Term
| What sectors have a beta greater than 1 |
|
Definition
Wireless Networking
Biotech
Computer Software/Services/Hardware
E-Commerce
Entertainment Technology |
|
|
Term
| Examples of Secondary Markets |
|
Definition
|
|
Term
| What sectors have a beta less than 1? |
|
Definition
Consumer Staples
Healthcare
Utilities
Tobacco
Petroleum Production |
|
|
Term
| What kind of companies have a high level of operating leverage? |
|
Definition
| Companies whose costs are mostly fixed |
|
|
Term
| What does unlevered beta show? |
|
Definition
| How much risk a firm's equity has compared to the market |
|
|
Term
| Where do you find levered beta? |
|
Definition
| The levered beta will be the beta you get from a site like Yahoo! Finance |
|
|
Term
| What is the most liquid asset? |
|
Definition
|
|
Term
| What is naked short-selling? |
|
Definition
| When an investor sells the stock without having any of the stock actually borrowed |
|
|
Term
|
Definition
| The risk that affects the entire market |
|
|
Term
| What is the goal of diversification? |
|
Definition
| A higher return with a lower risk than putting all your capital into only one or a few investments |
|
|
Term
| What does unsystemic risk affect? |
|
Definition
|
|
Term
| Who is market value of equity for? |
|
Definition
| Only publicly traded companies |
|
|
Term
| Example of a financial buyer? |
|
Definition
| A private equity fund doing a leveraged buyout of a company |
|
|
Term
| What are some types of derivatives? |
|
Definition
| Futures contracts, forwards, contracts, calls, puts, etc. |
|
|
Term
|
Definition
| A type of investment that derives its values from the value of other assets like stocks, bonds, commodity prices, or market index values |
|
|
Term
| When do you buy a put option? |
|
Definition
| If you believe the asset will decrease in value |
|
|
Term
| When do you buy a call option? |
|
Definition
| If you believe the asset will increase in value |
|
|
Term
| When do you write or sell a put option? |
|
Definition
| If you believe the asset will increase in value |
|
|
Term
| When do you write or sell a call option? |
|
Definition
| if you believe the asset will decrease in value |
|
|
Term
|
Definition
| Gives the holder the right to sell an asset for a specified exercise price on or before a specified expiration date |
|
|
Term
| What is a financial buyer? |
|
Definition
| A group looking to acquire another company purely as a financial investment |
|
|
Term
| What is a strategic buyer? |
|
Definition
| A corporation that wants to acquire another company for strategic business reasons, such as synergies, growth potential, etc. |
|
|
Term
| What is the easiest way to determine a company's credit risk? |
|
Definition
| Look at their credit rating, which is provided by both S&P and Moody's |
|
|
Term
| When is a bond selling at a premium? |
|
Definition
| If the coupon yield of the bond (coupon/face) is higher than its current yield (coupon/price) |
|
|
Term
| When is a bond selling at a discount? |
|
Definition
| If the coupon yield of a bond (coupon/face) is lower than its current yield (coupon/price) |
|
|
Term
| Non-investment "junk" ratings |
|
Definition
BBB-CCC(S&P)
BaaB-Ca(Moody's)
BBB-CCC(Fitch) |
|
|
Term
|
Definition
AA-BBB(S&P)
AaB-Baa2(Moody's)
AA-BBB(Fitch) |
|
|
Term
| What kind of bond demands a premium? |
|
Definition
| A bond that is putable or convertible |
|
|
Term
| What kind of bond trades at a discount? |
|
Definition
|
|
Term
| Who has the absolute last rights to any assets in the event of liquidation or bankruptcy? |
|
Definition
|
|
Term
| What is the order of creditor preference, starting with those who have more rights to a firms assets in the event of liquidation |
|
Definition
Senior debt
Subordinated debt
Preferred Stock
Common Stock |
|
|
Term
| One basis point is equal to what percent? |
|
Definition
|
|
Term
|
Definition
| a bond that has a poor credit rating and a relatively high risk of bankruptcy and is therefore required to pay investors a higher interest rate |
|
|
Term
| How do you determine the discount rate on a bond? |
|
Definition
| It is determined by the companys default risk |
|
|
Term
| What does a correlation of 1 mean? |
|
Definition
| Strong, positive correlation |
|
|
Term
| What does a correlation of zero mean? |
|
Definition
No correlation
Investments move independently |
|
|
Term
| What does a correlation of -1 mean? |
|
Definition
| Strong negative correlation |
|
|
Term
| How liquid are publicly traded large cap stocks? |
|
Definition
|
|
Term
| How liquid are money market accounts? |
|
Definition
|
|
Term
| What does unlevering beta do? |
|
Definition
| By unlevering the beta, you are removing the financial effects from the leverage (debt in the capital structure) |
|
|
Term
|
Definition
| Goodwill is a line item that is found on a company's balance sheet |
|
|
Term
|
Definition
|
|
Term
| What are the most widely known type of securitized asset? |
|
Definition
| Mortgage backed securities |
