Banking

Question 1

municipal bonds (fancy word for loan)

Answer 1

-PR- gets around federal state and local taxes** so municipal bonds have lower yield than corporate bonds
preciously bc of tax advatange, if bond was taxed then it would be X
bond and debt are the same thing= if I go to a bank and I say hey JP morgan please give me a loan of 10 million they will charge
me an interst rate, I make them payments along the way and then I give them their payment back
if I am IBM I want to borrow 1 billion 1 bank will not give me

If I owe the bank 1 million my problem f I owe the bank 10 billion that is the bank’s problem so tehy wull never lend huge sums of money to one entity because then you are exposed to more risk you are nto diversified what if hte entity defaults

• someone culd not be good for hte money, so if a company needs to borrow a huge amoutn of money, they can go to the banks in general, and get together and say IBM wants to borrow 10 billion dollars goldman is willing to do half a billion, JP morgan is willing to do half a billion

but if even bigger amount than IBM can go to the market….

Question 2

but if even bigger amount than IBM can go to the market….

Answer 2

everyone can chop up a loan and pitch in

bonds are a way to chop up a loan and get a lot of money, emcahisms are exactly the same as a loan from the bank, like microloans from 100 thousand different banks

Question 3

if actually trading on sovergin debt or bonds…….

Answer 3

if actually trading on sovergin debt or bonds
1. if a soverigen nation says they will not pay you what will they do about it, costa rica and argentina says fuck you
I will not pay you
2. if you feel great about Argetina at hte time, fully worth what payback amoutn would be then lets say 2 years later and argetina
shits the bed and screws up and hte market thinks we can’t get our money back, then we short the bond, and like a stock, 5 years ago the
security was worth 100 bucks things were looking good, but then 2 years later stuff is looking a lot less good and it trades down to 50, I
can go and buy that for 50 bucks in the hope that I get payback
3. prices of debt and bonds mve around just like stocks, so for active debt investors not just liek sign me up set it and forget it, actively
trade it, not to be too topical puerto rico bonds a lot of interesting features for bonds issued for PR, triple tax advantage, municipial bonds
don’t have to pay X tax, for ex if I invest in NYC debt and NY resident, I am except from federal tax but if in state resident I am except from city and state tax, but then I decide to say hey detroit school district bonds and I want to buy that as an NY state resident
municipals are tax free at federal level sometimes free at state level
4. federal bonds don’t have to pay state tax, triple tax break PR for common wealths and territories, but PR given tis economic relationship
with US and mainland US and amoutn of money goes back btw two entities

Question 4

housing market 2008

banks make loans to people

Answer 4

think about one indiviudal mortgage that a bank makes, small community bank they make 1 mortgage, this is what finance ppl love to do anytime there is a series of cash flows or pattern of cash flows we can make money off of that by throwing into a bigger instrument called a mortgage backed security

so if we have all these individual mortgages overhere from different parts of country, credit levels, etc right for if we pool a bunch of stuff together I will get a benefit of diversifitication, benefit was that it has never been the case since the great depression that housing values across the country went down at the same time** bc if one of hte mortgages super multimillion dollar home in bel air vs warehouse space in BK those two things can’t be correlated, BUT THEY ARE

if you are a soybean farmer 80% of your worth is in 80% in price power of soy bean like 20% is water or agriculture

Question 5

but when shit hits the fan everythign all goes to 1

Answer 5

everyone is selling it at the same time and it moves together, so if actually being thoughtful about correlation so when ppl run for the door at the same time everything goes down

so they all go to one and everything runs off a cliff

Question 6

mortgage 2008 issue 2

not a new thing existed since 80s, second clinton term

Answer 6

no one thought home prices could all go down at the same time and same level of pain but back to this Michael Burry

a bunch of banks make a bunch of loans aka mortgages to home buyers
-then IB say i will take these mortgages and diversify them across whatever, throw them into a new pot called special purpose vehicle so this new box will get stuff from new monthly mortgage payments, money coming in from individual checks from individual borrows
so pretend this is revenue for them compnay that has revenue coming in, just like any other company it can issue bonds, hey guys and market we want to use these mortgages we have and it is functioning as the colatteral and security to issue bonds to other ppl

so the mortgage holders pay their mortgages into bucket of little compoany and then this little company forwards on these payments to investors who bought these bonds, way to connect individual mortgage payments to investors at the end of the spectrum

Question 7

mortgage issue 2008 3

call option=

Answer 7

if I can buy or sell a normal thing, bodn stock whatever, I can also buy or sell options related to that thing

options are a right to buy at a certain price within a certian period of time** the details are nto as important, but ton of leverage built in so you had ppl buying the option to clal these mortgage bonds

so if somethign goes wrong if you want to buy insurance on these bonds incase they default just liek health insurance, if you want to pay for it we will promise to pay you something if somethign goes wrong that is when thi

AIG wrote all these insurances so when ti went belly up they went bankrupt, then separate derivatives called CDS credit default swaps

credit defeault swaps are a way for you to actively bet some of these bonds will go ot zero because they will default, or I want to protect myself that these bonds go to zero these are the insurance policies we were talking about

but then AIG went out of business and forced into insovlency

Question 8

CDS= credit default swaps

Answer 8

AIG wrote all these insurances so when ti went belly up they went bankrupt, then separate derivatives called CDS credit default swaps

credit defeault swaps are a way for you to actively bet some of these bonds will go ot zero because they will default, or I want to protect myself that these bonds go to zero these are the insurance policies we were talking about

