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Social Science
Economics
Finance
NTU FINANCE QUIZ
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Terms in this set (250)
LECTURE 2: TIME VALUE OF MONEY
LECTURE 2: TIME VALUE OF MONEY
= idea that money available today is worth more than the same amount in the future because you can invest the money
example: deposit money in the bank to earn interest, invest in stocks and bonds
Time value of money
Time value of money is important in finance. It analysis is used in many ways such as:
1. valuing _____ and ________
2. Planning _________________
3. Making corporate decisions regarding investing in new _______ & ________
4. Setting up ______ _________ _________
Stocks & Bonds
Retirement
plant & equipment
loan payment schedule
True or False:
Cash Flow can be positive OR negative because it is often uncertain.
TRUE
= cashflows of different periods have different values
Uneven cash flow
=finding the future value of a cash flow or series of cash flow (money gets bigger)
compounding
=finding the present value of a cash flow or series of cash flows
discounting
=series of equal cash flows at fixed intervals for a specified number of periods
annuity
=cash flows occur at END of a period
ordinary annuity
=cash flows occur at the BEGINNING of period
annuity due
Ordinary Annuity FUTURE VALUE formula?
FV= PMT/I [(1+I)^N]-1
Ordinary Annuity PRESENT VALUE formula?
PV=PMT/I [1-1/(1+I)^N
Future value annuity due is LARGER/SMALLER than Future value ordinary annuity
why?
LARGER, earns on more period of interest
=an annuity that last forever
perpetuity
Will the future value of a lump sum be larger or smaller if compounded more often, holding the stated I% constant?
Larger, as the more frequent compounding occurs, interest is earned on interest more often
=also called the quoted or stated. An annual rate that ignores compounding effects
-stated in contracts. Periods must also be given, e.g. 8 % quarterly compounding or 8% daily interest compounding
nominal rate (I NOM)
=amount of interest charged each period, e.g monthly or quarterly.
-Iper = Inom / M
where M is the number of compounding periods per year. M = 4 for quarterly and M = 12 form monthly compounding
Periodic rate (I PER)
= the annual rate of interest actually being earned, accounting for compounding
Effective (or equivalent) annual rate (EAR = EFF%)
Why is it important to consider effective rates of return?
1. Investments with different ______ _____ provide different effective returns.
2. To compare investments with different compounding intervals, you must look at their _____
compounding intervals
EFF% or EAR
=written in contracts, quoted by banks and brokers. Not used in calculations or shown on time lines.
INom
=used in calculations and shown on time lines
IPer
=used to compare returns on investments with different payments per year
EAR
a loan that is repaid in equal payments over its life.
Widely used for home mortgages, auto loans, business loans, retirement plans, etc.
amortised loan
LECTURE 3: FINANCIAL MARKETS & INSTITUTIONS, FINANCIAL STATEMENTS, CASH FLOWS, TAXES & INTEREST RATES
LECTURE 3: FINANCIAL MARKETS & INSTITUTIONS, FINANCIAL STATEMENTS, CASH FLOWS, TAXES & INTEREST RATES
the process of determining how and at what cost money is allocated among competing interests
Capital Allocation
Who are the 2 players in the capital allocation process?
Suppliers of capital
Demanders of capital
individuals & institutions with "excess funds"
These groups are saving money and looking for a rate of return on their investment.
Suppliers of Capital
individuals & institutions who need to raise funds
These groups are willing to pay a rate of return on the capital they borrow
Demanders of capital
What are the three ways capital is transferred between savers and borrowers?
1. Direct transfer
2. Investment banks
3. Financial Intermediaries
the capital is transferred directly from savers to business without going through any type of financial institution
usually used by SMALL FIRMS, relatively LITTLE capital is raised
Direct transfer
company sells its stocks or bonds to an investment bank who serves as a middle man and facilitates the issuance of the securities. Then the investment bank sells these same securities to the saver.
Investment banks
the capital can be made through a financial intermediary such as a bank or a mutual fund. The intermediary obtains funds from savers in exchange for their securities. The intermediary uses the money to buy and hold the business securities while the savers hold the intermediaries security
financial intermediaries
a venue where goods and services are exchanged
MARKET
place where individuals & organizations wanting to borrow funds are brought together with those having a surplus of funds
financial market
TYPES OF FINANCIAL MARKETS
are for products such as real estate, computers and machines
physical assets
TYPES OF FINANCIAL MARKETS
deal with stocks, loans, notes and mortgages
financial assets
TYPES OF FINANCIAL MARKETS
process that investors get fresh funds
primary
TYPES OF FINANCIAL MARKETS
securities are traded among investors
secondary
TYPES OF FINANCIAL MARKETS
places that are standardized, contracts traded on recognized exchanges
public
TYPES OF FINANCIAL MARKETS
transactions negotiated regularly between two parties
private
T/F:
Direct transfer of funds is used mainly by big firms which need large amounts of capital because they do not want to pay fees to investment banks
FALSE
T/F existing or outstanding stocks are traded in money markets
FALSE
T/F FM company issues 100,000 shares of new stock and sells them to the public through an investment barrier. This is a primary market transaction
TRUE
What are the four financial statements?