|
|
Term
|
Definition
D (S&P)
C(Moody's)
DDD-D(Fitch) |
|
|
Term
|
Definition
AAA-AA(S&P)
Aaa,Aa1-Aa2(Moodys)
AAA-AA(Fitch) |
|
|
Term
|
Definition
| A large railway company and a small software company |
|
|
Term
| Is a larger pharmaceutical production plant a liquid asset? |
|
Definition
| it is not a very liquid asset |
|
|
Term
| Why is the 'risk-free' rate considered 'risk free?' |
|
Definition
| The US government is considered to be a risk free borrower |
|
|
Term
| What factors affect foreign exchange rates? |
|
Definition
Interest Rates
Inflation
Capital Market equilibrium |
|
|
Term
| Why is a firms credit rating important |
|
Definition
| The lower a firms credit rating, the higher its risk of bankruptcy and therefore the higher the cost of borrowing capital |
|
|
Term
| What is a perpetual bond? |
|
Definition
| A bond that simply pays a coupon payment indefinitely (or the company goes into default) and doesnt ever pay back a principle amount |
|
|
Term
|
Definition
| A grade given to a bond depending on their risk of defaulting. The ratings are issued by independent firms and are updated over the life of the bond. |
|
|
Term
| 3 most trusted/well known rating agencies? |
|
Definition
Standard and Poors
Moodys
Fitch |
|
|
Term
| What are the 3 components of the Statement of Cash Flows? |
|
Definition
Cash from Operations
Cash from Investing
Cash from Financing |
|
|
Term
|
Definition
| The risk of a given company going bankrupt |
|
|
Term
|
Definition
| How two stocks will move in relation to each other |
|
|
Term
| What does correlation range between? |
|
Definition
|
|
Term
| What does it mean to short sell a stock? |
|
Definition
| To sell a stock that you don't actually own |
|
|
Term
| What is the average return on the market? |
|
Definition
|
|
Term
|
Definition
(Current assets-Inventories)
Current Liabilities
|
|
|
Term
|
Definition
Current assets
Current liabilities
|
|
|
Term
| What is the reserve requirement? |
|
Definition
| The amount of cash a bank must keep on hand to cover its deposits (money not loaned out) |
|
|
Term
| What does higher inflation put pressure on the fed to do? |
|
Definition
|
|
Term
| What does a weak dollar mean in terms of imported goods and inflation? |
|
Definition
| A weak dollar means the cost of imported goods will rise, which means higher inflation |
|
|
Term
| What is currency devaluation? |
|
Definition
| Currency devaluation occurs in a fixed exchange system like China when the government changes the exchange rate of its currency |
|
|
Term
| What is the effect on the dollar when US interest rates rise? |
|
Definition
|
|
Term
| What is the effect on the dollar when US inflation rates rise? |
|
Definition
|
|
Term
| If the price of a bond goes up, what happens to the yield? |
|
Definition
|
|
Term
| How do price and yield of a bond move in relation to one another? |
|
Definition
|
|
Term
| What is the risk free rate (usually) |
|
Definition
| The current yield on the 10 year government treasury |
|
|
Term
| What is the secondary market? |
|
Definition
| The market on which a stock or bond trades after the primary offering |
|
|
Term
| What is the most common multiple? |
|
Definition
|
|
Term
| Where to find risk free rate |
|
Definition
| front page of WSJ, Yahoo! Finance, etc |
|
|
Term
| What does a beta greater than 1 mean? |
|
Definition
| More volatile than market (higher risk, higher reward) |
|
|
Term
| What is the markets beta? |
|
Definition
|
|
Term
| What is the foreign exchange rate? |
|
Definition
| Price at which currencies will be exchanged for at some given date in the future |
|
|
Term
| Net working capital formula |
|
Definition
| current assets-current liabilities |
|
|
Term
| What are the 3 main financial statements? |
|
Definition
The income statement
The balance sheet
Statement of Cash Flows |
|
|
Term
| Where are credit default swaps sold? |
|
Definition
| Over the counter in a completely unregulated market |
|
|
Term
|
Definition
| A written synopsis of the companies strategy and results for a given year |
|
|
Term
| What kind of report is a 10-Q? |
|
Definition
|
|
Term
| What kind of report is a 10-K? |
|
Definition
|
|
Term
| What is enterprise value? |
|
Definition
| The value of an entire firm, both debt and equity |
|
|
Term
|
Definition
| Assets=liabilities+shareholder equity |
|
|
Term
|
Definition
| Revenues-COGS-Expenses=net income |
|
|
Term
| What is the treasury stock method mainly used for? |
|
Definition
| Estimating diluted EPS numbers |
|
|
Term
| Characteristics of Futures Contracts |
|
Definition
| highly standardized size, delivery date, etc. |
|
|
Term
| When is an option in the money? |
|
Definition
| When exercising the option will result in a profit |
|
|
Term
| What is the main reason two companies would want to merge? |
|
Definition
| The synergies that the companies will gain by combining their operations |
|
|
Term
| Statement of cash flows eqn. |
|
Definition
| beginning cash+CF from opns.+CF from investing+CF from financing=ending cash |
