Finance Flashcards
(94 cards)
1
Q
Quantitative easing
A
a tool that central banks can use to inject money directly into the economy to boost spending and investment in the economy
2
Q
What is the current interest rate in the UK?
A
The current bank rate is 0.1%.
3
Q
What happens if the Bank of England increases the interest rate?
A
Generally, a rise in the Bank rate is good for the UK’s savers and bad for borrowers - but the reality is a bit more nuanced.
Banks may not necessarily pass on any rise to their savers.
Those with variable-rate mortgages will likely see their monthly payments go up.
4
Q
Bull market
A
a market that is on the rise and where the economy is sound
5
Q
Bear market
A
a market in an economy that is receding, where most stocks are declining in value
6
Q
More dangerous to invest in- bear or bull market?
A
Bear because many equities lose value and prices become volatile
7
Q
Securities in a bull market
A
Strong demand, weak supply
Share prices will rise as investors compete to obtain available equity
8
Q
Securities in a bear market
A
Strong supply, weak demand
Drop in share prices
9
Q
Defensive stocks
A
stocks whose performance is only minimally impacted by changing trends in the market (e.g. utilities that are often owned by the government)
10
Q
Short selling in a bear market?
A
Investors may benefit by profiting from falling prices.
11
Q
Market capitalization
A
The market’s valuation of the company’s equity
Share price x Number of shares
12
Q
Shares versus Bonds
A
Both are traded securities.
Shares: part owner of the company (equity)
Bonds: part lender to the company (debt)
13
Q
How can a company raise money?
A
- Debt: loans, bonds
2. Equities: shares
14
Q
Security
A
something that can be bought/sold that has some type of claim on something, or some type of economic value
15
Q
Bond certificates
A
face/par/stated value to be paid at maturity (principle): essentially an IOU from a company
annual coupon = interest, usually paid semi-annually
To get a quote on a bond, you need BB terminal
16
Q
Short-selling / shorting stock
A
Betting that a stock will go down, borrowing the stock from a broker, selling it on the market while the price is still high, waiting until the price goes down, and then buying it back (“covering”). Then return the share to the owner and keep the surplus.
17
Q
Normal aim when trading stocks vs aim when shorting
A
Normal: Buy low, sell high
Shorting: Sell high, buy low
18
Q
Why is shorting riskier than simply buying and owning a stock?
A
When I buy a stock, the most I can lose is what I’ve paid for it, if the company goes bankrupt and the value of the stock goes down to zero.
If I short a stock, my losses can be infinite if share prices go up instead of down like I expect them too.
19
Q
What is the effect of shorting on the market?
A
Successful short-sellers reduce stock price volatility, so as long as none of the traders are manipulating the market, it can have a positive effect. Unsuccessful short-sellers increase stock price volatility.
Also, short-sellers are incentivized to uncover shady info on companies.
20
Q
Profit/Income
A
Revenue - COGS = Gross Profit
- Business Expenses = Operating Profit
- Financial Expenses = Pre-Tax Income
- Tax = Net Income
21
Q
Which is better- low P/E or high P/E?
A
All else equal, the lower the P/E, the less you’re paying. So you want a lower P/E to get the same earnings at a lower price. You make $1 for every $(P/E) paid.
22
Q
How to use P/E?
A
- Price to earnings ratio is a relative valuation to use for companies in the same industries.
- Think about the future: if company is low-risk and expected to grow you might accept a higher P/E ratio.
- Check if the companies you’re comparing are capitalized differently as this can impact P/E ratio.
23
Q
Enterprise value
A
= Market Capitalization + Debt - Cash
Captures the assets that are actually generating the operating profits.
24
Q
Enterprise Value / EBITDA
A
a valuation metric relative to other companies in the industry
25
IPO
Initial public offering, turns shares liquid
Syndicate manages IPO: goes to brokerage clients to ask if they are interested, get a feel for demand, determine share price.
Banks get typically 7% commission.
Shares are sold directly from the company to the buyers.
26
Secondary market
Buying securities from other traders (e.g. as opposed to buying shares from a company directly like in an IPO)
27
Syndicate
Group of banks working together on a large transaction to spread the risk
28
Private firms can sell shares to...
venture capitalists, private equity firms
29
Derivative
securities that derive their value from an underlying asset or benchmark (e.g. futures contracts, forwards, options, and swaps)
The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset (e.g. stocks, bonds, interest rates).
30
Corporate debt versus traditional mortgages
With a traditional mortgage, the person makes monthly payments to pay back interest and principle (as owed principle goes down, proportion of payment going to interest goes down).
