Week 2 ch. 2,3,11,12,13

Question 1

Solvency Ratio

Incorporates only balance sheet

Answer 1

Total Asset / total debt

Higher the better

Question 2

Liquidity ratio (current ratio)

Incorporates both balance sheet and income statement

Answer 2

Liquid assets / monthly expenses

Higher the better

Question 3

Savings Ratio

Incorporates inc statement

Answer 3

Savings per year / annual gross income

Goal 8-20% depending on age, higher the better

Question 4

Debt service ratio

Incorporates only income and Exp statement

Answer 4

Total monthly loan payments / monthly gross pre tax income

Goal is 30% or lower, lower the better

Question 5

Investing vs speculating

Answer 5

Investing involves predictability and stability with a level of return

Speculation is a buy/sell with a higher level of future uncertainty

Question 6

What’s the #1 reason for investing?

Answer 6

Retirement!

Question 7

Unsystematic vs systematic risk

Answer 7

Unsystematic- can be diversified away. (Industry specific- labor strikes, poor mgt, preferences.)

Systematic- can not be diversified away (economy, politics, sociological.)

-systematic is usually high in producing raw materials and insutrial goods.

Question 8

Types of unsystematic risk

Answer 8

• accounting risk
• additional commitment risk
• business risk
• country risk
• default risk
• event risk
• financial risk
• government/Regulatory risk

Question 9

Types of systematic risk

Answer 9

• Purchasing power/inflation risk
• pre-investment risk
• interest rate risk
• market risk
• exchange rate risk

Question 10

Acronym for systematic risk

Answer 10

P.R.I.M.E.

Question 11

Liquidity

Answer 11

Ability to readily convert an inv to cash, without risk of loss on principal

Question 12

Marketability

Answer 12

Degree to which there is an active market, there may be loss of principle.

Question 13

Book value

Answer 13

Assets - liabilities and preferred stock

Usually below Mkt value

Question 14

Market value

Answer 14

Mkt P per share X # of outstanding shares.

Question 15

Net profit margin

Answer 15

Net profit divided by sales

Question 16

Earnings per share

Answer 16

Preferred dividend - after tax earnings
—————————————————-
# of outstanding common shares

Question 17

P/E ratio

Answer 17

Mkt price per share / company earnings per share

Question 18

Beta

Answer 18

Indicates price volatility to the Mkt.

S and P is 1.0

Lower is less volatile, higher is more volatile.

Question 19

Conversion value

Answer 19

Conversion ratio X current market price

Question 20

Safest and most secure bond options?

Answer 20

Treasuries and GNMA are backed by full faith and credit of US Gov

Question 21

Formula for calculating tax equivalent yield to a municipal

Answer 21

Muni’s interest rate
—————————
1- there tax bracket

Ex. Comparing a 6% muni while in a 39% tax bracket

.06
—- = .993 or 9.93% tax equivalency
1-.39

Question 22

Current yield

Answer 22

Annual interest income
———————————
Market price of a bond

Question 23

Bid-Ask

Answer 23

Bid- highest offered price to purchase a security
Ask- lowest price a security is offered to sell

Investor pays the ask price when buying and receives the bid price when selling.

Question 24

NAV (net asset value)

Answer 24

Current price of fund assets - liabilities
——————————————————-
# of outstanding shares

Question 25

Medical expenses and dental.. when are they deductible?

Answer 25

They can be included as itemized deductions only after they exceed 7.5% of AGI