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Finance 305 > test 2 > Flashcards

test 2 Flashcards

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1
Q

From december to January the % rise was

A

0.5%

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2
Q

Payroll tax will do what to consumer spending

A

Cut it

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3
Q

flood of business loans

A

commercial and industrial loans were up 4.4% in the fourth quarter and 16% for all of 2012

Banks have been overloaded with deposits- slow economic growth and low interest rates crimp investment

loans may not be profitable

shifting market means higher-yielding real-estate loan are being replaced with lower yielding commercial loans

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4
Q

payroll tax whacks spending

A
  • will knock 2% off consumers take home pay
  • burgerking and kraft foods cutting prices
  • walmart very worried
  • causing 45.7% of consumers to spend less
  • retail sales in January smallest in 3 months
  • Walmart will get brunt of change
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5
Q

sequester will reduce growth by

A

one-half of a percentage point in 2013

could slow recovery

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6
Q

sequestration would cut budget authority by

A

$85 million

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7
Q

Real threat to federal budget

A

medicaid and medicare

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8
Q

Banks and investors are holding riskier debts

A

companies are issuing record high junk bonds

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9
Q

low rates cause people to take

A

on too much debt or too many risky assets

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10
Q

yields on low rated junk bonds have fallen under

A

6%

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11
Q

REITS are

A

growing

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12
Q

Dow Jones is no longer on the

A

rise its frozen

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13
Q

wealth effect

A

look at financial net worth, see how it is changing, use that to determine how one spends

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14
Q

Currency war

A

countries race to devalue their currencies in a desperate attempt to stimulate growth

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15
Q

quantitative easing causing

A

environment of low interest rates and put downward pressure on the dollar while ushing the currencies of other countries up

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16
Q

Japanese yen is down

A

20% against the american dollar, b/c new PM changed policies

Japanese exports now cheaper

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17
Q

Tax that cuy ould change trading game

A

good for europe, bad for US economy, raise the cost of capital for companies.

good for traders who b place millions of orders a day

a trade of 10,000 euros would face a 10 euro tax

discourages high frequency trading

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18
Q

shadow banking

A

funding mkts outside of banks, makes money mkt funds less vulnerable

important source of credit

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19
Q

Apple violated securities regulations by

A

bundling several shareholder proposals into one matter.

Einhorn wants Apple to return some of 137 million to share holders

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20
Q

extreme overvaluation

A

stock selling for 100 times revenue

Avg stock sells for 1.4 times revenue

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21
Q

Martin Zweig

A

tech analyst

called 1987 market crash

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22
Q

bonds are riskier than stock right now

A

10-year treasury yield went back up to 2%, if it goes back to regular 5%, bon funds could get smoked

worrisome for individual investors

stocks offer better returns than bonds- 6-7% after inflation > bonds 1%

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23
Q

CME Group

A

futures exchange operator

charged with disclosin private info about trading in its big energy markets to an outside party between 2008 and 2010 in return for meals and entertainment

gave info to a commodity broker

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24
Q

CFTC

A

commodity futures trading commision

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25
Q

DOW Jones finished best since stock market crash 2007

A

up 8.8%

fed pumping millions of dollars proves to investors there is a safety net

More emphasis on “bottom up” stock fundamentals, such as earnings and corporate balance sheets.

• The Dow is price weighted but if it were price under equal weighting we would be up even more.

  • IBM, Caterpillar, 3M, Chevron Corp, and United Technologies were the biggest drivers of the Dow to its new highs.
  • A 1% move in IBM causes a 16-point move in the Dow
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26
Q

profits v. employment

A

businesses are having a good year but the employment rate is stagnant

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27
Q

Builders fuel home sale rise

A

new home sales have strength in construction

home builders are paying closing costs in order to help buyers get loans

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28
Q

TIPS

A

have flexibility in their rates

Invesco prefers these

29
Q

Heinz, leveraged loan

A
  • LBO in form of leveraged loan
  • get debt down by asset sales, cash flows, expenditures
  • leverage loan is a risk, pay market rate for it
30
Q

covenant light loan

A

is a contract at principle value

the price is going up for them

31
Q

Herbalife

A

Icahn will have 2 board seats

right now is white knight taking over and saving company

32
Q

Marty lipton

A

successful lawyer defends against takeovers

33
Q

poison pill

A

A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills:

  1. A “flip-in” allows existing shareholders (except the acquirer) to buy more shares at a discount.
  2. A “flip-over” allows stockholders to buy the acquirer’s shares at a discounted price after the merger.
34
Q

Bond

A

cash paid, contract promises to pay amount at maturity

35
Q

zero-coupon bond

A

no paymentsbut at maturity you get back face value

36
Q

call provision

A

allows the original issuer to repurchase and retire the bonds

37
Q

convertible bond

A

can be converted into a predetermined amount of the company’s equity (stocks) at certain times during its life

38
Q

put bond

A

allows the holder to force the issuer to repurchase the security at specified dates before maturity. The repurchase price is set at the time of issue, and is usually par value.

39
Q

preffered stock

A

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders

like a hybrid between equity and debt
o Pays fixed amount of interest
o Gets paid out before common stock dividends
o Larger price swings (like debt)

40
Q

present value of a bond

A

c/(1+r) + c/(1+r)2 +… c/(1+r)n

41
Q

yield to maturity

A

The rate of return anticipated on a bond if it is held until the maturity date.