|
|
Term
| What does EBITDA stand for? |
|
Definition
| Earnings before interest, taxes, depreciation, and amortization |
|
|
Term
| What is EBITDA a good metric for? |
|
Definition
| evaluating a company's profitability |
|
|
Term
| What is net working capital a measure of? |
|
Definition
| How able a company is to pay off its short term liabilities with short term assets |
|
|
Term
| What does WACC stand for? |
|
Definition
| Weighted average cost of capital |
|
|
Term
| What comprises operations on the statement of cash flows? |
|
Definition
| Cash generated from the normal operations of a company |
|
|
Term
| How is yield to maturity expressed |
|
Definition
|
|
Term
| What is a eurodollar bond? |
|
Definition
| a bond issued by a foreign company but issued in US dollars rather than their own home currency |
|
|
Term
| Formal definition of duration |
|
Definition
| Unweighted average maturity of cash flows |
|
|
Term
| How is duration expressed/measured |
|
Definition
|
|
Term
|
Definition
| How sensitive a bond is to changes in interest rates |
|
|
Term
| What is the coupon payment |
|
Definition
| the amount a company will pay to a bondholder normally or on an annual or semi-annual basis |
|
|
Term
| what is the coupon payment equal to |
|
Definition
|
|
Term
| How could an investor that owns a stock hedge the risk of the stock going down |
|
Definition
| by buying put options on that security or other related businesses in the industry |
|
|
Term
| Where does depreciation on the statement of cash flows come from |
|
Definition
| property, plant, and equipment on the balance sheet |
|
|
Term
| If you believe interest rates will fall, should you buy or sell bonds? |
|
Definition
| if interest rates fall, bond prices rise, so you should buy bonds |
|
|
Term
|
Definition
| an exchange of future cash flows. this can be a swap of interest rates, currency exchange rates, etc. |
|
|
Term
| Why can inflation hurt creditors? |
|
Definition
| inflation cuts into the real percentage return that creditors make whenn they lend out money at a fixed rate |
|
|
Term
|
Definition
| a put bond gives the bond owner the right to force the issuer to buy back the security from them at face value prior to maturity date |
|
|
Term
| What is the yield to maturity on a bond? |
|
Definition
| the rate of return on a bond if it is purchased today for its current price and held through its maturity date |
|
|
Term
|
Definition
| beta represents relative volatility on risk of a given investment with respect to the market |
|
|
Term
| What does spreading comps mean? |
|
Definition
| spreading comps is the task of collecting and calculating relevant multiples for comparable companies |
|
|
Term
| What is a credit default swap? |
|
Definition
| essentially, insurance on a company's debt and a way to insure that an investor wont be hurt in the event of default |
|
|
Term
|
Definition
| A collateralized debt obligation is the broad asset class in which a number of interest paying assets are packaged together (securitized) and sold in the form of bonds |
|
|
Term
| Estimated credit default swap market |
|
Definition
|
|
Term
| Where to find 10-k, 10-q, and proxy statements |
|
Definition
| numerous locations including: sec.gov, the firms own website, yahoo! finance, or a database like capital iq |
|
|
Term
| What is a mortgage backed security? |
|
Definition
| a class of asset-backed security whose cash flows are secured by a package of mortgages |
|
|
Term
|
Definition
| valuation is the procedure of calculating the worth of an asset, security, company, etc. |
|
|
Term
|
Definition
| when an acquired company agrees to be paid in stock of the new company b/c they believe in the potential for success in the merger. |
|
|
Term
| How do you calculate the number of fully diluted shares? |
|
Definition
| the most common way of doing this is the treasury stock method |
|
|
Term
| How would you calculate the discount rate for an all equity firm? |
|
Definition
| if a firm is all equity then you would used CAPM to calculate the cost of equity, and that would be the discount rate |
|
|
Term
| What happens to the dollar when the spot exchange rate is higher than the forward exchange rate for the pound? |
|
Definition
| the dollar is expected to stregnthen relative to the pound in the comping year? |
|
|
Term
| What is the effect on US multinational companies when the US dollar weakens? |
|
Definition
|
|
Term
| What is the effect on earnings of US multinational companies when the US dollar stregnthens |
|
Definition
|
|
Term
| What is an investment grade bond? |
|
Definition
| One that has a good credit rating, a low risk of bankruptcy, and therefore pays a low interest rate |
|
|
Term
| Why would a company distribute earnings through dividends to common stockholders? |
|
Definition
| doing so signals that a company is healthy and profitable. it can also attract more investors, potentially driving up the price |