With corporate debt, companies pay only interest until the very end when the entire principle is due at once.
31
Treasury bill/notes/bonds
IOU from the government (principle + annualized interest)
Bill: 3 months - 1 year
Note: 1 year - 10 years
Bond: 10+ years
32
Yield curve
A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.
33
If interest rates go up, bond prices...
...go down because on the open market buyers can get higher interest rates for equivalent risk, so to buy a bond with a lower interest rate they're not willing to pay as high a price.
34
If interest rates go up, bond... (fancy words)
... would trade at a discount to par.
35
If interest rates go down, bond prices...
...go up because on the open market buyers can get only lower interest rates for equivalent risk, so to buy a bond with a higher interest rate they're willing to pay a higher price.
36
If interest rates go down, bond... (fancy words)
... would trade at a premium to par.
37
If treasury prices go up, yield...
goes down.
38
An inverted treasury yield curve is an indicator of...
a recession.
39
Open-end fund
An open-end fund is a diversified portfolio of pooled investor money that can issue an unlimited number of shares. The fund sponsor sells shares directly to investors and redeems them as well (active management).
40
Closed-end fund
A closed-end fund is a portfolio of pooled assets that raises a fixed amount of capital through an initial public offering (IPO) and then lists shares for trade on a stock exchange (active management).
41
Exchange Traded Fund (ETF)
a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index
- a basket of securities that trade on an exchange, just like a stock
- share prices fluctuate all day as the ETF is bought and sold
- passively managed
- track market indexes
42
Mutual Fund
a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets
- diversified
- professionally managed
43
Net asset value (NAV)
equal to a fund's or company's total assets less its liabilities
- commonly used as a per-share value calculated for a mutual fund, ETF, or closed-end fund
44
Hedge Fund
financial partnerships that use pooled funds and employ different strategies to earn active returns for their investors
- funds may be managed aggressively or make use of derivatives and leverage to generate higher returns
- not SEC-regulated, only accredited investors have access
- fund manager gets cut of the profit, usually about 20% (and 2% management fee)
45
Long Position
the buying of a stock, commodity, or currency with the expectation that it will rise in value
46
Venture Capital
a type of private equity: funding provided to companies and entrepreneurs
47
Private Equity
an alternative form of private financing, away from public markets, in which funds and investors directly invest in companies or engage in buyouts of such companies
- Private equity firms make money by charging management and performance fees from investors in a fund.
48
Leveraged Buyout (LBO)
the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition
- usually a ratio of 90% debt to 10% equity
49
Call option
an option contract giving the owner the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time
50
Put option
a contract giving the owner the right, but not the obligation, to sell–or sell short–a specified amount of an underlying security at a pre-determined price within a specified time frame
51
Underlying Security
stock, index, bond, interest rate, currency, or commodity on which derivative instruments, such as futures, ETFs, and options, are based
52
Strike Price
the set price at which a derivative contract can be bought or sold when it is exercised
- For call options, the strike price is the price at which the security can be bought by the option holder
- For put options, the strike price is the price at which the security can be sold.
53
Put-Call Parity
shows the relationship that has to exist between European put and call options that have the same underlying asset, expiration, and strike prices
- the price of a call option implies a certain fair price for the corresponding put option with the same strike price and expiration (and vice versa)
54
Forward Contract
a customized contract between two parties to buy or sell an asset at a specified price on a future date.
55
Long Straddle
an options strategy involving buying both put and call options to profit from big, unpredictable moves
56
Arbitrage
a type of trade in which a security, currency, or commodity is nearly simultaneously bought and sold, in different markets
57
FX
Forex is the marketplace where various national currencies are traded. The forex market is the largest, most liquid market in the world, with trillions of dollars changing hands every day. There is no centralized location, rather the forex market is an electronic network of banks, brokers, institutions, and individual traders (mostly trading through brokers or banks).
58
Fixed income
```
a class of assets and securities that pay out a set level of cash flows to investors, typically in the form of fixed interest or dividends
- at maturity for many fixed income securities, investors are repaid the principal amount they had invested in addition to the interest they have received
```
59
Most common types of fixed-income products
Government and corporate bonds
60
Commodities
basic goods used in commerce that are interchangeable with other goods of the same type
61
Traditional examples of commodities
grains, gold, beef, oil, and natural gas
62
Why use commodities to diversify portfolios?
Because the prices of commodities tend to move in opposition to stocks, some investors also rely on commodities during periods of market volatility.
63
Commodities Exchange
a legal entity that determines and enforces rules and procedures for trading standardized commodity contracts and related investment products
- commodities exchange also refers to the physical center where trading takes place
64
How does trading at the commodities exchange work?