Question 9

Michael Burry, Steve Isnen (steve Carrell), Paulson…

Answer 9

they placed a bet hte housing market will go to shit
like buying life insurance, on someone dying

he bought insurance on sick banks and bought insurance on the sick bonds that went into it, into instruments taht made up more complex things* he did it at the level of these loans look like they will go bad, these mortgages look bad so lets buy insurance on those first then he did a second level
oh holy shit goldman, huge banks had exposure to these risks
so he had to pay premium along the way and if it pays off you make bank*** last good trade jim paulson made

Question 10

life insurance on ppl…..

Answer 10

ike buying life insurance, on someone dying, a lot of ppl take out insurance on top performers if Patrick gets hit by a bus they get paid common business

csuite ppl almost always part of it, if I have a rockstar lawyer what if he gets hit by a bus and he brings in billions of revenue for a year, I want to amke sure from a management perspective his practice doesn’t go to zero overnight. if he gets hit by a buss then I have 100 million so it gives me some breathing room to rebuild that practice so it doesn’t hit me like a ton of bricks, here are all the boxes I want to check off they all go into one thing life insurance, key person insurance, pandemic insurance

Wimbledon most large sporting events they buy a giant weird insurance policy bc all of their revenue comes from a two week period, so wimbledon got over 100 million dollar pay out from insurnace company so they dont get a hole in balance sheet paying for it forever, cost along the way but if it actually pays off

Question 11

municipal bonds from patrick notes 10.30.24

Answer 11

municipal bonds
-PR- gets around federal state and local taxes** so municipal bonds have lower yield than corporate bonds
preciously bc of tax advatange, if bond was taxed then it would be X
bond and debt are the same thing= if I go to a bank and I say hey JP morgan please give me a loan of 10 million they will charge
me an interst rate, I make them payments along the way and then I give them their payment back
if I am IBM I want to borrow 1 billion 1 bank will not give me(I put on brainscape)

Question 12

milton friedman

Answer 12

Money supply causes inflation Milton friedman nominal gdp right level inflation is subdue right level of growing money supply central bamker focused on to make sure inflation doesn’t get out of control financial assets go up but also need risk of inflation and other side of it is fisical policy and right now we are running out of control covid deficiets

Question 13

financial modeling present value of money

Answer 13

Question 14

discount rate

Answer 14

In finance, the “opportunity cost” is called the Discount Rate, and it depends on your other,
similar investment options.
The Discount Rate matters because it lets you calculate the Present Value of an asset or
company – what its future cash flows are worth today.
We refer to this Present Value of future cash flows as the “Intrinsic Value” or “Implied Value” of
the company or asset as well.

Question 15

discount rate high vs low

Answer 15

A higher Discount Rate means that the risk and potential returns are both higher, and a lower Discount Rate means that the risk and potential returns are both lower.

For example, if you invest mostly in the stock market, your Discount Rate will be high because the average annual return has been 10-11% for the past 100 years.
But your risk is also quite high. In a given year, the market might fall by 30% or 50%, even if the long-term average is a 10-11% annual gain.
By contrast, if you invest mostly in U.S. government bonds, your Discount
Rate will be much lower: Perhaps 2-3% in a low-interest-rate environment.

Question 16

WACC

Answer 16

So, you need to look at the weighted average of these Discount Rates across all the asset classes or funding sources.

For companies, this “weighted average” is called the Weighted Average Cost of Capital, or WACC, and it’s one of the most important metrics for valuing companies.

You can use an analogy to your personal finances to understand WACC: What percentages of your money do you put in a checking account, savings account, bonds, and the stock market?

Your “Opportunity Cost” in each category might look like this:

Question 17

wacc ex.

Answer 17

Question 18

The two main funding options for companies are Equity and Debt.

Answer 18

The two main funding options for companies are Equity and Debt.

Equity means that the company will raise money by selling stock to investors. In exchange, each
investor will own a small percentage of the company.

Debt means that the company will raise money by borrowing it from lenders. The lenders do not own any portion of the business, but they receive interest payments, and they get their entire principal back in the future.

Question 19

equity

Answer 19

Equity means that the company will raise money by selling stock to investors. In exchange, each investor will own a small percentage of the company.

And for the company, raising Equity is almost always the most expensive way to fund its operations.

Question 20

debt

Answer 20

Debt means that the company will raise money by borrowing it from lenders. The lenders do not own any portion of the business, but they receive interest payments, and they get their entire principal back in the future.

Just as investing in bonds results in lower potential returns for you, raising Debt is also less
expensive for a company.

Question 21

ex of present value calculations for korea apartment

Answer 21

Since the Present Value of these cash flows exceeds the apartment’s Asking Price, we should buy the apartment.

But several factors could change our decision:

1) The Apartment Sale Value Falls – If the housing market crashes and the apartment is worth only $150K at the end, this decision turns into a “No.”

2) The Apartment Stays Vacant for Some Time – If it takes too long to find tenants, we might not earn $12K in rent each year, which could also make the decision a “No.”

