Series 65 - Unit 8

defensive investment strategy

A defensive strategy is one that is intended to minimize risk, preserve capital, and provide a somewhat stable income

If the dollar weakens

A rise in U.S. interest rates might strengthen the dollar. If U.S. interest rates rise, foreign investors would invest in U.S. dollar-denominated securities, thereby increasing the demand for dollars and causing the dollar to strengthen.

A person is

Anyone who can open an account

Which of the following statements describes the federal funds rate? A) Charge on loans to depositary institutions by the New York FRB B) Rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more C) Charge on loans to brokers on stock exchange collateral D) Base rate on corporate loans at large U.S. money center commercial banks

B

An investor using yield curve analysis would expect to view bonds of A) varying quality over a number of maturities B) varying quality of similar maturities C) similar quality over varying maturities D) a single issuer over varying maturities

D

Interest rates are rising. An analyst would be most likely to state that the business cycle is in which stage?

Expansion

What is a similarity between a contraction and a trough

Increasing unemployment rate

A decrease in the value of the monetary unit is just a way of defining

Inflation

Two consecutive quarters of economic decline is termed a ...

Recession

The economic theory that says economic growth results from lower tax rates and lower government spending is

Supply-side heavy taxing and government intervention have a negative effect on the economy.

TRUE or FALSE - net exports lead to an increase in GDP

True

Does giving advise on allocating assets among a group of securities fall into the first prong?

Yes

The primary function of the Federal Reserve System (the Fed) is to

carry out monetary policy. The Federal Reserve controls the money supply, enabling it to significantly affect interest rates. The Fed will follow a loose, or easy, monetary policy when it wants to increase the money supply to expand the levels of income and employment. In times of inflation, when it wants to constrict the money supply, the Fed will follow a tight monetary policy.

Non-securities investments include

commodities collectibles (Coins or stamps) metals, gold, silvers, real estate

GDP is based on

constant dollar

When business activity is declining from its peak, the economy is

contracting

Inverted "negative" Yield curve

curves downward When long-term interest rates are lower than short-term rates, so the yield curve slopes downwards, reflecting higher yields for short-term investments. predicts rates will fall in the future

Normal (Positive) Yield Curve

curves upward long-term interest rates are higher than short-term interest rates Occurs during periods of expansion predicts interest rates will rise

As interest rates go up, the market price of bonds will

decrease

Peaks are characterized by

decrease to GDP growth rate decrease to unemployment rate but slow down in hiring slower rate of growth in consumer spending increase inflation rate

longer more severe contractions are called

depressions

An aggressive investment strategy

designed to maximize returns and assume greater risks.

Overnight loans between banks are made at

federal funds rate

Investment Advisers Act of 1940

federal level

examples of non-durable goods

food and clothing,pharmaceuticals, tobacco, and energy.

If the yield curve is positive (sloping upward), this means that long-term interest rates are

higher than short-term rates

A trade deficit occurs when

imports are greater than exports.

What is one way an investor can protect against a weakening US Dollar?

invest in foregin securities

What are the three broad catergories of business cycle indicators?

leading, coincident, and lagging

Lagging indicators (where we've been)

measures that change four to six months after the economy has begun a new trend and serve to confirm a new trend Avergae duration of unemployment Averge prime rate change in CPI for services

inflation inertia

prices will rise slowly and then begin to increase at a faster rate

Define Inflation Inertia

rate of inflation does not immediately react to the unexpected changes in the economy. Rather, it lags behind sometimes for several quarters, before there is an effect

Another word for contraction

recession

flat yield curve

short and long term rates are the same occurs when no change in interest rates in expected

Specific securities may include

stocks, bonds, mutual funds, limited partnerships

Peak

when GDP increases rapidly and businesses reach their productive capacity, the nations economy cannot expand further. At this point, the economy is said to have reach its peak.

If an economy is headed downward, what is the safest place for one to place their funds?

