Discount Rate

Established by the Federal Reserve Board

Rate New your Federal Reserve Bank chanrges for short term loans to member banks

Broker Call Loan Rate

Rate Banks charge broker/dealers

Supply side Economics

Lower Taxes

Less Government

$ supply down = Demand $ up so employment goes up

Federal Funds Rate

Determined by the demand of bank reserves

Banks that are members of the federal reserve system charge each other for overnight loans fo $1 million or more.

Prime Rate

Interest rate that large US money center commericial banks charge their most credit worthy corporate borrowers for unsecured loans

US $ weakens it will buy

LESS of a foreign currency.

US exports more competitive

Leading Indicators

• Money supply
• building permits
• manufactors new orders
• stock prices
• Ave weekly initial claims for unemployment
• S&P 500

Current Assets

Cash and other items expected to be converted into cash within the next 12 months.

• Cash & Equivalents
• Accounts receivable
• Inventory
• Prepaid expenses

Keynesian

believe Fed gov should manage inflation through taxation & spending

Monetarist

Milton Friedman

Less Government intervention

Quantity of Money

FRB= monitor $ supply

Alpha

The extene to which an asset's or portfolio's actual return exceeds or falls shore of its expected returns

Beta

is a measure of its volatility in realtion ot the overall market

Price-to-earnings

The earnings multiplier is the price of the stock divided byits earnings per share

Eurodollar Bonds

Advantages

• bear no currency risk to US investors
• Rated by US rating agencies
• offer higher yields

Eurodollar bond

Disadvantages

• Not registered with SEC, Lack of transparency
• political and social risk
• less liquidity

Fundamental Analysis

The study of the business prospects of an individual company within the context of its industry and the overall economy.

Defensive Industries

Least effected by normal business cycles that generally produce nondurable consumer goods, such as food, pharmaceuticals, tobacco, and energy.

Cyclical Industries

Highly sensitive to business cycles and inflation trends.  Produce durable goods, such as heavy machinery and automobiles, as well as raw materials such as steel.

Growth Industries

Industry is growing faster than the economy as a whole because of technological changes, new products, or changing consumer tastes.

Current Liabilities

corporate debt obligations due for payment within the next 12 months

Balance Sheet

provides a snapshop of a company's financial position at a specific point in time.

Identifies liabilities & assets to determine net worth

Fixed Assets

Limited usefule lives because of their reduced value of time and wear/tear

• property
• plant
• equipment

Long Term Debt

financial obligations due for payment after 12 months

Shareholder equity

Stockholder claims on a company's assets after all of its creditors have been paid.

Capital Stock

Includes preferred and common stock listed at par value.

Capitalization

is the combined sum of its longterm debt and equity accounts

Working capital

Is the amount of captial or cash a company has available

Capital Structure

The relative amounts of debt and equity that complse a company's capitalization.

Working Capital

the amount of capital or cash a company has available.

Current assets-currrent Liabilities=working capital

Current Ratio

computation

current liabilities/ current liabilities

the higher the ratio the more liquid the company

Quick Ratio

Uses the compnay's quick assets instead of all the current assets.

Quick assets are current assets minus the inventory.  then divide these quick assets by the current liabilities to arrive at the quick ratio.

Straight Line Depreciation

a company depreciates fixed assets by an equial amount each year over the asset's useful life

Accelerated Depreciation

a method that depreciates fixed assets more dureing the earlier years of their usedful life and less during the later years.

*generates larger deductions (lower taxable income) during the early years and smaller deductions (higher taxable income) during the later years.

Capital Structure

• Long Term Debt
• Capital Stock
• Captial in excess of par
• Retained Earnings

Bond Redemption

liabilites on the balance sheet are reduced

Decrease in cash on the asset side of the balance sheet

Dividends

Cash dividend

retained earnings are lowered

current liabilities are increased

stock dividend

no effect on corporate assets or liabilities

Earnings Per Share

Measure the value of a company's earning for each common share

EPS=earnings available to common/ number of shares outstanding.

Stock split

on the balance sheet on the par valuer per share on and the number of shares outstanding change

Dividends Per Share

the dollar amount of cash dividends paid on each common share

Dividend Payout Ratio

measures the proportion fo earnings paid to stockholders

annual dividens per common share/ EPS

Price to Earnings Ratio

Provides investors with a rough idea of the raltionship between the prices of different common stocks compared with the earnings that accrue to one share of stock

A company's stock trades for $30 per share and has earnings of $1.50 per share.

It has a PE of 20 ($30/1.5)= 20

Very High or Very Low PE ratios

Speculative Companies

Higher PE ratios

Growth Companies

Cash Flow Statement

Money from operations

financing

investing

Form 8-K

Must be filed 4 days of occurance

 report newsworthy events

mergers, management change, bankruptcies

Form 10-K

comprehensive overview of the company's business and financial conditions and includes financial statements that have been audited by an independent accountant.

