fixed annual return (paid semiannually)
fixed term principal repaid at maturity
priority over stock holders
assumptions to make about bonds
pay semiannually and compound semiannualy
what happens to bond prices after interest rates rise
they fall, and other way around
is bond equity or debt
debt
is stock equity or debt
equity
whats a bond
When you buy a bond, you’re lending money to a company, government, or other organization. In return, they promise to pay you back the amount you lent (called the principal) after a certain amount of time (the maturity date), plus interest payments along the way (called the coupon).
stocks charateristics
voting rights
no fixed term
variable return(capital gain upon selling)
discretionary payment (dividends)
higher risk then bond
whats going long
using your own money for an investment
buying on margin
portion of your own money plus money from broker
margin requirment
% that represents portion of equity that you need to cover
TVM variables: r
interest rate or discount rate
TVM variables: n
number of periods
n=yearsxpayments (nxp)
TVM variables: PMT
payment amount
TVM variables: rnom
nominal rate given in the question (used to calculate r)
TVM variables: m
compounding frequency per year
TVM variables: p
payment frequency per year
whats APR
use when m and p are the same
ammortization
full length of mortgage
mortgage term
length of agreement of interest rate
effective interest rate
when m and p are not the same
down payment
money you put down before anything else
VENT
variables
equations
numbers
therefore
principal repaid
amnt originally owed-amnt still owing
interest
total payments made-principal repaid
BOND factors affecting price
interest rate changes (inverse relationship)
risk premium and market conditions
STOCK factors affecting price
company performance
market conditions
investor sentiment and economic outlook
is mortgage equity or debt
debt
whats margin buying
borrowing money to invest in stocks using the stock itself as colateral
rules of margin buying
must qualify for a margin account and sign hypothecation agreement
maintain min. margin requirment
margin call
happens when an investor borrows money from a broker to buy more stock than they could afford with their own cash
bull markets
a financial market where prices are rising or are expected to rise, typically over a sustained period.
bear markets
a financial market where prices are falling or are expected to fall, typically by 20% or more from recent highs.
why is $1 worth less one year from today
risk
real interest
inflation
present value
amount of money of current time
(need now, worth today, how much willing to pay)
future value
amount of money at some point in the future
(how much will you have, how much should you invest to have ___ in ___ years, you need ___ to retire)
single payment
single, lump sum that accumulates interest
(how much will you need today, make a deposit today)
annuity
stream of equal payments that accumulate interest
(how much do you have to save per month, you are looking to finance, annual payments be)
annuity due
payment occurs at beginning of the period
(starting now)
ordinary annuity
payment at the end of the period
(savings questions)
annuity vs perpetuity
annuity: ends after certain term. retirement plans, investment plans, mortgages
perpetuity: payment occurs forever
