Final Review

Question 1

Describe the bank discount yield.

Answer 1

The bank discount yield is equal to face value minus price divided by face value multiplied by 360 over days to maturity.

Question 2

Describe the effective annual yield or EAY.

Answer 2

The effective annual yield is equal to one plus the holding period yield raised to 365 over days to maturity minus one.

Question 3

Describe the money market yield

Answer 3

Take the holding period yield and multiply 360 over days to maturity.

Question 4

Describe how you would calculate a quantile.

Answer 4

Take the number of observations, add one, and multiply by the percentile you are looking for.

Question 5

Describe Chebyschev’s (pronounced Chevy Chev) inequality.

Answer 5

one minus one over k squared

Question 6

When a distribution is negatively skewed, the peak is to the ________ (left or right) and the mean is _________ than the median which is ________ than the mode.

Answer 6

right (tail to the left)

less than

less than

Question 7

A distribution that is Platykurtic, has excess kurtosis that is ________ than 0, and is __________ (more or less?) peaked around the mean

Answer 7

less than

less

Question 8

What is the addition rule (as it relates to probability)?

Answer 8

The probability of A or B is equal to the probability of A plus the probability of B minus the joint probability of AB.

Question 9

What is the Multiplication rule (as it relates to probability) for joint and independent events? Unconditional?

Answer 9

Joint: The probability of AB is equal to the probability of A given B multiplied by the probability of B.

Independent: The probability of AB is equal to the probability of A multiplied by the probability of B.

Unconditional is the same as independent, but is additive.

Question 10

Describe how to calculate portfolio variance.

Answer 10

Variance multiplied by weight squared + 2 multiplied by the weights, standard deviations and correlation.

Question 11

When order does not matter, which labeling method do you use? (nCr or nPr)?

Answer 11

nCr ‘Combination’

Question 12

When order does matter what labeling method is used? (nCr o nPr)

Answer 12

nPr ‘Permutation’

Question 13

What is the difference between nCr and nPr ?

Answer 13

nCr has (n-r)!r! in the denominator vs (n-r)!

Question 14

Describe the binomial formula.

Answer 14

P(x) = nCr multiplied by p raised to the x multiplied by the one minus p raised to the n minus x.

Question 15

Describe the formula for calculating Z scores.

Answer 15

hypothesized value minus population mean divided by standard deviation. ( X - mu) / std dev

Question 16

When the distribution is normal, variance is known, and population is either small or large what test statistic is used?

Answer 16

z

Question 17

When the distribution is normal, variance is unknown, and population size is either small or large what test statistic is used?

Answer 17

t

Question 18

When the population is non-normal, variance is known, and the population size is large, what test statistic is used?

Answer 18

z

Question 19

If the distribution is non-normal, variance is unknown, and population is only large, what test statistic is used?

Answer 19

t

Question 20

Describe the t statistic.

Answer 20

the test statistic is x bar minus mu not over standard error. OR sample mean reduced by hypothesized mean divided by standard deviation over square root of n

Question 21

Describe the Chi Squared calculation.

Answer 21

Chi Squared is equal degrees of freedom (n-1) multiplied by sample variance, divided by hypothesized variance

Question 22

Describe the F test.

Answer 22

Largest variance divided by smaller variance

Question 23

What makes an equilibrium stable or unstable?

Answer 23

An equilibrium is stable if supply cuts the demand line from above.

Question 24

Describe how Elasticity of Demand is calculated?

Answer 24

Is the ratio of % change in Q over % change in P.

Question 25

Describe how the Elasticity of Demand ratio is interpreted for Normal Goods, Inferior Goods, and Luxury Goods.

Answer 25

Normal Goods: > 0 Inferior Goods: < 0 Luxury Goods: > 1

Question 26

Describe ho the Crossprice Elasticity ratio is interpreted for Substitutes and Complements.

Answer 26

Substitutes: > 0 Complements: < 0

Question 27

Describe the following abnormal Goods: Veblen & Giffen

Answer 27

Veblen: higher prices increase demand Giffen: Negative Income effect > positive substitution

Question 28

What is the difference between accounting profit and economic profit?

Answer 28

Implicit Costs (or equity compensation)

Question 29

Describe the fundamental equation. S is equal to .....

Answer 29

S = I + (G-T) + (X-M) *Savings are either funded from the deficit or a trade surplus.

Question 30

What are the components of Economic Growth?

Answer 30

= Growth in Total Factor Productivity + Growth in Capital + Growth in Labor

Question 31

Describe Growth in per capita potential GDP.

Answer 31

=Growth in Technology + Growth in Capital to Labor ratio

Question 32

Describe the three different CPI Indexes Laspeyres, Paasche, and Chained.