U.S Treasury bonds

True or False- net exports may lead to an increase in GDP (gross domestic product)

true

an economy is in a recession when a decline in goods and services (the GDP) continues for

two or more consecutive quarters

Too much import of goods and not enough exports would weaken or strength the U.S dollar?

weaken

How can you distinguish the trough business cycle?

when businesses are operating at their lowest capacity levels.

A frequently-used metric by analysts is the yield, or credit spread. Common methods of computing this would be comparing 1.bonds of similar quality and similar maturities. 2.bonds of similar quality and different maturities. 3.bonds of different quality and different maturities. 4.bonds of different quality and similar maturities.

2 & 4

Fiscal Policy

Government spending and taxation government adjusts its spending levels and tax rates to monitor and influence a nation's economy Budgeting and taxation Actions of CONGRESS and the PRESIDENT Government spending and taxation

Expansions (recoveries) are characterized by:

Increase business activity - in sales, manufacturing, and wages Increasing consumer demand increase rate of inflation increasing industrial production Decrease in unemployment falling inventories rising stock markets rising property values increasing GDP

How does investment advisor and IAR corelate?

Individuals who fall under the definition of investment advisor are technically called investment advisor representatives (IAR). So if you want to provide investment advice to clients, you would become an investment advisor representative. The firm you work for, on the other hand, would be an investment advisor.

Consumer Price Index (CPI)

Measure of the general retail price level Monthly Basis Most common used measurement of the rate of inflation Ex. By comparing the cost of a basket of goods with the cost of buying the same basket a year ago, we can get an idication of changes in living (Inflation)

Does the fed set the prime rate?

No, that is done by major commercial banks. Fed's actions do impact all interest rates though.

countercyclical industries

Opposite of business cycle trends turns down when economy heats up, rises when economy is going down ex. gold

If a country decreased its value of currency, it would result in

a credit to that nation's trade account balance and an increase in that nation's exports When a currency is devalued by a country, it means that foreigners will find their money has more buying power in that country. Therefore, it would be expected that foreigners would buy more goods produced in that country causing an increase in exports. Those exports result in a credit to the country's trade account balance.

How would you describe inflation in simple terms?

a decrease in the value of the monetary unit (because inflation is not just in the United States or occurs just to the dollar) it is a global issue

Four stages of the business cycle

expansion, peak, contraction, trough

Contractions/recessions are characterized by

rising numbers of bankruptcies increasing unemployment decreasing consumer spending falling stock markets decrease inflation rate rising inventories (a sign of slackening consumer demand) negative growth rate for GDP

Define investment advisor (3 prong test)

someone who gives advice on securities, does so as a regular business activity, and gets paid to do it

Core inflation is best described as an inflation rate

that excludes certain volatile goods prices. Core inflation is measured using a price index that excludes food and energy prices. The primary reason for that is the volatility of those two.

Top-down approach

the "macro" view of the economy, overall then specific broad then narrow down

inertial inflation

the current rate of inflation will remain at this level until economic shocks cause it to change

When bank members of federal reserve system borrow from each other, what is the rate of borrow?

the federal funds rate

How many quaters to be considered a recession? How many quatars to be considered a depression?

2 6

Interest rates are declining. An analyst would be most likely to state that the business cycle is in which stage?

Contraction

As prices trend higher and consumer demand increases, the economy is moving from expansion to a ...

Peak

Uniform Securities Act

State level Model legislation In 1956, the USA was drafted as a template for states to follow Not actual legislation, USA is a template but most states follow it almost exactly the same

Describe the relationship between interest rates and bond prices

There is an inverse relationship between interest rates and bond prices. This means that as current interest rates go up, the market price of existing bonds will go down.

Explain what may help if the U.S Dollar were to be weak in order for it to strengthen

When U.S. interest rates rise, foreign investors invest in U.S. dollar-denominated securities, thereby increasing the demand for dollars and causing the dollar to strengthen.

Administrator

office or agency that has the complete responsibility for administering the securities laws of the state

Inertial inflation means

the current rate of inflation will remain at this level until economic shocks cause it to change.