|
|
Term
| What is the difference between a "strong" and "weak" currency? |
|
Definition
| a strong currency is one whose value is rising. a weak currency is one whose value is falling |
|
|
Term
| Are micro cap stocks liquid? why? |
|
Definition
| they could be relatively low liquid due to the limited market demand for them |
|
|
Term
| Is a liquid investment safer? |
|
Definition
| a more liquid investment is relatively safer, all else equal, since the investor can sell it at any time |
|
|
Term
| Example of a negative correlation? |
|
Definition
| oil prices and airline stocks |
|
|
Term
| What is the treasury stock method? |
|
Definition
| a hypothetical exercise that estimates the potential impact of certain securities on equity holders ownership |
|
|
Term
| What is an initial public offering? |
|
Definition
| an IPO is the first sale of stock in a previously private company to the public markets |
|
|
Term
| Example of a strong positive correlation |
|
Definition
| two high end hotel chains |
|
|
Term
| What do you assume in calculating YTM? |
|
Definition
| that the coupon payments are reinvested at the same rate |
|
|
Term
| What is the black-scholes model an industry standard for? |
|
Definition
|
|
Term
|
Definition
| approves external auditor files |
|
|
Term
|
Definition
|
|
Term
| Net Working Capital Formula |
|
Definition
|
|
Term
| What kind of assets are amortized |
|
Definition
|
|
Term
| NCFOA (net cash flows from operating activities) formula |
|
Definition
| NCFOA=NI-noncash Revenues+Noncash Expenses |
|
|
Term
| Current Assets Definition |
|
Definition
| Assets likely to be converted to cash within a year (or one operating cycle) |
|
|
Term
|
Definition
Realization
Matching
Going Concern
Cost Principle
Arm's Length |
|
|
Term
|
Definition
Prepared by the financial accounting standards board
Authorized by SEC |
|
|
Term
|
Definition
E=Equity
D=Debt
P=Preferred Stock
Ksube=Cost of Equity
Ksubd=Cost of Debt
Ksubp=Cost of Preferred Stock
T=Corporate Tax Rate |
|
|
Term
|
Definition
| Choose the long term assets that will yield the greatest net benefits for the firm |
|
|
Term
|
Definition
|
|
Term
| Where are forwards traded? |
|
Definition
|
|
Term
| how much does a forward contract cost? |
|
Definition
| no money is charged initially. Forwards are designed to protect each party from future price fluctuation |
|
|
Term
| What 'option' does the buyer of the option have? |
|
Definition
| the option to buy or sell the stock for a set price on or before a set date |
|
|
Term
|
Definition
| a type of derivative that gives the bearer the 'option' to buy or sell a security at a given date without the obligation to do so |
|
|
Term
| how much does the buyer of an option pay? |
|
Definition
| the buyer pays an amount less than the actual value of the stock |
|
|
Term
|
Definition
| a call option gives the holder the right to purchase an asset for a specified exercise price on or before a specified expiration date |
|
|
Term
| What generally happens to interest rates if the US dollar weakens? |
|
Definition
| if the US dollar weakens, the interest rates in the US will rise |
|
|
Term
| What does goodwill represent? |
|
Definition
| intangible assets such as a brand name, good customer relations, intellectual property, etc. |
|
|
Term
| What is fundamental analysis? |
|
Definition
| Examining a company's fundamentals, financial statements, industry, etc. and picking stocks that are "undervalued" |
|
|
Term
| What is technical analysis? |
|
Definition
| the process of picking stocks based on historical trends and stock movements mainly based on charts |
|
|
Term
| What is the black scholes model? |
|
Definition
| one way to value asset options (puts and calls) |
|
|
Term
| What factors influence the price of an option |
|
Definition
Current Stock Price
Exercise Price
The volatility of the stock
Time to Expiration
Interest Rate
Dividend Rate of the stock |
|
|
Term
|
Definition
-an exchange of future cash flows
can include a swap of interest rates, currency exchange rates, etc. |
|
|
Term
|
Definition
| a financial strategy designed to reduce risk by balancing a position in the market |
|
|
Term
|
Definition
| the instantaneous buying and selling of two related assets to capture a gaurenteed profit from the trade |
|
|
Term
|
Definition
| payment for the ownership of a corporation in cash |
|
|
Term
|
Definition
| finance assets with the optional combination of short term debt, long term debt, and equity |
|
|
Term
|
Definition
| manages and reports on activities to limit the firms risk in financial and commodity markets |
|
|
Term
|
Definition
| earnings before interest, taxes, depreciation, and amortization |
|
|
Term
| What is the spot exchange rate? |
|
Definition
-the rate of a foriegn-exchange contract for immediate delivery
-spot rates are the price a buyer will pay for a foriegn currency |
|
|
Term
| who uses the forward exchange rates? |
|
Definition
-speculators
-companies looking to hedge thie foriegn exchange risk
