EXAM 3 (General Terminology) Flashcards by Noelle Smith

Savings for children

Section 529

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What does a Section 529 consist of?

variable annuites & debt issues

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What does Morning Star sell?

They sell stars securities

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Mutual Fund

The investment pool is managed by a manager and there are multiple investors

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Are Mutual Funds liquid?

They are not that liquid

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Do stars have value for mutual funds? And Why?

No, because stars are based on historical risk-adjusted performance which has no relationship to future-adjusted performance

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Do stars have value for stocks?

Yes

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The best predictor of mutual funds performance according to morning star?

Management Operating expense as a percent of net asset value

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Call provision

gives the company the right to buy bonds back at a predetermined price prior to the maturity date

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What is the rule of 72?

How long it takes for an investment to double

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Perpetuity

An annuity in which the cash flows continue forever

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Consol

A type of perpetuity

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Website for why rule of 72 works

www.moneychimp.com

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Relationship between Future rate and Present value

Inverse

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Present Values

The current value of future cash flows discounted at the appropriate discount rate

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Discount

Calculation of the present value of some future amount

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Discount rate

The rate used to calculate the present value of future cash flows

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Website for a downloadable windows-based financial calculator

www.calculator.org

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Website for using Excel for the time value of money and other calculations

www.studyfinance.com

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When is the Call provision exercised?

When the rates drop and the company will refinance

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The Call Provision is at the Advantage and Disadvantage of who?

Advantage - The company
Disadvantage - Investor

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How do companies refinance

By selling new bonds to pay off old bond

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Mortgaging refinancing dropped what percentage?

90%

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YTM

Yield to Maturity

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What is mortgage refinancing?

buying new bonds at a lower rate extinguishing the debt

Will interest rates drop, and is yes or no then why?

Yes because of historical evidence due to recessions in the past

Why did the feds raise the rates

They believed it will slow inflation

Where is the raising price of energy coming from?

Ukraine War & Opec

What is Opec?

Organization of the Petroleum Exporting Countries

What company said they will cut petroleum by 2 million barrels a day?

Opec

Characteristics of a bubble

- everyone is happy - Feds created it - always end badly - interest rates are low

Relationship between rate & price

Inverse

You want a risk-free rate with buying what?

A bond

Credit Risk

liability to pay back what was borrowed, and a lot is based on the financial ratios

What is a Risk Free Rate

Compensation for credit risk and buying the bond

What is a Risk Free rate based on

the treasury bill rate

Why does the treasury have zero default risk?

Because they create the money & raise taxes

TMCC Bonds

Toyota Motor Credit Corporation

Examples of an annuity

- mortgage - car payment

Types of Annuity

- Regular/ Ordinary - Annuity Due

Regular Annuity

series of equal periodic payments

Annuity Due

Due at the beginning of each period

Difference between an Annuity due and a Regular annuity

When the payments are due

Difference between stocks and bonds

Bonds - pays interest (always paid first) Stocks - pays dividends (residual)

Why do people buy stocks?

Fixed interest doesn't change but common stock has room for growth

Relationship between time and rate of discount

direct

1st step to any problem

having the correct table

Market value = Price per share (true or false)

True

What does the Market Value Ratio measure

Deals with market price per share of the stock

What are all the Market Value Ratios

- Price to Earnings ratio - Price to Sales ratio - Market-to-book ratio - EBITDA ratio

EBITDA

Earnings before interest taxes, depreciation, and amortization

What is the Price-Earnings (PE) Ratio

shows how much investors are willing to pay per dollar of current earnings

What does high PE show

shows prospects for future growth

Why PE varies

Differences in the expected future earnings growth

Do we want PE to be low or high

We want it to be low, because price is what you pay, earnings is what you get

Growth rate and PE ratio relationship

direct

Interest rates and PE ratio relationship

inverse

Earning yield

Inverse of the PE and it is the amount you get back per dollar you invest in a stock

Market to book Ratio

Compares the market value of the firm’s investments to their costs (a value of less than 1 could mean the firm has not been successful overall in creating value for its stockholders)

What is M1?

The money supply

Since when has M1 been going down?

March of 2022

M1 annual increase

30%

Why is Inflation coming down?

because M1 is going down

What is the Simplest form of loan?

Pure discount loan

Perpetuities are called what in Canada and the United Kingdom?

consols

About the 2% target inflation rate

- feds came up with it - They said you need to have inflation to favorable growth - 2012

Yield to maturity

How much an investor gets compensated

The YTM has to be higher to compensate for what?

“Risk of Call”

EAR

Effective annual rate

The relationship between PVSS and r

inverse

The relationship between PVSS and t

inverse

The relationship between FVSS and r

direct

The relationship between FVSS and t

direct

What do we mean by discounted cash flow, or DCF, valuation?

calculating the present value of a future cash flow to determine its worth today

Retroactive interest

Interest put on the original payment price even though the amount left to pay off is less at that point

Future value of annuity (fva)

value of periodic payments at the end of a specified period

Net future value depends on 2 factors

- Time (number of periods) - Rate of return

Monetary expansion is the same as what?

quantitative expansion

What are the determinants of interest are

-inflation -credit risk -monetary policy -expanision monetary policy

What do we mean by compound interest? How does is differ from simple interest

Interest on interest is compound, simple interest is interest on the principle

Fun Fact about Wayne

Wayne is a company that went bankrupt because they had debt they couldn’t pay off

2 types of interests rates

- compound - simple

Fun Fact about Benjamin Franklin

- Benjamin Franklin funded student loans - it was in the trust agreement that the money had to be used for student for loans - he set up a trust that stated that for the first 100 years it had to be used for this purpose - he used compound interest

APR

annual percentage rate

EXAM 3 (General Terminology) Flashcards

(84 cards)