Economic Factors and Business Information

Lagging Indictors

- average duration of employment - CPI - labor cost - prime rate

Leading Indicators

- average unemployment claims - new orders for consumer goods - major stock indexes - building permits - money supply

Coincident

- employment - personal income - manufacturing and industrial production

Under SEC rules, Form 8-K must be filed ________ days after the even

4

An 8-K must be filed _______ days after the major event occurs

4 business days

Standard Deviations by Confidence Level 68% Confidence 99% Confidence 98% Confidence

68% = 1 SDs 99% = 3 SDs 98% = 2 SDs

How to use the Rule of 72

72 / Expected RoR the product is the amount of time it will take for an investment to double

The Balance Sheet Formula

Assets minus liabilities equals net worth or Liabilities plus equity equals assets

If you were using the discounted cash flow method to determine the appropriate value of a security, you would want to purchase that security when the current market price is ________ the PV

Below (this means that the security is trading at a discount and should be purchased)

When owning an ADR, what 2 risks are the of the most concern to an investor?

Business and Currency

The difference between present value and net present value represents the

Cash outlay (when computing the net present value, we remember that the word net means something must be subtracted. The number subtracted is the initial cost of the investment)

Which investment vehicle has the least exposure to inflation risk?

Common stock

Final approval of the annual operating budget for the United States is given by the:

Congress

In comparing the change in the GDP from one year to another, to arrive at an accurate figure, each year's GDP should be converted to which of the following?

Constant Dollars

GDP is measured in:

Constant dollars

A company's working capital equals its

Current Assets - Current Liabilities

Working Capital =

Current Assets - Current Liabilities

Difference between current yield of a stock and dividend payout ratio:

Current yield = Dividend Payment / Stock Price Dividend Payout Ratio = Dividend / EPS

Credit risk is also referred to as:

Default risk

Dividend Payout Ratio

Dividend Payment / EPS

Rule of 72

Dividing 72 by the interest rate gives you how many years it will take to double your money or Divide 72 by the number of years to get the interest rate needed for the present amount to double

Which method is used for determining the internal rate of return to an investor based on cash flow in and out of the portfolio?

Dollar-weighted return

An investment strategy where a higher price is paid for a stock based on expected returns is:

Growth investing

A retired woman whose sole income comes from a portfolio of investments with a fixed rate of return is most affected by:

High inflation

Purchasing power is the same as:

Inflation risk

What happens to interest rates during: Inflation Deflation

Inflation usually has rising interest rates Deflation typically has lowering interest rates

When owning a bond that matures in 15 years, which risk is greater: interest rate or inflation?

Interest rate risk

What does it mean when a security has a beta of 0?

It is a risk free investment (traditional example is a 90-day U.S Treasury Bill)

Two main characteristics of growth stocks

Low PE ratio Low price-to-book

Price-to-Earnings Ratio

Market Value of Stock / Earnings Per Share

When someone inherits shares of a mutual fund and sells them, do they sell at NAV or POP?

NAV, only the buyer pays POP and the return for the person who inherited it is the Selling Price NAV - Inherited NAV

On a balance sheet, what are footnotes?

Notes located on the bottom that describe/outline unusual items such as accounting policies

Debt Exposure

Only includes liabilities on the balance sheet

Price to Book Value Ratio

Price per Share / Stockholders Equity per Share

What generally happens to outstanding fixed-income securities when the rate of inflation slows?

Prices of the securities will rise

What risk factor is the most important to an investor in long-term debt?

Purchasing power

Key difference between a fiduciary and prudent investor?

Requires "reasonable care, skill, and caution"

Which financial ratio tends to give an indication of the profitability of the enterprise?

Sales to earnings ratio

PE Ratio =

Stock Price / EPS

Systematic v. Unsystematic Risk

Systematic: can't be diversified and includes market risk Unsystematic: can be diversified and is the risk that an individual company could perform poorly

If a company successfully gets its 7% debenture holders to exchange their 7% debentures for 7% preferred stock, what is the effect on EPS?

The 7% payment is moved from a pre-tax deduction to an after-tax payment. This increases the amount of taxable income, thereby increasing the company's tax liability. The 7% payment remains the same. With an increased tax burden and everything else remaining the same, the EPS will decrease.

What does it mean when a stock has "thinly traded shares"

They are either not actively traded on an exchange or not held by a large number of investors

In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account is a ________ trust

Totten (someone can open up a bank account in another persons name but that money isn't accessible until the death of the person that opened it)

Best investment to protect against deflation and a slumping economy?

U.S Treasury Bonds due to the fact that they are the safest

Difference between systematic and unsystematic risk?

Unsystematic risk can be diversified away while systematic is constant (unsystematic is also specific to a certain investment)

Formula for Working Capital and Quick Ratio

Working Capital = current assets - current liabilities Quick Ratio = Current Assets / Current Liabilities

Describe Working Capital:

amount of money a corporation has available to work with if it liquidates its current assets and pays off all of its current liabilities

Free-market Economists

believe that government interference in business should be minimal in order for the invisible hand of the market to allocate goods and services in the most efficient manner

Defensive stocks

companies that will still produce during times of economic uncertainty. they are necessities that include utilities and food

Net Present Value =

difference between the sum of the discounted cash flows that are expected from an investment and its initial cost

When a bank borrows from the Federal Reserve, it does do at the _________ rate

discount

Overnight loans between banks are made at the _________ rate

federal funds

Keynesian Economics

governments should manage the economy by adjusting levels of taxation and government spending

The price-to-earnings ratio shows

how much investors value the stock as a function of earnings to the company's market price (The 2 components of the price-to-earnings ratio are the current market price and the earnings per common share)

The present value of a dollar indicates:

how much must be invested today at a given interest rate, to equal a specific cash value in the future.

A portfolio manager who is successful at market timing will _______ the beta of a portfolio in a time of a ________ market.

increase, rising

The difference between present value and net present value represents the:

initial cash outlay

Compound Interest

interest earned on interest that has been added to the original principal

A bond's yield to maturity reflects its

internal rate of return

The ________ rate is charged by the banks to their stronger borrowers

prime

Supply Side Economics

reducing government and its claims on taxpayers' income is the best way to keep a nation's economy healthy

Unsystematic Risk

risk that can be diversified and reduced

Systematic Risk

risk that is built in and can't be reduced (all securities are exposed to this type)

Alpha

the % difference in returns compared to beta

Monetarist Economics

the economy operates best when the Federal Reserve manages the money supply, not when the government stimulates economic activity through fiscal programs

Form 8-K

used to report significant events that could affect the price of the company's stock