(company can enter into a forward contract to help hedge against exchange rate fluctuations in future) |
|
|
Term
| what does a beta of less than 1 mean? |
|
Definition
| less volatile than market (lower risk, lower reward) |
|
|
Term
| Why do you project out free cash flows for the DCF model? |
|
Definition
| because free cash flows is the amount of actual cash that could hypothetically be paid out to lendors and investors from the earnings of the company |
|
|
Term
| 3 decisions of finance manager |
|
Definition
capital budgeting
financing
working capital |
|
|
Term
| what kind of info does a proxy statement include? |
|
Definition
| info on voting procedures, background info about the company's nominated board of directors, the company's board of directors and executive compensation, and a breakdown of all fees paid to the auditor |
|
|
Term
| What is a proxy statement? |
|
Definition
a document that a company is required to file when soliciting shareholder votes
it is filed with the SEC |
|
|
Term
| Market Value of Equity Formula |
|
Definition
| Market Value of Equity = Shares Outstanding x Price Per Share |
|
|
Term
|
Definition
| EBITDA = Revenues - Expenses (excluding tax, interest, depreciatiom, and amortization) |
|
|
Term
| What does WACC represent? |
|
Definition
| The blended cost to both debt holders and equity holders of a firm based on the cost of debt and cost of equity for that specific firm |
|
|
Term
| What is the Capital Assets Pricing Model used for? |
|
Definition
| to calculate the required/expected ROE (return on investment) or the cost of equity of a company |
|
|
Term
| What is operating leverage? |
|
Definition
the percentage of costs that are fixed versus variable
(the relationship between a company's fixed and variable costs) |
|
|
Term
| one basis point is equal to ___ of a percent |
|
Definition
|
|
Term
| What position is an investor that short sells a stock taking? |
|
Definition
| he is taking the position that he will be able to purchase the stock at a lower price in the future |
|
|
Term
|
Definition
How freely an asset or security can be bought or sold on the open markets by an investor
it is also how quickly an asset can be converted into cash |
|
|
Term
| How does grade affect speculativity and yield? |
|
Definition
| the lower the grade, the more speculative the stock, and all else equal, the higher the yield |
|
|
Term
| if the price of a 10 year treasury note rises, what happens to the notes yield? |
|
Definition
| the yield and price are inversely related, so when the price goes up, the yield goes down |
|
|
Term
| If two stocks have a strong positive correlation, how do they move in relation to one another? |
|
Definition
| when one moves up, the other should move up as well and vise versa |
|
|
Term
| An example of a non-liquid asset? |
|
Definition
| in the example of a large corporation, a large specialized factory or production plant which could take years to convert into cash |
|
|
Term
| What are some negatives to "going public" |
|
Definition
| sharing future profits with the public investors, loss of confidentiality, loss of control, IPO expenses to investment banks, legal liabilities, etc. |
|
|
Term
| If two stocks have a strong negative correlation, how do they move in relation to one another? |
|
Definition
| When one moves up, the other should move down and vice versa |
|
|
Term
| What can an investor eliminate is he is properly diversified? |
|
Definition
| all unsystematic risk from his portfolio |
|
|
Term
| Who is a more senior creditor, a bondholder or stockholder? |
|
Definition
| a bondholder is always a more senior creditor than a stockholder |
|
|
Term
| In the event of bankruptcy/liquidation, does a bondholder or stockholder get paid first? |
|
Definition
|
|
Term
|
Definition
| the action of buying or selling stock in a company based on info that is not publicly available |
|
|
Term
| how many basis points is equal to .5 percent? |
|
Definition
|
|
Term
| the senior debtholder usually consists of? |
|
Definition
banks are senior bondholders
they usually have some of the firms assets as collateral |
|
|
Term
| What does the calculation of YTM include? |
|
Definition
| the current market price, the par value, the coupon payments, and the time to maturity |
|
|
Term
| What are some losing investments? |
|
Definition
|
|
Term
| Value of Perpetual Bond Formula |
|
Definition
Coupon Payment
Current Interest Rate on Comparable Bonds
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Term
| What are forwards contracts? |
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Definition
| derivative agreements which call for future delivery of an asset at an agreed upon price |
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Term
| What are some gaining investments? |
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Definition
-Government Bonds
-AAA Corporate Bonds |
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Term
