Unit 3 - Session 11 - Basic Economics & Fin Reporting Flashcards
Fiscal Policy
Gov’s use of spending on taxation to influence economic activity
Monetary policy
Central Banks actions the affect the quantity of money and credit in an economy in order to influence economic activity. It is either expansionary (increase in the money supply and credit to the economy) or contractionary (reduces the quantity of money and credit in the economy).
Keynesian Economics
Recognizes the importance of government intervention. During recessionary times, government should run deficits to stimulate demand and employment.
Classical and Supply-side Economics
Lower taxes and less government regulations benefits consumers through a greater supply of goods and services at lower costs. Supply-side holds that supply creates demand by providing jobs and wages
Monetarist Theory
The quantity of money or money supply determines overall price levels and economic activity. Milton Freedom school of thought. Too many dollars chasing too few goods leads to inflation and too few dollars chasing too many goods leads to deflation. A moderately increasing money supply leads to price stability
Tools of the FED
- ) Chases in reserve requirements: by changing the amount of funds commercial banks must leave on deposit with the FED, the amount of money available for these banks to lend out is decreased. The shrinkage of money supply translates into higher interest rates. the reserves is true when reserve requirements are eased
- ) Changes in the discount rate: This is the rate the FED charges member banks when lending them money. Higher rates discourage borrowing, reducing the money supply with lower rates having an opposite effect
- ) Open market options: FED buys and sells US Treasury securities in the open market under the direction of the Federal Open Market Committee (FOMC). When Treasuries are purchased, it adds to the money supply, b/c the FOMC is purchasing the securities from commercial banks causing the banks to have greater reserves. the opposite occurs when treasuries are sells the money supply is reduced
Economic Business Cycles
Expansion, Peak, Contraction, Trough
Expansion
increasing business activity throughout the economy. This leads to an increase in inflation and production - decreases unemployment, hiring accelerates, falling inventories, rising stock markets, rising property values, increasing GDP
Peak
When business reach their productive capacity. this leads to a decrease in GDP, decrease to the unemployment rate, slowdown in hiring, slower rate of growth in consumer spending and business investment, increase to the inflation rate
Contraction
When businesses decline from their peak; mild term contractions are recessions, more severe are depressions. Contraction leads to risking number of bankruptcies and bond defaults, decreasing hours worked, increasing unemployment rate, decrease in consumer spending, home construction, business investments; falling stocks; decrease in inflation; rising inventories; negative growth rate for the GDP
Trough
business activity stops declining and levels off. Such as change from negative to positive GDP, high unemployment rate - increasing use of overtime and temp workers; spending on consumer durable goods and housing may increase; moderate or decrease in inflation
Economic Recession
When an output of goods and services (GDP) continues for two or more consecutive quarters
Economic Depression
When an output of goods and services (GDP) continues for six or more consecutive quarters
Cyclical Industries
Highly sensitive to business cycles and inflation trends. Most produce durable goods such as heavy machinery and autos as well as raw materials. During recessions the demand for durable goods declines, manufacturers postpone investment and new capital goods and consumers postpone purchases
Countercyclical Industries
Turn down as the economy heats up and rise the economy turns down. I.e. Golding mining
Defensive industries
Least affected by normal business cycles. Companies in defensive industries generally produce nondurable consumer goods such as food, pharmaceuticals, tobacco, and energy. During recessions these stocks tend to decline less than other industries
Inflation
General increase in prices as measured by an index such as the consumer price index (CPI). CPI reflects the average cost of goods and serves purchases by consumers compared to those same goods and services purchased during a base period. CPI stats are purchasing monthly by the BLS.
Inflation inertia
the concept that inflation does not immediately reflect unexpected changes to economic conditions rather, it lags behind, sometimes for several quarters
Deflation
General decline in prices, usually occurs during severe recessions when unemployment is on the rise
Real rate of interest
the nominal rate (rate of interest) minus the expected inflation
Federal Funds Rate
The rate banks that are members of the Federal Reserve System charge each other for overnight loans of $1MM or more. The rate is considered a barometer of the direction of short-term interest rates.
Prime Rate
Most preferential interest rate on corporate loans at large US money center commercial banks. This rate is lowered when the Fed eases the money supply and raises rates when the Fed contracts the money supply
Discount Rate
The rate the New York Federal Reserve Bank charges for short-term loans to member banks
Broker Call Loan Rate
Rate banks charge broker-dealers on money they borrow to lend to margin account customers. Broker call loans are callable on 24 hr notice.