Traders rarely deliver any physical commodities through a commodities exchange. Instead, they trade futures contracts, where the parties agree to buy or sell a specific amount of the commodity at an agreed upon price, regardless of what it currently trades at in the market at a a predetermined expiration date. The most traded commodity future contract is crude oil.
65
Forward Contract
a customizable derivative contract between two parties to buy or sell an asset at a specified price on a future date (e.g. apple farmer and apple pie shop agree to a sale of 1 million lbs at harvest for $0.20 per lb)
66
Does a forward contract sell on an exchange?
No, they are considered over-the-counter (OTC) instruments.
67
Futures Contract
financial derivatives that oblige the buyer to purchase some underlying asset (or the seller to sell that asset) at a predetermined future price and date
- allow an investor to speculate on the direction of a security, commodity, or a financial instrument, either long or short, using leverage
68
Do futures contract sell on an exchange?
Yes, they are standardized.
69
Contango
when it's cheaper to buy a commodity on the spot market than it is to agree to buy it at a future date with a futures or forward contract
- futures prices will usually converge toward the spot prices as the contracts approach expiration
- advanced traders can use arbitrage and other strategies to profit from contango
70
Short Straddle
when traders sell a call option and a put option to profit from an underlying lack of volatility in the asset's price
71
Hedging
a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset
- The reduction in risk provided by hedging also typically results in a reduction in potential profits.
- Typically involves derivatives, such as options and futures contracts.
72
Derivatives Examples
options, futures contracts
73
Mortgage-Backed Security (MBS)
an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them
74
Asset-Backed Security (ABS)
an investment security—a bond or note—that is collateralized by a pool of assets, such as loans, leases, credit card debt
75
Collateralized Debt Obligation (CDO)
complex structured-finance product that is backed by a pool of loans and other assets
- split into three tranches: senior (lowest risk, lowest interest), mezzanine, and junior (highest risk, highest interest)
76
The higher a bond's rating, the [ x ] the interest rate it will carry, all else equal.
lower
77
When rating a bond, look at...
- entity’s ability to pay their bills and remain liquid
(firm's balance sheet, profit outlook, competition, and macroeconomic factors)
- bond's future expectations and outlook
78
Hedging example
An oil company or producer uses futures contracts to essentially fix or lock in a price for a certain volume of oil the group expects to deliver during a set time period. Thus, when the price of oil drops significantly, hedging gives companies and producers some protection against losses. However, it can also include risk — if the price of oil soars, companies and producers may lose money.
79
Volatility
a measure of the rate of fluctuations in the price of a security over time
- indicates the level of risk associated with the price changes of a security
80
Historical Volatility
This measures the fluctuations in the security’s prices in the past. It is used to predict the future movements of prices based on previous trends. However, it does not provide insights regarding the future trend or direction of the security’s price.
81
Implied Volatility
This refers to the volatility of the underlying asset, how the marketplace views where volatility should be in the future.
82
Historical Volatility calculation
average deviation from the average price of a financial instrument in the given time period
83
Implied Volatility use
one of several components of the Black-Scholes formula, a mathematical model that estimates the pricing variation over time of financial instruments, such as options contracts
84
Black-Scholes formula
a mathematical model that estimates the pricing variation over time of financial instruments, such as options contracts
85
Inputs of the Black-Scholes formula
```
implied volatility
market price of the option
underlying stock price
strike price, the time to expiration
risk-free interest rate
```
86
What is the Bank Rate?
- determines the interest rate paid to commercial banks that hold money with the Bank of England
87
Effects of the Bank Rate
- influences the rates those banks charge people to borrow money or pay on their savings
“If Bank Rate changes, then normally banks change their interest rates on saving and borrowing.”
88
Why would the Bank of England cut interest rates?
to lower the cost of borrowing and therefore encourage spending.
89
Stock Split
a corporate action in which a company increases the number of its outstanding shares by issuing more shares to current shareholders
90
The primary motive of a stock split is...
to make shares seem more affordable to small investors.
91
Blue chip
an established, stable, and well-recognized corporation
- typically seen as a safer investment
- used in indices such as FTSE 100, Dow Jones, etc.
92
FTSE 100 is composed of...
blue-chip stocks listed on the London Stock Exchange
93
Alpha
a strategy's ability to beat the market (i.e. "excess return")
- active return on an investment
- measure of performance in finance
94
Rebalancing
In portfolio management, the act of adjusting portfolio asset weights in order to restore target allocations or risk levels over time.
- can be calendar-based, corridor-based, etc.