| Risk Bearing Financial Institution |
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Definition
| Financial organization that assume the risks of large groups of customers and use risk diversification to reduce risks in these groups |
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Term
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Definition
| Revenues>COGS>EBITDA>EBIT>EBT>NI |
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Term
| When can swaps benefit both companies? |
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Definition
| if one has access to lower floating rate, and one has access to a lower fixed rate, and each desires the rate the other company has access to |
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Term
| 7 Reasons two companies would want to merge |
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Definition
-synergies
-new market presence
-consolidate options
-gain brand recognition
-grow in size
-gain patents, plants, equipment; intellectual property
-management ego and the desire to run a larger company and increase their own compensation |
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Term
| What rights can be gained by merging? |
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Definition
| the rights to some properties(physical or intellectual) that they couldn't gain as quickly by creating or building it on their own |
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Term
| What are some ways you can value a company? |
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Definition
-Comparable companies (to calculate either enterprise value or equity value)
-market valuation/Market Capitalization
-Precedent Transactions
-DCF Analysis
-LBO Valuation |
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Term
| What face value are bonds normally issued at? |
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Definition
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Term
| Face Value/Par Value of a Bond Definition |
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Definition
| Face Value (par value) of a bond is the amount the bond issuer must pay back at the time of maturity |
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Term
| How would you calculate an equity beta? |
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Definition
You would perform a regression of the return of the stock versus the return of the market as a whole (the S&P 500)
The slope of the regression line is the beta |
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Term
| What is the market risk premium? How is it calculated? |
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Definition
| The required return that investors require for investing in stocks over investing in "risk-free" securities. It is calculated as the average return on the market--the risk-free rate |
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Term
| How do you calculate Free Cash Flow? |
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Definition
EBIT (1-T)+Depreciation+Amortization-Change in Net Working Capital-Capital Expenditure*
*T=Tax Rate |
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Term
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Definition
-Promises to pay the seller annual payments
-recieves a large payout if the underlying company defaults
-The swap will actually become more valuable if the underlying company becomes financially distressed |
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Term
| If the stock market falls, what would you expect to happen to bond prices and interest rates? |
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Definition
| When the stock market falls, investors flee to safer securities, like bonds, which causes the demand for those securities to rise and therefore the price. Since prices and yield move inversely, if bond prices rise, yields will fall. The government may lower interest rates in an attempt to stimulate the economy |
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Term
| What is Currency Depreciation? |
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Definition
| Currency depreciation occurs when a country allows its currency to move according with the currency exchange market and the country's currency loses value |
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Term
| If the spot exchange rate of dollars to pounds 1.60/lb, and the 1 year forward rate is 1.50/lb, would we say the dollar is forecast to be strong or weak relative to the lb? |
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Definition
| since 1 lb costs more dollars now than it would in the future, the dollars is expected to strengthen in the next year |
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Term
| What will happen to the price of a bond if the fed raises interest rates? |
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Definition
