Final Flashcards
(153 cards)
1
Q
Income Statement steps
A
net sales cogs gross income ops exp ebit interest ebt income tax net profit
2
Q
How long are short term interest rates
A
security rates less than one year
3
Q
How long are long term interest rates
A
security rates greater than one year
4
Q
Who sets short term interest rates
A
The Fed
5
Q
Who sets long term interest rates
A
by the bond market based on expectations of inflation
6
Q
define interest
A
the cost of borrowing money
7
Q
define spread
A
difference between 2 interest rates
8
Q
define basis point
A
one hundredth of a percentage point (bips)
9
Q
define money market securities
A
debt securities maturing in less than one year
10
Q
define risk
A
uncertainty about the outcome
11
Q
define inflation
A
an increase in prices over time
12
Q
define real
A
value adjusted for inflation
13
Q
what is the length of time for interest accrual payment
A
standard is a year
14
Q
do interest rates change over time?
A
yes
15
Q
define bonds
A
debt securities with an original maturity greater than one year
16
Q
define common stock
A
equity securities
17
Q
what is the CPI and who releases it
A
consumer price index measures inflation at the store / the government
18
Q
what is PPI and who releases it
A
product price index measures inflation at the middleman level - between manufacturers and sellers eludes to what consumer price will be / the government
19
Q
how does demand increase interest rates
A
more demand, less supply, rates goes up
20
Q
what is core CPI and who releases it
A
CPI minus food and energy / the government
21
Q
what is a debt security
A
bonds
22
Q
what is an equity security
A
stocks
23
Q
positive real interest rate
A
interest rate is greater than inflation rate
24
Q
negative real interest rate
A
interest rate is less than inflation rate
25
risk return trade off
the greater the risk the greater the potential return
26
what are investors to risk
risk averse, must be compensated for them to invest
27
3 types of yield curves
short, intermediate, long
28
flattening of yield curve
a decrease in the difference between maturity rates
29
steepening of yield curve
an increase in the difference between maturity rates
30
what does a negative yield curve signify
a recession
31
alt name for yield curve
term structure of interest rates
32
what is a flat yield curve
interest rates remaining the same regardless of maturity length
33
what is a negative yield curve
when short term interest rates are higher than long term
34
what is nominal rate
total rate, with inflation, doesn't differentiate what you're earning compared to inflation
35
positive real interest rate
interest rate is greater than inflation
36
negative real interest rate
interest rate is lower than inflation
37
difference between nominal and real risk free rate
US Treasuries use nominal risk free, meaning that it is a risk free investment but without adjustment for inflation
38
Types of US debt securities
bills - less than 1 year
notes - 2-10 years
bonds - 10+ years
39
examples of default risk
a borrower failing to pay, an institution going bankrupt
40
alternate name of default risk
credit risk
41
default risk
possibility that the borrower may not be able to make scheduled interest or principal payments
42
why are US securities the safest
can just increase taxes to pay for it and never go bankrupt
43
inflation premium
average projected annual inflation rate over the life of the investment.
44
liquidity risk
how easily something is able to be converted to cash, greater the longer it has until maturity
45
maturity risk behavior
bond price fluctuation due to interest rates is weaker the closer it gets to maturity
46
interest rate risk
the amount prices change due to interest rates
47
do risk premiums remain constant over time
no, can change
48
risk premium
measures the minimum amount of return required for investors
49
what do bond ratings measure
measure of the borrowers ability to repay creditors
50
2 bond ratings agencies, are they government
Moodys
Standard and Poors
no
51
can bond ratings change over time
yes
52
cut off of investment vs junk bond ratings
BBB- is the lowest investment grade
53
alternate names for junk bonds
high yield / speculative
54
what does S&P mean
Standard and Poors
55
what kind of securities are bonds
debt, long term
56
difference between debt and equity securities
debt is an instrument to get money, equity a claim of ownership,
57
which financial statement tells if bonds have been issued
balance sheet
58
par value corporate bond
1000
59
can par value change over time
no
60
coupon rate
rate of interest that a bond pays on its par value
61
par value
the amount issuers agree to repay upon maturity
62
alt name for par value
principal value / maturity value / face value
63
how do interest rate changes relate to value
market value is inversely related to interest rates
64
type of capital bond holders provide to issuer
debt
65
two reasons why bond market value changes
bond rating and coupon rate
66
what component of total return is interest
income
67
what is total return
combination of income and growth for investments
68
municipal bond differences
interest they pay is federal income tax-free to investors
69
secured bond
bond back with collateral (mortgage)
70
unsecured bond (name)
debentures
71
zero-coupon bonds
pay no interest but are issued at a significant discount
72
convertible bonds
may be exchanged for the issuer’s common stock, at the bondholder's option
73
when can a callable bond be called since issue
may be redeemed at the issuer's option prior to maturity
74
refunding operation
paying off old high interest bonds with new lower interest rate bonds
borrowing money to pay off a debt that has a higher interest rate
75
who does the call feature favor
borrowers, allows ability to pay less interest on low new bonds
76
who does call protection period favor
investor
77
