Series 65 - Part 2

Prime Rates

Set by the BANKS not the fed

Price to Book Ratio

The price-to-book-value ratio is calculated by dividing the price per share by the stockholders' equity per share. This ratio shows the relationship between a company's stock price and the company's book value.

Before reaching the bottom (the trough), the business cycle is in the contraction phase.

graph to show this?

U.S. Treasury bond Risk

inflation risk. purchasing power risk. reinvestment risk. NO LIQUIDITY RISK

central tendency

mean, median, mode

Internal Rate of Return

the discount rate at which the net present value of an investment project is zero; the rate of return of a project over its useful life -Reflects YTM - TVM uses -IRR is the rate of interest that equates the initial investment with the present value of future cash flows; it is the rate of return that results in an investment having a net present value of 0.

Supply-side economics

the theory of Arthur Laffer, who believed that heavy taxing and government intervention have a negative effect on the economy.

Defensive Stock

A defensive stock maintains future earnings that are likely to withstand an economic downturn. Typical examples are stocks of those firms that supply basic consumer necessities such as foodstuffs. A stock selling at an extremely high PE ratio is indicative of a speculative company or one that can decline in value rapidly.

This is the basic approach of top-down analysis - start with the "big picture" and narrow it down to the most attractive individual stocks.

A securities analyst's approach is to look at the overall economy and try to forecast which industry will outperform. Then, the analyst searches for those individual companies within that industry that appear to have the best expected return and add those to their recommended list. In so doing, this analyst is using the

Alpha

Alpha is the difference in the expected return of the portfolio, given the portfolio's beta and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns. The risk of the portfolio associated with the macroeconomic factors that affect all risky assets is systematic risk. The portfolio's average return in excess of the risk-free rate divided by the standard deviation in returns of the portfolio is the Sharpe ratio or measure. The measure of the variance in returns of a portfolio around its average return is the standard deviation. -alpha = (actual return − risk-free rate) - (beta × [market return − RF])].

Bottom up analysis

Bottom-up analysis starts by attempting to find superior performing companies, regardless of the industry. Those analysts believe that these companies will provide attractive returns even if they are in an industry sector that is in a negative position in the economic cycle.

Current Ratio

Current Assets/Current Liabilities. Current assets include cash, accounts receivable, and inventory. Current liabilities include accounts payable, wages payable, dividends payable, and short-term debt. Equipment is a fixed asset, and shareholders' equity is net worth.

Contraction - Downturn in business cycle

Downturns in the business cycle (a contraction) tend to be characterized by rising inventories due to a lack of consumer demand.

Expansion and Recovery

During expansion or recovery, demand is high and goods are less likely to remain in inventory.

Expansion

Expansions in the business cycle are characterized by increasing consumer demand for goods and services, increasing industrial production, and rising stock markets and property values. Simply stated, business activity is expanding.

Trade Defecit

Imports > Exports

Monetarist Theory

Monetarists believe that the economy and inflation are best controlled through the management of the money supply rather than through fiscal policy stimulation.

EPS

NI-Div/# sh outstanding

Inertial inflation

Tendency of an inflation rate to remain constant or consistent unless there is a demand shock or supply shock.

8-K

The Form 8-K is used to report significant events that could affect the price of the company's stock. The SEC does not consider a relocation of a subsidiary to be of significant magnitude. -The Form 8-K is filed with the SEC within 4 business days of any one of a number of significant actions, including the sale of a significant asset such as a wholly-owned subsidiary. -The Form 8-K is used to report significant events of importance to investors. Examples would be the resignation of a member of the board because of an operational dispute, liquidation of a significant asset, filing for bankruptcy, or change in management control. When any of these occur, the Form 8-K must be filed with the SEC no later than 4 business days after the event. The Form 10-K is the company's annual filing and that is due, depending on the size of the company, 60 to 90 days after the end of the fiscal year.

Discount rate

The discount rate is the rate charged when banks borrow directly from the Federal Reserve.

Federal Funds Rate

The federal funds rate represents the interest charge on reserves, traded among commercial banks for overnight use, in amounts of $1 million or more.

Fiscal Policy

The federal government's fiscal policy establishes the government's taxation, spending, and debt practices. Fiscal policy can affect the securities markets because it can be used to regulate prices, employment, and economic growth. If fiscal policy includes deficit spending, the government sells bonds to make up the deficit.

A client owns an investment-grade bond with a coupon of 7%. If similarly rated bonds are being issued today with coupons of 5%, and the market is efficient, it would be expected that the client's bond

With a discount rate of 5% (the discount rate in a present value computation is the current market interest rate), a debt instrument with a 7% coupon rate will be selling at a premium (interest rates down, prices up). If the market is efficiently pricing that bond, its market price should be equal to its present value, resulting in an NPV of zero.

Working Capital

Working capital is current assets minus current liabilities. In this question, that is $400,000 minus $215,000, or $185,000. As is often the case, there are numbers shown that have no relevance to the question.

Cash Flow from operations

computed by adding the year's depreciation deduction to the net income.

A 91-day U.S. Treasury bill

zero beta