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SIE LICENSE > Chapter 3 > Flashcards

Chapter 3 Flashcards

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1
Q

Define Amortization:

A

the gradual reduction in the value of an intangible asset

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2
Q

Define collateralized securities:

A

a security that is backed by a specific asset or pool of assets

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3
Q

Define goodwill ( balance sheet item):

A

the value of an asset calculated by taking the difference between the price paid for the asset and its market price

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4
Q

Define intangibles (balance sheet item):

A

Non-physical asset ( copyrights, patents)

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5
Q

Define maturity date:

A

the date a term or dollar bond pays par value, plus the last semi-annual interest payment, or for a serial bond the date the last payment is received

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6
Q

Define P/E ratio:

A

price to earnings ratio, computed by dividing the price per share of a stock by it’s earnings per share, and used to gauge the value of the stock

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7
Q

Define repurchase agreement:

A

Also known as “repo”, a form of short-term borrowing for dealers in government securities

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8
Q

Define treasury bonds:

A
  • Also called treasuries
  • Long-term U.S. government bonds with maturities ranging from 10-30 years.
  • Interest is paid semi-annually and is exempt from state and local taxes
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9
Q

Define yield curve:

A

A graph depicting the relationship between yields on short-term and long-term bonds

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10
Q

Who controls fiscal policy?

A

Fiscal policy is set by the president and congress

- implemented through government spending and taxes

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11
Q

Who controls monetary policy?

A

Monetary policy is set by the federal reserve (central bank of the U.S.)
- consists of actions aimed at influencing the money supply and interest rates

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12
Q

What’s the principal focus of fiscal policy?

A

Stable economic growth and high level of employment

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13
Q

Which is the most volatile of all interest rate from the Federal Reserve Board (FRB)?

A

The federal funds rate

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14
Q

When was the Keynesian theory introduced and by who?

A

It was inroduced during the great depression by an economist by the name of John Maynard Keynes

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15
Q

What is the Keynesian Theory?

A

It’s an economic theory that advocated using fiscal policy to jumpstart the economy to “full employment”.

  • The idea is that if people are out of work, they do not consume or spend money
  • Gov’t responsibility to stimulate the economy to “full employment” by increasing spending
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16
Q

Supply side economics is what?

A
  • The opposite of Keynesian economics
  • The doctrine says that as long as the gov’t does not meddle with the economy, business will take care of itself
  • Stable interest rates, money supply, and low inflation achieved through monetary policy will enable business to drive the economy to full employment
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17
Q

What is the Federal Open Market Committee (FOMC)?

A

It’s the Federal Reserve System’s top monetary policy -making body.

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18
Q

What does monetary policy refer to?

A

Refers to actions taken to influence the money supply and credit inthe economy, which in turn affects the interest rates.

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19
Q

What are the basic tools the FRB uses to control the money supply and attain its monetary pilicy objectives?

A

There are three:

  1. Reserve requirement
  2. Discount rate
  3. Open market operations (OMO)
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20
Q

What is the reserve requirement?

A

An overnight cash reserve that each federal reserve member bank must maintain each night.

  • FRB’s most powerful tool
  • FRB will raise this requirement to tighten the money supply or lower it to increase the money supply
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21
Q

What happens if a member bank is short on the reserve requirement?

A

The member bank must borrow from another bank or borrow from the main federal reserve bank in new york

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22
Q

What is the federal funds rate?

A
  • a short term interest rate
  • The interest rate member banks charge each other for overnight loans in order to maintain their bank reserves at the federal reserve
  • It is the average of all the interest rates charged by member banks for these overnight loans
  • Extremely volatile because it can change overnight
  • It is set by the federeal open market committee.
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23
Q

What is the “discount rate”?

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A
  • Set by the FED
  • This is the rate that the main Federal Reserve Bank charges member banks for loans to meet their overnight reserve requirements
24
Q

What is the term for when a memeber bank borrows from the federal reserve bank at the discount rate?