Form 10-Q

Filed Quarterly and contains unaudited financial statements

Technical Analysis

is a method of attempting to predict stock price trends over the near term, generally four to six weeks

Overbought

there has been an extended perios of vigorous buying in the market

Oversold

to much selling that the sellers have run out of secruities to sell and hence the prices will stablize or perhaps begin to increase.

Bullish market

The trendline is under the hills supporting them up.  If the bottom of the hill falls below the supportline then it is a signal of a turn in the market.

Bearish Market

Rides on top of the hills going downward.  if the top of a hill goes above the trendline it is a signal of a changing market.

Head & Shoulders

if the H & S is below the line then the market is going up

if the H & S is above the line then the market is going down

Moving Averages

Take the closing of a stock on Friday for the past 13 weeks add them and then divide by 13.  This will give you the average.  It will move week to week as you add a new week closing and drop the 1st closing.

Standard & Poors 500

Index includes 4 main groups

400 industrials

20 transportation compnaies

40 public utlitites

40 financial institutions

New York Stock Exchange (NYSE) Index

composite index that covers all of the common stocks listed on the NYSE more than 3,000 different companies.

Index base is 50

Dow Jones Industrial Average

30 industrial stocks are among the 30 best known corporations in the world and it publishes the Wall Street Journal.

UTI

15 Utilities

20 Transportation

30 Industrial Stocks

composite 65

NASDAQ Composite Index

3,000 over the counter companies

index number of 100

EAFE

Europe, Austrailia, and Far East

an index of foreign stocks.  the index is market capitalization weighted and was developed by Morgan Stanley Captial international.

Wilshire 5000

consists of virtually every US based company listed on the NYSE and AMEX and NASDAQ.  It now has in excess of 6.000

The market that reflects the broadest coverage of the US Stock Markets

Wilshire 5000

Short Interest Theory

the number of shares that have been sold short

Odd-lot trading

Believe that small investors invariably buy and sell at the wrong times.

Random Walk Theory

suggests that throwing darts at the stock listings is as good a method as any for selecting stocks for investment.

Modern Portfolio Theory

an approach that attempts to quantify and control portfolio risk.

Focuses on the relationships among all the investments in a portfolio

Current Yield

What you get/what you paid= CY

6%   $750

60/750= 8%

Yield to Maturity

YTM

10% coupon bond @ 105 ($1050) with 10 yrs remaining

$100 a year in interest

If held to maturity, the bondholder loses $50.

$1050-1,000=50 50/10 is $5 a year

If bond price is less than par it is accreted

If bond price is more than par the premium is amortized

Inflation adjusted return

Find it by merely subtracting the CPI from the total return

Net Present Value (NPV)

Internal rate of Return (IRR)

The yield to maturity of a bond reflects its IRR

The investment is a good one if it has a positive NPV; stay away if the NPV is negative

NPV is generally considered more important than IRR

Beta Measures

systematic rick-- that is, the risk that can be associated with the market in general.

Correlation

Means that securities move in the same direction

Correlation

securities that move in the same direction

Standard Deviation

Is the measure of the volatility of an inveestment's projected returns, computed by using historical performance data and inludes both systematic and unsystematic risk.

Sharpe Ratio

The ratio is calculated by subtracting the risk-free rate (90th day Treasury Bill) from the overall return of the portfolio.  The result is then divided by the standard deviation of the portfolio.

This ratio measure the amount of return per unit of risk taken.

the higher the ratio, the better or more return per unit of risk taken

It measures risk-adjusted return

3 components of the Sharpe Ratio

The actual return

The riskfree rate

standard deviation

Monte Carlo Simulations

MCS

a risk analysis technique in which probable future events are simulated on a computer, generating estimated rates of return.

Expected Return

Used to calculate the estimated return of an investment

Real Return

Return that has been adjusted for inflation

Holding Period Return

  Rate of return calculated over the period an investor owns the security

Current Yield

Annual Interest divided by the current market price

Total Return

Return that includes an investment's income and capital appreication over a 1 year period

Yield to Maturity

A bond's return if held until the principal is repaid

Future Value

Used to calculate what $1,000 would be worth if held for 10 years @ 8%

Risk Adjusted Rate of Return

Determined by dividing the difference between a security's actual return and the risk-free rate by its standard deviation

Internal Rate of Return

Calculated from cash flows of a specific investment

Present Value

How much an investor must invest today to result in a retirement fund of $1 million in 20 years

Inflation Risks

fixed income securities are the most vulnerable to this risk

3 Primary Systematic Risks

Market

Interest Rate

Inflation or purchasing Power

4 Primary unsystematic Risks

Business

Liquidity

Political

Regulatory