GDP (Gross Domestic Product)

total market value of the goods and services produced by a country's economy during a specified period of time provides an economic snapshot of a country, used to estimate the size of an economy and its growth rate

If the Consumer Price Index (CPI) is down but consumer demand is up, the economy is likely in which stage of the business cycle? A) Peak to contraction B) Recovery to trough C) Recovery to expansion D) Contraction to trough

C As prices trend downward and consumer demand increases, the economy is moving from recovery to expansion.

Does Rising interest rates cause the values of all fixed-income securities to incline or decline?

Decline, therefore they would not be an attractive investment in times of inflation

Leading indicators (where we're going)

Economic activities that tend to turn down before a recession or turn up before an expansion. Used to predict economic activity four to six months hence. Ex- Money supply Building permits Average weekly claims for unemployment insurance Stock prices (S&P 500) Manufacturers' new orders for consumer goods Positive changes in a majority of leading indicators point to increased spending, production, and employment. this will generally result in an increase to the rate of inflation

Which term refers to the taxation, expenditures, and debt management of the federal government? Monetary policy Fiscal policy Revenue code procedures Open market operations

Fiscal Policy

Under the concept of inertial inflation, do prices stay the same until an economic shock or increase steadily until an economic shock?

Increase

bottom-up approach

Looking for specific, usually the most attractive then overall start with a specific company then work our way up

An expansionary fiscal policy would usually result in

a government increasing government spending to stimulate economic activity. An expansionary fiscal policy is one that is deliberately implemented to boost demand. Increased spending would be an expansionary policy.

Monetary Unit

a standard unit of value of a country's coinage.

If the value of the U.S. dollar were to increase with respect to other currencies, it would make

exported products become more expensive in those foreign markets and are less competitive. On the other hand, imported products become less expensive in U.S. markets and are more competitive. U8LO1

Discount Rate

rate the fed charges member banks for loans FRB (Federal reserve bank) establishes this Managed rate (Unlike the federal funds rate)

Mold short-term contractions are called

recessions

when business activity stops declining and levels off, the cycles makes a

trough

Which of the following would NOT be considered a defensive security? A) Tobacco stock B) Steel company stock C) Utility company stock D) Food chain stock

Answer is B

coincident indicator (where we are)

Change directly with the business cycle. Examples include- Industrial production Nonagricultural production Personal Income Manufacturing and trade sales in constant dollars

Cyclical Industry

-sensitive to business cycle and price changes -durable goods, raw materials, heavy equipment (heavy machinary, raw materials such as steel)

three non-persons

1. A minor 2. A deceased individual 3. An individual declared mentally incompetent by the courts

The Federal Reserve Board foresees the probability of an overheated economy and the resumption of double-digit inflation. Therefore, the FRB takes actions to slow down the economy, including increasing the discount rate. Which of the following are likely effects of these moves? An increase in the prime rate An increase in bond yields and an accompanying decrease in bond prices A slowdown in corporate growth A decrease in corporate earnings

ALL The FRB attempts to slow the economy and decrease the money supply with a corresponding increase in interest rates. When interest rates rise, the prime rate increases, bond yields rise, and bond prices drop. Higher interest rates have a tendency to slow corporate growth, with a resulting slowdown in earnings; these events occur in this approximate sequence.

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

Prices go up. When the rate of inflation slows and is expected to remain stable, coupons on new issue bonds will often decline to offer lower yields. The prices of outstanding bonds will go up to adjust to the lower yields on bonds of similar quality.

The Fed does not set the prime rate- true or false?

True

True or False- When the yield curve is positively sloped (normal), long-term bonds carry higher interest rates than short-term bonds of the same quality.

True

Interest rates tend to increase with inflation

True or False

monetary policy

seeks to control the economy by manipulating the money supply and interest rates central bank's actions that affects the quantity of money and credit Under control of FRB (federal reserve board) (The Fed) the fed determines how much money is available for businesses and consumers to spend

A yield curve shows the relationship between

short-term and long-term interest rates When the yield curve is positive, it slopes upward. This means that long-term interest rates are higher than short-term rates.

inverted yield curve

shows near-term maturities with higher yields than those of long-term maturities the closer the bond is to its maturity date, the higher the yield.