3) Our Opportunity Cost Changes – If we find some incredible new opportunity, this apartment might not be worth it.

4) The Asking Price Changes – If the current owner suddenly decides to ask for $250K, this would turn into a “No” decision.

The same factors could change our decision to invest in a company: Its future selling price might fall, its cash flows might decline, our opportunity cost might change, or the owner of the company might want more for it.

Question 22

rule of thumb:

Asking Price < Intrinsic Value: Invest!

Asking Price > Intrinsic Value: Don’t invest!

Answer 22

Asking Price < Intrinsic Value: Invest!

Asking Price > Intrinsic Value: Don’t invest!

Question 23

internal rate of return

Answer 23

In addition to comparing an investment’s Present Value and its Asking Price, you can also estimate its Potential Returns and compare them to your Opportunity Cost.

You estimate these “Potential Returns” by calculating the Internal Rate of Return (IRR), which is a type of Discount Rate.

The difference is that you solve for this Discount Rate – you don’t know it in advance.

If you have a series of cash flows and a Discount Rate, you can solve for the Present Value.

Question 24

In other words, if the Asking Price < Present Value, then IRR > WACC; and if Asking Price > Present Value, IRR < WACC.

Answer 24

In other words, if the Asking Price < Present Value, then IRR > WACC; and if Asking Price >
Present Value, IRR < WACC.

Question 25

NPV

Answer 25

NPV = Present Value of Cash Flows Discounted @ WACC – Asking Price If NPV is positive, then we invest because PV of Cash Flows @ WACC > Asking Price. You also know that the IRR is the Discount Rate at which the NPV = 0. 0 = NPV = Present Value of Cash Flows @ IRR – Asking Price Then, using algebra: PV of Cash Flows @ IRR = Asking Price We can then line up both formulas as follows: x = Present Value of Cash Flows @ WACC – Asking Price And x > 0 since we’re assuming the NPV is positive. 0 = Present Value of Cash Flows @ IRR – Asking Price If x > 0, PV of Cash Flows @ WACC > PV of Cash Flows @ IRR. The Asking Price and Cash Flows are constant in both formulas, so the different Discount Rates must explain the different values.

Question 26

margin from marketing class booth winter 2025

Answer 26

loosely used as a synonymn for profit. sometimes in $ terms sometimes in % terms when used in % terms there are two different approaches to calculating margins: 1. margin on cost (or markup)--> (price-cost)/cost 2. margin on price--> (price -cost)/price gross margin = net sales- cost of goods sold

Question 27

gross margin

Answer 27

net sales-cost of goods sold

Question 28

contribution margin

Answer 28

unit's contribution against fixed costs (revenue- variable costs) although not correct from an accounting standpoint, sometimes used interchangeably with gross margin

Question 29

net margin

Answer 29

an imprecise term used to indicate the profit of an item after subtracting both variable costs adn some allocation of fixed costs

Question 30

multiples 1

Answer 30

compares a stock's price to some fundmental number generally speaking higher multiple more expensive a stock is considered like price per pound at a butcher shop quantity for chicken vs steak differnet but look at rpice per ln 6.0 per lb or 17.5 per lb P/E is an example of a multiple

Question 31

P/E ratio

Answer 31

price to earnings easy to calculate take stock's price / earnings per share ex. plain bagel net income 2 million 1 million shares outstanding trading at a price of 30 dollars 30 million/ 2 million = 15.0x multiple historic trailing p/e ratio trailing bc using historical information represents how much an investor is willing to pay per dollar of a company's profits so here paying price equal to 15x our share of company's profit, helps us understand how much we are paying for a stock

Question 32

p/e ratio 2

Answer 32

short comings is it is backward looking many believe markets are forward looking better to use forward P/E dividng stock's price by how much it is expected to make next year for ex if we expect the bagel shop to release a new bagel and net income to be 2.5 million and earnings per share is still 1 milion 30 30/2.5 million = foward P/E is 12.0 x relying on forecasts which may not pan out but can still help value stock and how much cpmapny is paying for a companuy

Question 33

multiples are a reltive measure!!!!

Answer 33

need to understand if level is attractive or not to do so you have to compare it to other multiples, like ocmpare it to plain bagel's historical ratios of P/e to see how it ha changed over time if earnings are inc but stock price fallen multiple has contracted not necesssarily a good thing if forward earnings have fallen but price of stock has risen multiple has expanded meaning ppl are paying more for less profit, comapre p/e to stocks long term average to see if amrgin is larger or smaller than nromal, if stock's 10 yr average P/e is 10x

Question 34

if stock long term average > or < than P/E

Answer 34

if 10 yr averageis 15x > p/e temporarilty cheaper than normal if pick up stock and multiple later exapnds back to long term aveage we can earn a return even if company's earnings are flat, so if a multiple is expected to revert to its mean over time MULTIPLES ARE EXPECTED TO REVERT TO ITS MEAN OVERTIME!!!! if 15x > 12 x so stock multipel right now at 12 is temporiarily cheaper and good to buy, earn a return if goes back to 15.0x even if earnings are flat also always comapre the stock to other stocks in industry

Question 35

if compare P/E to peer average taking into account company's growth rate! growth rate