| If interest rates rise, newly issued bonds offer higher yields to keep pace, therefore existing bonds with lower coupon payments are less attractive and the price must fall to raise the yield to match the new bonds |
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Term
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Definition
Sale Price + Dividends - Purchase Price
Purchase Price
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Term
| What does adding a risky stock do to the overall risk of a portfolio? |
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Definition
-depends on the correlation of the new investment to the portfolio
-could potentially lower the overall risk of the portfolio |
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Term
| Why could two bonds with the same maturity, same coupon, from the same issuer, be trading at different prices? |
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Definition
-one of the bonds could be callable
-one of the bonds could be putable
-one of the bonds could be convertible |
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Term
| If you believe interest rates will fall and are looking to make money due to the capital appreciation on bonds, should you buy them or sell them short? |
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Definition
| Since price moves inversely to interest rates, if you believe interest rates will fall, bond prices will rise and therefore you should buy bonds |
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Term
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Definition
-promises to pay swap buyer a certain amount if the underlying company defaults
-recieves annual payments in exchange for the 'insurance'
-sellers include banks, hedge funds, insurance companies, etc |
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Term
| What is the default premium? |
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Definition
| The difference between the yield on a corporate bond and the yield on a government bond with the same time to maturity to compensate the investor for the default risk of the corporation, compared with the "risk-free" comparable government security |
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Term
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Definition
The 10-Q is a boiled down 10-K and must be filed by public companies for each fiscal quarter
-it is focused mainly on financial statements and includes little narrative info |
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Term
| Would I be able to purchase a company at its current stock price? |
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Definition
| Since purchasing a majority stake in the company will require paying a contract premium, most of the time, the buyer wouldn't be able to simply purchase a company at its current stock price |
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Term
| How would you diversify your portfolio? |
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Definition
| You would pick investments that have a low correlation so that when economice conditions push one investment to have a good period, the stock will be having its down period and vice versa |
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Term
| What are some factors that will influence a bonds discount rate |
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Definition
-a companys credit rating
-the volatility of their cash flows
-the interest rate on comparable US bonds
-the amount of current debt outstanding |
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Term
| What is the most prominent "swaps" lately? |
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Definition
| credit default swaps issued by banks as a type of insurance against companies not being able to pay back their debt |
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Term
| When is a call option in the money? |
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Definition
| when its exercise price is below the market price since an investor can purchase the asset at the exercise price and instantly sell it in the market |
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Term
| If the president is impeached and convicted, how are interest rates affected? |
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Definition
| Any negative news about the country as a whole will lead to fears that the economy may decline, so the fed would most likely lower interest rates to stimulate economic expansion |
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Term
| What comprises investing on the statement of cash flows? |
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Definition
change in cash from activities outside normal scope of business
may include the purchase of property, plant, and equipment, and other investments not reflected on the income statement |
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Term