42
Q

current yield

A

coupon rate/price

43
Q

coupon rate

A

The yield paid by a fixed income security

44
Q

reinvestment risk

A

The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased.

Reinvestment risk is more likely when interest rates are declining. Reinvestment risk affects the yield-to-maturity of a bond, which is calculated on the premise that all future coupon payments will be reinvested at the interest rate in effect when the bond was first purchased.

45
Q

unemployment rate dropped to

A

7.7%

can also be affected by people leaving the labor force

46
Q

convexity

A

is positive if two bonds have same rating, is more attractive

47
Q

Swap

A

selling out of one bond and replacing it with another

o this to pick up higher rate of cash return

48
Q

“Sequester

A

85 billion in automatic cuts from now thru Sept. 30, will hurt growth, unemployment, but not hurt corporate profits

49
Q

Student-Loan

A

total debt is at a 15 year low
o Less carried credit card balances
o Less borrowing = less spending, which could hurt the economy
• Bankruptcies and foreclosures have played a role as well
• Young people are saving more than any other age group

• Average yield is falling, now at 1.48%

50
Q

Munis

A

avg yield is 3.4%

not taxable

lose money and use lots of leverage

51
Q

• ETN: Exchange Traded Note

A

o Uncollateralized debt obligations of the issuing financial institution
o Borrower promises to pay a certain rate based on an index
 Subject to counterparty risk
o Higher fees than ETFs
o More tax efficient

52
Q

• “Say on Pay” votes

A

o Let investors weigh in annually on a company’s executive-pay decisions
o Dodd-Frank act requires companies to hold say-on-pay votes

53
Q

o Cost basis

A

refers to the price of acquiring an investment
 Starting point for figuring tax after the asset is sold
• Designed to help honest tax-payers and discourage cheaters

54
Q

o Alternative is frontier markets

A

 Higher long-term growth and cheaper valuations

o Political turmoil, poor corporate governance standards and corruption

55
Q

• Equal weight indexing –

A

weights stocks equally, regardless of market capitalization
o Receiving a lot of attention, possibly undeserved
o Limits the harm that one tumbling stock can do
 Apple is 3.1% of S&P capital, its recent fall was felt harder when unweighted
• Equal weight funds rebalance all positions quarterly
o Selling winners, buying losers
 Effort to pick up value stocks
o Focuses more on mid to small-cap stocks
• Higher fees associated with equal weight indexing

56
Q

“gross profitability”

A

o Identifies companies that will earn even more money in the future

57
Q

History Lesson: Buying High, Selling Low

A
  • With stocks at all time high, stockbrokers are saying a lot of retail investors want to get back in.
  • It might be to late and there is a wildcard retail investors are not thinking: The Federal Reserve
  • The Fed has boosted the economy with cheap money and support and if the market gets better they will leave the market eliminating the floor in the market making the market fall.
58
Q

Banks Pass Fed’s Tests; Critics Say it was Easy

A
  • Stress Test = sensitivity analysis on what would happen if things in the market got bad, would the banks survive?
  • Of the 18 largest banks, 17 would be able to survive. Ally Bank (formerly known as GMAC) failed. GMAC = former General Motors financing arm.
59
Q

Under water Homes

A
  • More homeowners are turning to short sales – where they sell their homes for less than they owe in a mortgage debt and the bank typically eats the difference.
  • Short sales used to be rare, but now are becoming common in part because lenders, homeowners and real estate agents have become more experienced at marketing and pricing the properties.
60
Q

• Convents

A

place restrictions on the borrower (fine print of the loan agreement).
o If companies do NOT what the convents say (lets say have to much debt) the bondholders are require the company to do things.

61
Q

Mortgage REIT

A
  • Niche financial stocks that invest in real estate debt, buy commercial and residential mortgage-backed securities
62
Q

How Mortgage REIT makes money

A

They make money by borrowing money using short-term debt and use long-term mortgage securities, earning the spread between the rates

63
Q

What is feds stimulus policy creating an REIT Boom?

A
  • keeping short term interest rates low
  • this reduces mortgage REIT borrowing costs, enabling more money to be made off their bond portfolio
64
Q

Good call to invest in mortgage Reit?

A

feds stimulus plan is double eddged sword for mort-reits

fed spends 80 billion a month on mortgage securities making mortgage bond prices higher and bonds lower

face risk if interest rates rise, would increase short-term borrowing costs

65
Q

Oil/Gas Breakthrough

A

gets it in economically attractive matter, gives US ability to produce own oil, reduces cost of energy, reduces deficit, positive current economy

Side effects: increases value of U.S. dollar in foreign exchange, exports price at higher level which equals lower profits for US companies in foreign mkts

66
Q

Whats With? article

A

financial markets are moving up faster than the economy

67
Q

Shadow economy

A

economy could be better than #s suggest

  • Illegal- drugs prostitution smuggling
  • unreported- undocumented workers, day job who moonlight as others at night, ebay/craigslist, roadside stands

Concealed to avoid taxes, get arrested

unemployed may actually have income

68
Q

Jerome stein

A

works for fed, cautious of low interest rates in risky investments

69
Q
A

Finance 305 (2 decks)

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