Answer 35

if 12x compared to peers which is 10 x then its more expensive than its peers compared to peers it may seem expensive at 12x but if its growitng its earnings at a faster pace, teh multiple may be justified! why high growth companies like tech companies have higher multiples like 28.0x vs stocks in utilities 12x on other side of spectrum just bc stock is trading at the other side of spectrum is trading below its average of peers or its historical average like 12 vs 14x vs 16 x for historical doesn't mean it is a good buy! the multiple compression could be justified if company's fundamentals have deterioriated! like if steak you buy from butcher isn't even beef anymore so no 3 ollar steak, just bc something is cheap doesn't mean you should buy it

Question 36

a lower stock's P/E

Answer 36

doesn't mean you should buy it!! a lower stock's P/E may reflect a justified P/E of company, for keto diets expected to kill bagel industry or company facing regulation that will stop it from making its plain bagel adn that will hurt the future profitability of copany soeven if mutliple will cotnract, the company's long term prospects have deterioriated! multiples are meaningless without context without understanding of company's core business multiples are meaningless do not chase cheap mltiples

Question 37

value trap

Answer 37

stock looks cheap compared to historical prices but like P/E 5.0 compared to histoircal prices of 20x but continues to fall even further bc of deterioration in firms fundementals and issues with firm

Question 38

multiples 3

Answer 38

they are not useless they are a handy way to quickly understand a stock's price level, but they are a rough gage of a stocks' value at best, some even contest that the P/E multiple is icnredibly limtied bc of use of accoutning earning numbers which can be altered easily by managemnet assumptions and noncash items they can help you make decisions but make sure decision yourself is a thorough understanding of a firm's operations not just the stock's multiple "its far better to buy a wonderful company at a fair price, vs a fair company at a wodnerful price"

Question 39

module 3 breaking into.... 2.17.25

Answer 39

Question 40

APIC

Answer 40

market value- par value never changes when share price changes, what it was when stock was issued

Question 41

treasury stock

Answer 41

common stock repurchases, almost always negative if exists and doesn't chage if share price changes! if company repurchaes shres at 10 per share and it goes up to 20 or down to 5 it doesn't matter, all that matters is the share price at the time shares were repurchased

Question 42

cash flow

Answer 42

Question 43

cash is a current assedt but not operational 3 sections from accounting don't list cash bc then double counting can't do that

Answer 43

Question 44

call options

Answer 44

contract you have to have a buyer and a seller, buyer pays something seller on day 1, and that is the right to buy a stock at a guaranteed price doesn't exist forever Right to buy a stock at guaranteed price at some point in the future

Question 45

derivatives are a zero sum game

Answer 45

if I enter into a contract, any money I make you lose, the seller has an obligation to sell the stock to me at whatever price we agreed on the guaranteed rpice we typically refer to that as a strike price or an exercise price the buyer of the call option whenever I buy a thing I am quote on quote long, the buyer of the call option is long hte call option and the seller of the call option is short the a put I make money if the stock goes down, then what doesit mean tobe short a put- call option, has a strike price of 100 dollars, ignore the price we pay for this contract today thnk about hey what happens in teh future or at expeiration, these things have a fixed life they are not infinite what happens at teh end of our contractral term here, from buyers perspecive

Question 46

if it sat 110 right ot buy for 100

Answer 46

exercise option buy it for 100 or receive it for 100, but then if I am just really just interested in capturing that immediately, as soon as I exercise it, I can instantenously capture that 10 dollar difference right vs obligation so if it stock goes to 150, in the future 10 dollar pay off once we get mroe in teh weeds with whwere this theory was created when we say pay offs we are thinking of future profit= future pay offs then accountign for what I had to pay for the thing on day 1, now we are thinking about future payoffs if stock goes to 150 and you can buy it at 100 you ge tto capture the 50

Question 47

on the opposite side

Answer 47

you have the right to do the stuff you already exercised, if you dont exercise nothing happens to me as the seller why would someone sell? have a buffer or more leway before I start losing money, Ikf I haev to sell as hte seller I wnat to sell high but I have to sell to you for 100, now I hav eto go buy it for 110 and sell it to for 100

Question 48

hedging strategy

Answer 48

I have owned this stock for a long time it is currently at 110 I can call it at strike price of 110 I alreayd have itnot losing money say I buy hte thing at 90 sell at 110 then you just gained 20 conservative option strategy happy to sell higher you pay me money today the buyer of an asset you think it iwll go up, and someone on other side willing to sell it to me doesn't believe that, derivatvies and hedging strategies can expand into uper complexiities but someone has a different view that is what makes a market, why would I sell my bose airpods 100% time better than apple pods if I can sell them for 100 dollars bc that is a price I am happy with bc I think I am getting the value, if you buy them from ou think you are getting a deal high and low mean different things btw different ppl

Question 49

value vs growth investors

Answer 49

value investors try to identify things its current price is less than what it is actually worth, and if all goes according to plan will it eventualy move up to what it is actually wroth, buy it on the cheap here in hope of selling it in real value much later on growth investors buy high sell higher, still buy low sell high but not afraid to jump in and in whatever metric I want to use but I think it will get even more expensive, I think the thing is goign to move up in value but its more abotu the startign point , do I think it ssuper straight in early days he was hard core deep value looks like a super super low quality business, such a margin for safety and margin for error I am wiling to invest. charlie munger added can find stuff under valued start looking at high quality businesses that are undervalued