Answer 32

Laspeyres: basket wt. from a base period Paasche: basket wt from current period Chained: geometric mean of two

Question 33

Describe the fiscal multiplier.

Answer 33

The fiscal multiplier is one over 1 minus MPC times one minus the tax rate.

Question 34

How would you calculate the real exchange rate?

Answer 34

Nominal (d/f) x CPI foreign / CPI Domestic

Question 35

Describe how you would find the no-arbitrage forward exchange rate.

Answer 35

Forward (a/b) / spot (a/b) = ia / ib

Question 36

Describe the process for finding the breakeven production quantity.

Answer 36

The breakeven quantity is when your contribution margin covers your fixed costs. BEQ = FC / (ASP - VC)

Question 37

Describe the winners and losers of tariffs.

Answer 37

Winners: domestic producers & governments Losers: Domestic consumers

Question 38

How is inventory reported under IFRS?

Answer 38

1. Lower of cost or NRV | 2. Can write down or up (only to cost)

Question 39

How is inventory reported under GAPP?

Answer 39

1. Lower of cost or market (replacement cost) | 2. Can write down but not up

Question 40

Describe Degree of Operating Leverage.

Answer 40

DOL = % chg EBIT / % chg Sales OR | Sales - Var Cost) / (Sales - Var Coast - Fixed

Question 41

Describe the Degree of Financial Leverage

Answer 41

DFL = % chg Net Income / % chg operating income OR (Sales - Var Cost - Fixed) / Sales - Var Cost - Fixed - Interest

Question 42

Describe the Degree of Total Leverage

Answer 42

DTL = DOL x DFL OR % chg Net Income / % chg number of units sold OR (Sales - Var Cost) / (Sales - Var Cost - Fixed - Interest)

Question 43

Describe the kinked demand model applicable to oligopolies.

Answer 43

Competitors will match a price below but not above. Thus, the demand curve is more elastic above and less elastic below.

Question 44

Describe the LIFO conformity rule under US GAAP and what it means for US LIFO reporters book and tax records.

Answer 44

The LIFO conformity rule requires US companies to use LIFO for financial reporting if they also use LIFO for tax purposes.

Question 45

When prices are rising and inventory quantities are stable or increasing: LIFO results in what four things? (higher/lower) COGS (higher/lower) Gross Profit (higher/lower) Inventory Balances (higher/lower) inventory turnover

Answer 45

1. Higher COGS 2. Lower Gross Profit 3. Lower Inventory balances 4. Higher Inventory Turnover

Question 46

When prices are rising and inventory quantities are stable or increasing: FIFO results in what 4 things? (higher/lower) COGS (higher/lower) Gross Profit (higher/lower) Inventory Balances (higher/lower) inventory turnover

Answer 46

1. Lower COGS 2. Higher Gross Profit 3. Higher Inventory Balances 4. Lower Inventory Turnover

Question 47

(FIFO/LIFO) is the best inventory cost method for balance sheet purposes because it more accurately reflects the current cost of inventory.

Answer 47

FIFO

Question 48

(FIFO/LIFO) is the best cost flow method for the Income Statement COGS because it reflects the most current prices into the Cost of Goods Sold.

Answer 48

LIFO

Question 49

Under IFRS, inventories are carried at the lower of ________ or __________. Inventory write-ups (are/are not) allowed.

Answer 49

Lower of Cost Net Realizable Value are allowed: only to the extent they reverse a previous writedown.

Question 50

Under US GAAP, inventories are carried at the lower of _____ or ________. Market = replacement cost, but can not exceed net realizable value. OR be less than NRV - profit margin.

Answer 50

Lower of Cost Market NRV (remember to net selling cost) Market NRV - Profit Margin

Question 51

Under IFRS, inventories are carried at the lower of ________ or __________. Inventory write-ups (are/are not) allowed.

Answer 51

Lower of Cost Net Realizable Value are allowed: only to the extent they reverse a previous writedown.

Question 52

Under US GAAP, inventories are carried at the lower of _____ or ________. Market = replacement cost, but can not exceed net realizable value. OR be less than NRV - profit margin.

Answer 52

Lower of Cost Market NRV Market NRV - Profit Margin

Question 53

EBITDA Coverage (Leverage Tolerance) = ?

Answer 53

EBITDA / Interest Expense

Question 54

Describe the Fixed Rate Payer Calculation.

Answer 54

The fixed rate payer = (Swap Fixed Rate - LIBOR) x (# days / 360) x notional

Question 55

In an arbitrage trade, two general conditions are present. 1. There (is/is not) risk. 2. There (are/are not an initial investment.

Answer 55

An arbitrage trade has NO RISK and requires NO INITIAL INVESTMENT.