reinvestment rate and risk
putting money from one investment to another is riskier, but generally pay higher interest
78
call premium
an amount above the par value that is paid to the bondholders if called
79
alt names for fundamental value
intrinsic / theoretical
80
required rate of return
minimum amount of return required for investors to invest
81
yield to maturity
compound annual total return you would earn if you hold the bond until it matures
82
what components does YTM measure
income and growth, covers all of total return
83
what does YTM reflect/indicate
current market rate of interest of similar rated bonds
| indicates investors' required rate of return for the bond
84
what variable is YTM for Vbond
i
85
discounted cashflow analysis
calculates present value of expected future cashflows
86
do you use YTM or coupon rate to determine interest payment of a bond
coupon rate
87
do you use YTM or the coupon rate for interest rate when calculating Vbond
YTM
88
interpretations of the results of Vbond
| interpret Vbond
if you invest x today and recieve i yearly with an end result of v you must invest y today
89
current yield of a bond formula
annual coupon interest in $ / current market price of the bond
90
how to calculate Vbond with semi annual payments
divide total Vbond by half
91
what does it mean to interpret
write out sentences explaining what happened
92
Yield to call (YTC)
compound annual total return assuming the bond is called on the next call date
93
2 things that YTC reflects
current market rate of interest for the callable bond
the required return for the callable bond
both also include similarly rated bonds
94
what variable is YTC used for for V callable bond
i
95
call premium formula
call price - par value
96
yield to maturity formula
1
97
when should an investor expect to earn YTC or YTM
1
98
if coupon rate is lower than market rate,
1
99
when are callable bonds called
when interest rates drop
100
Corporate Charter / Articles of Incorp.
Registered with the secretary of state, establish the existence of a corp in the US outlining objectives
101
Authorized Stock
max shares a corp is allowed to issue, stated in articles of incorp
102
Issued Stock
The amount of shares registered and either held in treasury or sold
103
Treasury Stock
Stock not sold or sold stock bought back
104
Pre-emptive Right
Clause to buy new shares first to maintain percentage owned
105
formula for shares outstanding
issued shares - treasury shares
106
Corporation
a legally incorporated business entity, owners are shareholders
107
Incorporation
the process of becoming a business entity
108
Company
a business whose owners are members of the business, not legal entity
109
what type of capital is common stock
equity
110
dividend
distribution of earnings to shareholders
111
how often are stock dividends paid
quarterly
112
which shares do not receive dividends
treasury
113
what rate is Tbill
nominal risk free
114
how is market risk affected when there is higher perceived risk
goes up
115
Beta
how risky an investment is
116
Beta of a portfolio
multiply percentage owned times beta then add together
117
TTM
trailing 12 months
118
proceeds
the amount you receive from selling something
119
Dividend discount model variables
| Present future value of all dividends
P0 = D1/rs-g
P0 = V at time 0
D1 = dividend at end of year 1
(dollar amount + growth rate ^ # terms)
rs = required rate of return on the stock (expected return)
g = annual growth rate
120
goal of financial management steps
max present value of companys expected future free cashflows
max value of common stock
max wealth of business owners
121
alt names for shareholder wealth
shareholder value /
122
alt names for EBIT
earnings before interest and tax / operating profit
123
2 variables that impact free cashflow
EBIT and Tax Rate
124
Value of a firm
PV of expected future cashflows
125
V Firm Formula
Freecashflow 1 / (1+WACC)^1 + FCF 2 / (1+WACC)^2 + etc
126
WACC
Weighted Average Cost of Capital
127
WACC meaning
weighted average of the required returns on the corps securities
128
2 variables that impact Vfirm
freecashflow / WACC
129
how do variables impact value of the firm
if FCF goes up V goes up
| if WACC goes up V goes down
130
which security is riskiest to invest in
common stock
131
which security is least risky to invest in
bonds
132
capital budget
used to determine which long term investments are worth pursuing
133
optimal capital budget
amount of investment toward goals that optimizes shareholder investment
134
capital rationing
placing a limit on the amount of new projects undertaken by a company
135
independent project
funding of one project does not affect another
136
NPV formula
Cash Flow / (1+i)^t - initial investment
i = rate
t = periods
137
accept or reject a project based on IRR
internal rate of return
138
MIRR
Modified internal rate of return
139
2 types of equity capital
shareholder equity
| paid in capital
140
role of board of directors
protects the interests of the shareholders
| consists of execs, large shareholders, officers
141
3 uses for free cashflow
Distribute dividends
Buy back stock
pay off debt
142
expenditure
a cash outflow, but not an expense
143
goal of financial management
maximize wealth of stockholders
| max value of stock/company
144
benchmark
ratios used for industry standards
145
gross margin
gross profit/net sales
146
net profit margin
net income/net sales
147
leverage
potential increase on investment returns
decreases amount owners must invest
increases risk
148
common equity
the amount that all the investors have put into the company
149
calculate interest
Principle * interest * fraction of a year
150
calculate return in dollars
amount received - amount invested
151
calculate return in %
Return in $ / amount invested
152
ordinary annuity
payments at the end of each period
153
annuity due
payments at the beginning of each period