Question 50

short

Answer 50

bet value of this stock will go down, if I think enron stock is going to decline in value, I wan tto bet it goes sdown, go to broker, hey I want to short this stock, get shares or borrow shares froms oneone so I am borrowing the shares, so far I have not paid anymoney and borrowed something from someone now I go out bc they are temporarily mine even though I am borrowing them then you sell them so sel them for 100 dollars, then I get 100 dollars my only obligations is I must return the shares back to whomever I borrowed them from, if stock price goes downf rom 100 to 50 now I cna go back and buy them for 50 and I only had to pay 50 only had to pay 50 to get back paid 100 originally, and just give shares back to the guy who I borrowed them from. in that case I shorted at 100, went down to 50 and I amde that diference of 50 dollars when I sell the thing, I have cash in my account put into US treasury saving account, earn interest on that and interset income tht way but then also do you think my broker is doign all of thsi for free for me for just a solid they will charge me- Overstock.com horrible buisnessmodel securities frraud, but if we are all short the same thing the only ppl that are onligated to buy at some point are short sellers that is how I close out my position if I am warren buffet buys adn sits on it forever for short position you have to return the shares from whomever I borrowed them from, which is why teh roll of short sellers gets miscronstrued they are the only ones that are forced buyers, makes marketts mroe ocmpletle

Question 51

Naked short selling

Answer 51

illegal means your broker lets you short the thing without borrowing the thing first, which seems almost impossible today hit shoert or sell and everything happens in a nano regulation is necessarily reactive of what happens in markets, market making allegations of front running, regulatory grey area ask for forgiveness rather than position, a lot of hte stuff is actually baseline unethical, short sellers provide liquidity be a buyer or seller no matter what happens Ken Griffin we are talking abotu micropennies differences smart ppl good at hiding behind broad talking points of value of the finance industry

Question 52

for every dollar one side makes the other side has to pay them a value captured on one side is loss on the other side

Answer 52

seller has obligation to sell no matter what

Question 53

if Ibuy anything hte most I can lose is what my initial investment is

Answer 53

when I sell things whether I am shorting stock or selling short stock, selling options I get a ncie little chunk of money on day one, but if shit goes sideasy I can lose 100x that

Question 54

tips

Answer 54

treasury inflation protected securities I buy bond for whatever price, tips are deisgned to protect you from inflation I am giving you money and I am willing to accept a fixed amount of csh fo 30 yrs, crucial ting which makes inflaiton for regular bond investors, Iam still getting the same payment

Question 55

Answer 55

Question 56

Answer 56

Question 57

every bond contract has at least 5 components

Answer 57

the borrower the price the date of maturity the value of maturity coupon rate

Question 58

terms of the bond

Answer 58

Question 59

call options if 75

Answer 59

Question 60

call options part 2

Answer 60

Question 61

what is a moat

Answer 61

think Coke has a moat bc of a few different reasons, brand been around forever, Kleenex things synonomous with product, advantages of scale, so say I Patrick connelley wanted to start Patrick connelley beverage company how much money will it take it take me ot build out the scale and infraastrucutre pepsi and coke have my god that is a shit ton of moey, compeititive advantage Also coke is so big that the folks it buys glass and sugar from so big they get huge volume discounts they get to be bte bully like walmart walmart can be like here are the terms and they are really attractive for walmart and really horribel for the party if you want to sell your shit in our stores here are the terms, they also will only pay you when they feel like it, they will pay you when they feel like payign you advantages of scale is you get to be a bully, walamrt is maximizing their value, and unilever doing the best they could but you get to push ppl around and if you are small you have no leverage

Question 62

EBIT better than EBITDA

Answer 62

EBIT is mney I paid in the past that I have to account for movign forward there is no dna fairy that magically takes the DNA away or magically pays the D and A for us, we have to pay it bc depreciation and amorization is a real thing, he tends to focus on EBIT

Question 63

right now warren holding cash

Answer 63

markets have gone up a lot, taken some money off the table, and that is even more attractive bc then he can put it more into Treasury bills and short term government bonds yielding 4% risk free hes been holding a otof cash as interest rates inc, he doesn't see a lot of opportunities right now because valuations are so high bc over the past two yrs which is icnredibly rare 20+% per year in 2023 and 2024 rarely rarely happens to have gaisn that crazy and a lot of it is being led by these high growth AI tech firms and ppl super starry eyed about the future so happy to buy high valuations of nvidia --> nvidia is 56 so p/e we are willign to pay 56 times that just to own your stock, another way to think about that is if nvidia does the earnings we think they will do it woudl take 56 years for me to get my money back so I am willing to pay for every 1 dollar of earnings they have I am willing to pay 56 bucks if you think it will grow even more

Question 64

value investing mindset vs growth investors

Answer 64

buy low or buy super cheap and take a risk but with a margin of safety but look this thing is crazy cheap, low probability this will go down more buy lwo sell high growth= willing to buy high and sell higher** value guys look to understand downside risk bc if you manage the downside then you cans leep at night dont need to worry about the upside, as oppoosed to buying nvidia at some crazy evaluation and praying it doesn't crash

Question 65

warren buffet doesnt like PE bc..... why charlie was so usefull to him..