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A
  • It is said to borrow at the discount window.
  • Borrowing at the discount window is a sign that a member bank is experiencing financial trouble
  • The main federal reserve bank is known as the “lender of last resort”
25
What are open market operations?
- Secondary Market - OMO is the purchase and sale of securities in the secondary market by the central bank to implement monetary policy - It is the most used and most flexible method
26
** When and how does the federal reserve stimulate the economy?**
The federal reserve stimulates the economy by buying bonds in the open market, typically when inflation is low, and the economy is in recession.
27
How would you describe the term "Money Supply"?
- The total stock of money circulating in the economy - This includes ( dollar bills and coins issued by the federal reserve system and U.S. treasury) and deposits held by the public at commercial banks and other depository institutions, susch as thrifts and credit unions.
28
FOMC operations have the greatest impact on M1, the most liquid measure of the money supply. What are the three M's and their meaning?
M1 - Cash and Demand deposits, such as checking accounts M2 - M1 plus savings accounts and some money market funds M3 - M2 plus institutional investments and money markets
29
Explain money market rates?
- Usually slightly higher than fed funds - Banks earn money market rates when they invest on a short-term basis - Money market instruments are highly liquid with very short maturities
30
What are the different types of money market rates?
- Repurchase Agreement (Repo Rate) - Commercial Paper - Bankers Acceptance - Certificate of deposits or CD rates
31
What is commercial paper?
- A type of money market rate - short term, unsecured money market instrument - Issued by big corporations with excellent credit ratings to finance short term credit needs - Maturities range from 30 - 270 days
32
What is bankers acceptance?
A short term fixed rate loan used to finance trade related transactions
33
What are CD's?
CD's are time deposits with a fixed maturity date and fixed interest rate.
34
What is the prime rate?
The interest rate that individual banks charge their most creditworthy commercial borrowers for unsecured loans. - It is the lowest rate for commercial loans - Based on the federal funds rate
35
What is a broker call loan rate or "call loan rate"?
The interest rate that banks charge broker/dealers for money that they lend to margin account investors.
36
What does the term "prime plus" mean?
Means the prime rate plus another percentage that is based on the borrowers credit rating and other factors.
37
Business Economic factors: What are the different financial statements?
1. Balance Sheet 2. Income statement 3. CashFlow Statement
38
What is a balance sheet ?
Provides a snapshot of a companies assets, liabilities, and shareholders equity at a specific point in time
39
What is an Income statement?
Provides a summary of a company's income and expenses over a period of time, usually 1 year
40
What is a cash flow statement?
Shows a company's inflows and outflows of cash over a specified period of time, indicating whether a company can meet its expenses
41
What information is contained on a balance sheet?
1. Assets - Resources that a company owns, such as cash, inventory, accounts receivable, investments, land, buildings, equipment, as well as intangible asstes Assets = Liabilities + shareholders equity 2. Liabilities - Debts owned by a company, for example, money owed to lendors, suppliers, and employees 3. Shareholders Equity - Ownership interest, this is the difference between a company's assets and liabilities. Shareholders Equity = Assets - Liabilities
42
What does the "business cycle refer to ?
Refers to recurring patterns of expansion and retraction in the economy. - AKA Economic Cycle - Useful too for analyzing economy, industries, and companies
43
What are the phases of the business cycle (economic cycle)?
Expansion Peak Contraction Trough
44
Describe expansion phase of the business cycle.
The economy is prospering and growing
45
Describe peak contraction of the business cycle.
- Economic activity is in a decline. | - The economy is considered to be in a recession or contraction period when moving from peak to trough
46
How is a recession defined?
Defined as a decline in gross domestic product that last for 2 consequtive quarters.
47
Define inflation.
Too many dollars chasing too few goods and services
48
Define cyclical industries?
They have regular, pronounced cycles of growth and contraction. Stocks of companies in cyclical industries tend to rise nicely in a rising market, and suffer badly in a falling market. (Large appliances and automobiles, heavy equipment, and airplanes)
49
Define countercyclical industries?
Prosper during economic declines and underperform when the economy is growing strongly. (Pawn shop and asset repossession industries)
50
Define defensive industries?
- Stocks in defensive industries do not experience dramatic growth swings in up markets or declines in weak markets. They tend to have realitively steady performance through all economic phases - They produce basic consumer goods
51
Define growth industries?
- Characterized by rapid development. | - Typically fueled by new technological advances
52
What is the U.S. Balance of Payments (BOP)?
It's an accounting of the country's international transactions over a specified period of time, typicaly a calendar quarter or a year - It represesnts the sum of all transactions between individuals, businesses, and government agencies in the U.S. and the rest of the world - Important Index - Reveals whether a country is a creditor or a debtor and is an indication of a rising or falling currency values
53
What is the gross national product?
GDP + income earned by residents overseas minus earned domesticly by residents from overseas
54
What is the spot exchange rate?
The current market rate used to exchange one currency for another today.
55
Floating currency characteristics?
- Exchange rate determined by supply and demand - Market correts to reflect inflation, other forces - rates fluctuate
56
Pegged/Fixed System characteristics?
- Exchange rate set, maintained by government - Rate pegged to another country's currency - Rates do not fluctuate

SIE LICENSE (3 decks)

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