Yield Curve
The difference between short and long term interest rates when plotted on a graph. Upward slopping is positive yield, long term rates are usually higher than short-term rates. Also is a reflection of investors expectations on inflation. Downward sloping usually means there is current high demand for money relative to available supply
Flat Yield Curve
When long-term and short-term interest rates of the same
Yield Curve Spread between corp and gov bonds
If it is widening a recession is expected, investors have chosen the safety of government bonds over higher corp yields. If it narrows, an economic expansion is expected and investors are willing to take risks
Gross Domestic Product (GDP)
Expresses the total value of all final goods and services produced within the US during the year. This includes personal consumption (largest), government spending, gross private investment, foreign investment and the total value of net exports. If imports exceed exports, that negatively affects GDP and the net amount is subtracted. Measures the country’s output produced within its borders, regardless of who generated it. Net Exports lead to an increase in GDP.
Gross National Product (GNP)
Includes the income a country’s citizens earned abroad and excludes income foreigners earned domestically. Measures the output generated by the country’s citizens regardless of where they did so
Consumer Price Index (CPI)
Measure of the general retail price level by comparing the current cost of buying a basket of goods with the costs of buying the same basket of good a year ago, provides indication of changes in the cost of living.
Balance of Payments
Measures all the nation’s import and export transactions with those of other countries
Protection against weakening dolalr
Invest in foreign securities. Simplest way to do that is through ADRs. As the dollars strengthens, ADR value goes down.
What the three barometers of economic activity?
Leading, Coincident (Current) Lagging - published daily by the Conference Board
Leading Indicators
Economic activities that tend to turn down before the beginning of a recession or turn up before the beginning of an expansion. Used by economists to predict the future direction o economic activity 4-6 months at a time. These indicators include: money supply, building permits (housing starts), average weekly initial claims for unemployment insurance, average weekly hours in manufacturing, Manufacturer’s new order for consumer goods, manufacturer’s new order for nondefense capital goods, index of supplier deliveries (vendor performance), interest rate spread between 10 yr treasury and federal funds rate, stock prices, index of consumer expectations
Coincident (Current) Indicators
Economic measurements that change directly and simultaneously with the business cycle. Examples include: Nonag employment, personal income (minus Social security, vet benefits, welfare), industrial production, manufacturing and trade sales in constant dollars
Lagging Indicators
Measurements that change 4-6 months after the economy has begun a new trend and serve to confirm the new trend. These include: avg. duration of unemployment, ratio of consumer installment credit to personal income, ration of manufacturing and trade inventories to sales, average prime rate, change in CPI for service, total amount of commercial and industrial loans outstanding, change in the index of labor cost per unit of output
Balance Sheet
Assets = liabilities + equity
Assets
Appear on the company balance sheet in order of liquidity
Current Assets
Items expected to be converted into cash within the next 12 months
Liabilities
Financial claims by creditors against corporate assets
Current Liabilities
debt obligations due for payment within the next 12 months
Capital Stock
Preferred and common stock, listed at par value. Par value is the total dollar value assigned to stock certificates when a corporate owners (stockholders) first contributed capital. This is an arbitrary value with no relationship to market price
Capital in excess of par
Aka additional paid-in capital or paid-in surplus is the amount of money over par value that a company received for selling stock
Retained Earnings
Profits that have not been paid out in dividends. earnings represented the total of all earnings held since the corporation was formed less dividends paid to stockholders
Current Ratio
Current Assets - Current Liabilities. The high the ratio, the more liquid the company is
Quick Ratio
Current Assets - inventory / current liabilities
Debt-to-Equity Ratio
debt / capital
Book Value Per Share
Liquidation value of the company after all debts are paid. Formula: (tangible assets - liabilities - par value of preferred) / shares of common stock outstanding = book value per share.
Accumulated Depreciation
reduces the value of fixed assets on the balance sheet
Annual Depreciation
reduces taxable income on the income statement
Earnings Per Share (EPS)
Measures the value of a company’s earnings for each common share: earnings available to common / number of share outstanding
Current Yield
Expresses the annual dividend payout as a percentage of the current stock price: annual dividends per common share / market per common share
Dividend Payout ratio
measures the proportion of earnings paid to stockholders as dividends: annual dividends per common share / earnings per share (EPS)
Form 8-K
The form is used to report newsworthy events to the SEC, thereby making them available to the public. I.e. changes in management, company name change, mergers & acquisitions, bankruptcy filings, board of director change, sale of subsidiary, etc. Filed within 4 days of the occurrence.
Form 10-K
Annual report filed with the SEC.
Form 10-Q
reports filed quarterly; unaudited financial statements