Answer 65

there is a huge huge amount of manipulation in accounting to manipulate earnings, including things liek cost recognition, revenue recognition all this other stuff sohe likes to look higher up, if he will look at something on the incoem statement he will look at something on the income statement how profitable is each unit I sell adn each profit I sell then look at EBIT salaries SGA all that other stuff, and he does as many times he said Private equity is garbage he thinks EBITDA is worst his letters give you his thought profit before warren buffet became warren buffet, his analytical thought process hasnt changed that much the main difference is that he now can only look at stuff that can now move hte needle what charlie did= before warren was looking at super super lwo valuation companies garbage investing companies that was his idea and what he did really really well, hey everyone else is saying this company is super garbage town but I see a path to a turn aroundand even if I am around I will buy the garbage company but I am buying it on the cheap that if things go wrong I can sleep at night, once charlie came along who is much more quantiatively smart he was able to actually intellectual horsepower on granual level had been together forever, look warren you dont have to just look at garbage companies you can look at high value companies undervalued on a regular basis, not going to go look at high priced but high value companies where we can make an investment in veyr high high value companies that have a huge area and ability to grow like Sees candies is one of their first joint investments, its a monopology undervalued sure its a boring business, sugar high cash flow they care abotu cash flow as their main metric

Question 66

warren buffet and charlie 2

Answer 66

worst investment ever investment banking hard business to do well in, savier tried to solomon brothers commerical banking is a lot more predictable, but still risky so much leverage behind it, financail crisis 08 09 he dumped 5 billion but relative to berkshire balance sheet 2% gave goldman 5 billion but attached these crazy terms to it, when berkshire got to be big enough this is how he made a 5 billion investment in goldman which is preferred stock hybrid btw debt and actual stock so it lives in the middle there, you get a huge dividend nad paid before hte common stock holders so his deal with Goldman all the stars were perfectly aligned new york and fed telling all banks you have to raise money you are scaring the shit out of everyone and raise capital however you can which had lowest risk idea buffet thinking this is the brand, this is the brand for investment banking looked deeply into the balance sheet ok thi sis hte lowest risk I can take I feel good about their ability to come out of it, the government is not exactly forcing but basically forcing all the banks to take money so I will give them 5 billion and got 5-6% dividend which is preferred paid before other stuff right nwo he is takign the cash and putting it in the bank and earning 4.5% risk adjusted returns he could have kept his money in cocola wells fargo whatever the stock portfolio is, I could keep it there but the market has risk OR I can take it and put it in something risk free government bonds and get a guaranteed risk free 4% on it berkshire hawthway at its core is an insurance company and writing a bunch o finsurance policies, receiving a shit ton of income as an operating business like a healthnsurance company getting premiums in the door get those adn invest them and hopefully earn a greater return versus what they think they have to pay out or what they think they will pay out

Question 67

warrents= long term options

Answer 67

long term options if things got a lot better had the option to buy the common stock and profit from that as well he is the fire truck if stock is at 150 he ha sthe right to buy it at 50 and he gets the 100 dollars of profit warren's strategy= is this company willing to do well in teh future then think abotu price, if company is bad bail, if company is good and cheap perfect , if company is good and overpriced not with it, if company is good/meh but cheap

Question 68

inflation with bonds

Answer 68

math works inflation goes higher investors want a higher premium real rate above inflation so bonds sell off so yields go up inverse relations yield and the price of the bond the negative mathematical correlation - tenure has a duration 7 based on coupon is yield goes up 10 bases points bond price goes down 7% duration x change in interest= tip bond market has rallied 50 basis points times duration of, 10 yr bond has gone up in value over past 2 weeks last month there was 100 billion trade deficit annual trade is because companies were buying big expensive assets before tariffs went in 25 billion dollars means that they pre ordered - 1% earnings come down, dynamic historic if interest rates fall a lot supports equity market but if ultimately hat drives equity prices is earnings and it looks like trump is getting companies to earn earnings grow much lower than I thought so stock market sits and turns

Question 69

moat

Answer 69

is what you have defensible

Question 70

spoofing in gold ex christian trunz jp morgan

Answer 70

like trying to sell a handburger by flooding your resturant which a bunch of ppl and once someone buys it everyone disappears flooding deriviative markets with orders that traders will nto actualy execute to trick other market participants to mvoe price in a direction they want it to Spoofing causes market prices to go up or down, at which point the trader cancels the sale and places an opposite bet in an effort to manipulate share price — a blatant violation of the Securities and Exchange Commission’s rules.

Question 71

what is a derivative

Answer 71

A derivative market is a financial marketplace where contracts, like options and futures, are traded. These contracts derive their value from an underlying asset or set of assets, such as stocks, commodities, or interest rates. They are used for various purposes including risk management, speculation, and portfolio diversification. Derivatives: Financial contracts whose value is derived from an underlying asset. Underlying Assets: Assets like stocks, bonds, currencies, commodities, or interest rates that the derivative's value is based on. Purpose: Derivatives can be used for hedging (managing risk), speculation (betting on price movements), or leverage (increasing investment power). Participants: Hedgers (who want to reduce risk), speculators (who want to profit from price changes), arbitrageurs (who take advantage of price discrepancies), and margin traders (who use borrowed funds). Types of Derivatives: Common types include futures contracts, options contracts, swaps, and forwards.

