Week 4

Question 1

What is an inverted yield curve and why is it significant?

Answer 1

It’s when short term interest rates are higher that long term rates. It is significant as a highly likely precursor of a recession.

Question 2

Why is it unusual for short term interest rates to be above long term rates?

Answer 2

Since long term bond yield payouts come later, they are riskier; therefore, people demand a higher interest rate in compensation for the risk.

Question 3

What does mortgage mean?

Answer 3

Dead pledge, because the loan was dead when paid or defaulted

Question 4

What is a DPP?

Answer 4

Direct participation partnership.

Question 5

What are the DPP rules?

Answer 5

• for accredited investors
• it is a limited partnership, ie, limited liability
• IRS says must have limited life, not perpetual
• flow through vehicle, ie, the income goes to investors as ordinary income, and DPP is not taxed

Question 6

What is an REIT?

Answer 6

Real estate investment trust

Question 7

What problem did REIT solve?

Answer 7

DPPs were not for smaller investors and considered unfair. So US Congress made REIT to enable smaller investors to profit from real estate

Question 8

How were REITs defined and why?

Answer 8

Since REITs escape corporate tax, they had to be defined. 75% must be in real estate or cash; 75% of earnings from real estate. 90% of income must be from real estate dividend, interest, or capital gains, and 95% must be paid out. No more than 30% of income from short term ownership.

Question 9

What is microprudential vs macroprudential regulation?

Answer 9

Micro is one guy or small business. Macro is relatively new, and refers to regulation to avert big crises that affect the whole economy.

Question 10

What are five levels of regulation?

Answer 10

• within firm regulation
• trade groups
• local government regulation
• national government regulation
• international government regulation

Question 11

What is tunneling?

Answer 11

Expropriation by minority shareholders, or executives, etc

Question 12

What are blue sky laws?

Answer 12

Local USA regulation of financial tricks, deception, and other shenanigans starting in Kansas in 1911, and spreading to 47 states by 1933

Question 13

What is the SEC and what is it an example of?

Answer 13

Securities and exchange commission is an example of national financial regulation

Question 14

What is Edgar?

Answer 14

It is the name of the part of the SEC that dispenses financial statements

Question 15

What is front running?

Answer 15

Customer asks broker to buy large quantity of stock. Broker then buys an amount at the current lower price; then executes the order, which raises the stock price, and then sells his shares at a profit

Question 16

What is net income?

Answer 16

net income is operating income less any other non-operating expenses, such as interest and taxes.
This is SEC’s definition of bottom line earnings, or sales minus cost of goods sold. Net income (also called the bottom line) can include additional income like interest income or the sale of assets.

Question 17

What is operating income?

Answer 17

Operating income is revenue less any operating expenses, or
Revenue minus cost of doing business. Operating income includes expenses such as selling, general & administrative expenses (SG&A), and depreciation and amortization.

Question 18

What is FASB and what does it do?

Answer 18

Financial Accounting Standards Board. This is a SEC recognized organization that sets accounting standards for USA companies. It created GAAP, generally accepted accounting principles, which defined net and operating income among others.

Question 19

What is SIPC?

Answer 19

Securities and Investor Protection Corporation. It insures us against brokerage failure up to $500,000 per account, and $100,000 per cash account.