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Definition
-Mixing a wide variety of investments in your portfolio
-it means investing in stocks, bonds, alternative investments, etc.
-it also means investing across different industries |
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Term
| What does eliminating all unsystemic risk from a portfolio do? |
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Definition
-limit the risk associated with an individual stock
-doing this means the portfolio will only be affected by factors affecting the entire market |
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Term
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Definition
-A bond that allows the issuer of the bond to redeem the bond prior to its maturity datem therefore ending its coupon payments
-Usually a premium is paid by the issuer to redeem the bond early |
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Term
| What are futures contracts? |
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Definition
| a financial contract obligating the buyer to purchase an asset like a commodity or another financial instrument at a specified price on a specified date. Futures are strictly defined in their terms |
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Term
| Why do you subtract cash from Enterprise Value? |
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Definition
-Cash is already accounted for within the market value of equity
-You also subtract cash because you can either use that cash to pay off some of the debt or pay yourself a dividend, effectively reducing the purchasing price of the company |
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Term
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Definition
Enterprise Value = Market Value of Equity + Debt + Preferred Stock + Minority Interest - Cash
Market Value of Equity is also the company's Market Cap |
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Term
| Characteristics of Forwards Contracts |
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Definition
-Can be customized, negotiated, changed after purchase
-privately negotiated contracts and can be arranged to basically any specifications that the buyer and seller agree on |
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Term
| What is a convertible bond? |
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Definition
| a convertible bond can be "converted" into equity over the course of the life of the bond. Therefore, a bondholder can decide that equity is worth more to them than the bond and the company can essentially buy back their debt by issuing new equity |
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Term
| What are the main difference between futures contracts and forward contracts? |
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Definition
-futures are traded on exchanges and forwards are traded over the counter
-futures are highly standardized, which allows them to be traded on exchanges
-forwards are privately negotiated and can also be changed after the contract has been agreed upon, as long as both parties agree |
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Term
| In words: What is the price of a bond? |
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Definition
| the price of a bond is the net present value of all future cash flows (coupon payments and par value) expected from the bond using the current interest rate |
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Term
| What does the 10-K include? |
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Definition
| a letter to shareholders, managment info + compensation, mgmt. discussions and an auditors statement, the 3 main financial statements (may be among other detailed financial statements) a notes section that explains any adjustments made to a financial statements in previous reports, a financial highlights section that is rather simplifies + unregulated summary of the firms financial performance |
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Term
| What is a primary market? |
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Definition
the market where an investment bank will go in order to sell new securities before they go to market. With an IPO or bond issuance, the majority of these buyers are institutional investors who purchase large amounts of the security
Where a firm sells a new stock or bond issuance to the 1st time it comes to market |
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Term
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Definition
-Financial Statements required to be filed with the Securities and Exchanges Commission for any publicly traded company in the U.S. They must follow specific standards and be available for any person to sell at any time.
-Documentation is required essentially any time a public company has a significant financial event |
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