Question 72

spoofing 2

Answer 72

put in a fake order in the market to buy or sell but then you withdraw that order before it is executed - so cause and effect if you put in an order that is siazable it can mve ht ep price of other commodities for ex with precious metals at JP morgan a. TRUNZ and his co-conspirators, in order to maximize trading profits and minimize losses for themselves and Banks A and B, placed electronic orders to buy and sell gold, silver, platinum, and palladium futures contracts with the intent to cancel those orders before execution (the "Spoof Orders"). b. In placing the Spoof Orders, TRUNZ and his co-conspirators intended to induce other market participants to trade against the conspirators' genuine orders (that is, orders that TRUNZ and his co-conspirators did want to execute) on the opposite side of the market from the Spoof Orders at prices, quantities, and times at which the other market participants likely would not have traded otherwise. The Spoof Orders thus were designed to, and at times did, move the price of precious metals futures contracts in a direction that was favorable to TRUNZ and his co-conspirators.

Question 73

derivatives 2

Answer 73

contract whose value is something that derives its value from something else, it is not the product it is a contract that derivces its value from changes in the product!!!! - ex futures, options adn swaps--> only 3 products in this market, all other products sold by banks are some combination of these three Futurres steraightforward contract that mirrors the change in price of an another asset come in different vs. options which give you flexibility that futures does not , hence the call the asset acrpss the pit

Question 74

future

Answer 74

contract that tracks price of udnerluying value of an asset without you having to buy asset saves you hassle of having to buy and store corn, Al etc. nearest thing in UK is spread bet or CFD- similar products as a retail inestor spread bets are a little bit like futures, swaps market is not available to you

Question 75

options

Answer 75

this gives you the choice of whether you buy or sell an asset- includes some flexibility that futures do not so you pay an upfront premium*** retail equivalent is covered warrants

Question 76

swaps

Answer 76

allow you to change your expsosure to something !! change expsoure to something without having to get your hnds dirty in the something, that can be a currency, interest rate and even an asset one of the 3 products in the derivative market

Question 77

what is the point of swaps, options and future......?

Answer 77

derivatives can be used in quite a few differnt ways, very flexible adn in the wrong hands they are very dangerous 1. can use it for gambling, spread bets can be used to take a directional bet on anything you like shares comodities proeprty and so on, that is taking on risk 2. ironically you can also use them to hedge which is opposite to reduce risk, 10000 shares worried about price falling and losing out on dividdends, can keep the shares and use something like an option to hedge any fall in the price* so can also use these to reduce risk, traditional hedigng** to reduce risk 3.arbitrage- take advantge of short term price anaomolies, like cars for ex. you can do this like one contract traded in 2 different exchanges in far east at 2 differnt prices, if fast enough can buy cheap one and sell expensive one and make some money if fast enough Nick Lesson did this in UK 4.you can create solutions using derviatives, structured prodcuts I am not a huge fan of are a combination of deriviatives to achieve a particular result

Question 78

swaps 2

Answer 78

ex. if you have a company, say Company A, you have two clients thats how bank makes money, company A and company B now companies both need to borrrow money to expand, need to borrow 5 mill each and different views abotu interest rates Company A- would like to borrow at a variable rate of interest bc they think interest rates are dec - so company A aim to pay variable interest on money borrowed -goes to company A, big well known adn established, you can borrow and pay 7% fixec interest rate, if you want 5 mill loan at variable you can pay us at london bank offer rate (variable rate set by banks btw themselves) LIBLE variable rate set by banks btw themselves to fix the variable rate, the banks decide what that is and it can cahnge every day if it does - in mid morning banks get together and decide london IBOR , variable rate, will not change 7% if fixed libel rate will cahnge depend on bank of england Company B- would like to pay a fixed rate of interst, mortgage market fixed interst rate over 5 years, some are happy to take variable rate of interest over the same term, banks have to cater to both types of mortgages -wants to pay fixed interest on money borrowed, these companies don't actually know each other, so swap banks can improve both their lives and helps -goes to its Bank B here are terms, company B smaller harder to raise money -fixed 10%, libel +1, so if in 5 yr times libel is 10% you pay u 11, or if its 1% or 100 basis points over libel so if in 3 yrs time its 8 % you pay us 9% or just take a fixed rate at 10% so you know exactly what you are paying take it or leave it

Question 79

swaps 3

Answer 79

now swaps bank in between when you take out a loan with Bank A do exact opposite, take loan from Bank A for 5 million but pay Bank A fixed rate of 7% then goes ot its other client Company B, I know you want to borrow at lowest possible rate of 5 million, go to bank and take out a loan at variable rate, so go to bank B and do lible +1% pay them variable rate of libel plus 1 - so what you have so far is two companies that take out separate loans both for 5 million, with own banks and at the wrong rate in both cases, spo how can a swaps bank give them teh rate they want and reduce teh cost of it. here is the answer: how bank can make some money and help both clients, and offset risk on both sides - swap bank will do seprate deal with each client, separate swaps so swap 1 and swap 2, swap is ecchangign one thing for another in this case interest rates -lets agree a swap on interest payments you are commmitte dto nothing else, not igivng you another 5 million you just want to change interst rates variable to fixed of what you originally wanted, -company B you are paying variable and would rather pay fixed so without paying another 5 million I will agree to swap on interest, we will pay you libel you pay us 8.5% fixed just an agreement to swap interst payments on what is called a notonal amount of 5 million, every 6 months swap bank will settle difference with company B btw libel and 8.5% on 5 million and every 6 months company A and swap difference in interest terms btw libel rate and fixed 8% with 5 million so dependingon what libel does which is variable rate, company B can be payign bank or vice versus same with company A financial magic swap banks making money, reeives 8% from company A and 8.5 from B, 5 mill x libel flows in and flows out and 8.5% of 5 million comes in and 8% goes out so swaps bank is making .5% as its profit 5 million at 5% is worth doing make that .5% even if variable rate is 20 % its a deal for them they still amke difference btw 8 and 8.5% provided company B keeps buying and making that .5%

Question 80

bank makes money .5% but company also makes money

Answer 80

libor cancels leaving +1% so company B originally paying on 8.5+1 or 9.5% fixed, and 9.5% fixed is less than 10% fixed but the point is that is saving .5% on 5 mill over say 10 ys that is worth doing - company A is happy too bc always wanted to borrow 5 million at lowest possible variable rate, the swap of 8% ipaying Libor but receiving 8% on 5 mill and only paying otu 7 fixed on both cases, fixed 1% savingon 5 mill company A is paying Libor for whoel term fo loan -1% and again athat is better than paying libor, and that is th epoint of hte swap!!! cimpany A paying variable rate of interest lower than could have gotten from other Bank and company B happy bc paying a fixed rate lower than what it could have gotten from bank B< and this works with comparive advantage= swap bank knows both cleints able to borrow at different terms, like we borrow at diff terms, terms for loans and motgages can vary depending on size of mortgage and credit etc, all swap bank have done is spot gap btw both clients obviosuly some risks if company A or B go bust you have a problem, so swaps bank has to be sure both companies are able to do it, can take security from them called cllateral, swaps banks and swaps do help to bring down borrowing costs for everyone, not just on companies but on mortgages, like variable rate mortgaege, btw swaps are one of hte reasons why mortgage rates are higher than they otherwise would be

Question 81

deriviatives 4

Answer 81

The term “derivative” refers to a type of financial contract whose value is dependent on an underlying asset, a group of assets, or a benchmark. Derivatives are agreements set between two or more parties that can be traded on an exchange or over the counter (OTC). These contracts can be used to trade any number of assets and come with their own risks. Prices for derivatives derive from fluctuations in the prices of underlying assets. These financial securities are commonly used to access certain markets and may be traded to hedge against risk. Derivatives can be used to either mitigate risk (hedging) or assume risk with the expectation of commensurate reward (speculation). Derivatives can move risk levels (and the accompanying rewards) from the risk-averse to the risk seekers. Derivatives are financial contracts, set between two or more parties, that derive their value from an underlying asset, a group of assets, or a benchmark. A derivative can trade on an exchange or over the counter. Prices for derivatives derive from fluctuations in the prices of underlying assets. Derivatives are usually leveraged instruments, which increases their potential risks and rewards. Common derivatives include futures contracts, forwards, options, and swaps.

Question 82

why is debt cheaper than equity?

Answer 82

debt is cheaper bc can maximize return on equity if it works, you are adding ink to the capital structure but if you grow cash flow enough to pay down /service the interest then if you have 5 billion of debt then generating 500M if one 1b pay 10 x for it, so 5 billion of debt and 5 billion of equity, 5 billion of debt at a capital cost of 7% that will be 250 million 350 million a year put debt on it if you can grow cash flow 100 M a year it has to do with in year 3 now generating 600 M of cash flow again and in mean time debt is 5 billion - 1.25 now 3.8 now debt is 3.2 after good year of 600 M EBIDTA now pay 10x worth 13 billion - debt so equity you put in 5 now 85% return is now 96 % by using debt initially you make it riskier but if you do grow at some amount you are almost doubling return to the equity holder no debt 1.4x return if you use debt inc IRR by 50% if it works its great

Question 83

a pull down for example large VC firms/PE have "pull down 10 x the cpaital a small fund will have"

Answer 83

different than management fees pull down means 10x the original equity capital return or term mic applied pulldown of 10 is invested capital 10 x

Question 84

Long term capital bonds ex germany vs italy

Answer 84

concentrate on realtive value trades on bond markets, buy some bonds and sell some others. bet on spreads between bonds to widen or contract if italy's interest rates were significantly higher than in Germany, meaning that Italy's bonds were cheaper than Germany's, bc bonds are opposite interest rates, higher the interst rate, lower bond value they are inversely correlated with interes rates. when rates go up, bond prices fall Anyway so if italy's bonds were cheaper than Germants, and Italy had signifciantly higher interest rates, then a trader who ivnested in Italy and shorted Germany would profit if and as this differential between the bond prices narrowed. this is a relatively low risk strategy bc since bonds usually rise and fall in sync, spreads dont move as much as the bonds themselves! the theory at LTCM was that it would be unaffected if marekts rose or fell or even if they crashed

Question 85

what is a spread:

Answer 85

A spread in trading is the difference between the buy (offer) and sell (bid) prices quoted for an asset. The spread is a key part of CFD trading, as it is how both derivatives are priced. Many brokers, market makers and other providers will quote their prices in the form of a spread.