Balance sheets
income statements
statements of stock holders equity
statement of cashflows
provides a snapshot of a firms financial position at one point of time
balance sheets
summarizes a firms revenues & expenses over a given period of time
income statements
Company balance sheet
Current assets include what three things
cash & equivalents
accounts receivable
inventory
Company balance sheet
long term (fixed assets) include what two things
Net plant & equipment
other long term assets
Company balance sheet
current liabilities include what 3 things
accused wages and taxes
accounts payable
short-term borrowings
company balance sheet
Stakeholders equity?
must equal what?
common stock + retained earnings
total assets - total liabilities
common stock + retained earnings also known as
common equity
Total assets also known as what?
includes what?
YOU OWN
current assets & fixed assets
Total liabilities and equity also known as what?
includes what?
COMPANY OWES
current liabilities
long-term debt
stakeholders equity
True or false: total assets must equal total liabilities and equity
TRUE
tangible assets: trademarks, copyrights
amortisation
interest comes from
bonds & bank loans
"Bottom line" most important to stockholders?
EPS
Tax treatment of interest and dividends paid by corporations
=tax deductible for corporations (paid out of pre-tax income)
interest paid
Tax treatment of interest and dividends paid by corporations
=paid out of after tax income
dividends paid
Straight line depreciation depreciates the assets cost equally over its life, but _____ results in higher initial depreciation charges.
accelerated depreciation
______ is similar to deprecation except that it represents a decline of intangible assets
amortisation
t/f Although bank b is NOT SAFE, if they increased their interest rate you would consider depositing your money with them
true
What 4 factors affect the level of interest rates
Risk
product opportunities
expected inflation
time preference for consumption
if savers are willing to defer consumption and save for future consumption, interest rates will be relatively _____.
low
=represents the real "risk-free" rate of interest
r*
r* affected by what two things?
time preference for consumption & product opportunities
r*
interest rate on risk free borrowing when there is...
0 expected inflation
=represents any nominal rate
-required return on debt security
-takes into account expected inflation
r
=the rate of interest on treasury securities
rRF
rRF
borrowing by US government: considered ______ & very liquid
default free
-average expected inflation over life of debt security
IP
-compensation for possible default
DRP
-compensation for possible difficulty selling
LP
-compensation for possible loss in value due to increase in IR over maturity of debt security
-affects longer term more than shorter term
MRP
What 3 components are the risk factors?
DRP
LP
MRP
=relationship between IR (or yields) and maturities
term structure
=graph of term structure
yield curve
Draw the chart
long term & short term debt instruments
Draw the chart
long term & short term debt instruments
True or False:
the maturity risk premium increases as time to maturity increases as it should be since the equation is linear
true
Hypothetical yield curve:
Yield Curve is often _____ sloping
Upward slope due to ______ in expected _____ and increasing ____
upward
increase
inflation
maturity risk premium
Relationship between treasury yield curve & yield curves for corporate issues
_______ are higher than that of _____, though NOT necessarily parallel to the _______.
____ & __ difference in rates.
Corporate Yield Curves
treasury security
treasury curve
DRP & LP
The spread between corporate & treasury yield curves _____ as the corporate bond rating ______.
widens; decreases
corporate bond ratings indicate the likelihood of ...
default by the borrower
Macroeconomic Factors That Influence Interest Rate Levels
1. Federal ______ ______ (monetary policy)
2. Government _____ ______ or ______
3. ______ factors
4. Level of ____ _____
reserve policy
budget deficits or surpluses
international
business activity
t/f
future markets are markets in which physical assets such as wheat, autos etc. are immediately traded
FALSE
t/f
if thomas buys stocks of Singtel from a seller through the Singapore stock exchange it would be considered a secondary market transaction
true
t/F
short term debts and common stock are examples of money market instruments
false
common stocks are ..
capital market instruments
LECTURE 4: BONDS AND THEIR EVALUATION
LECTURE 4: BONDS AND THEIR EVALUATION
=a long-term debt instrument in which a borrower agrees to make payments of principal and interest, or specific dates, to the holders of it
Bond
2 most basic types of bonds
zero-coupon bond
coupon bond
in bond terminology:
Yield = _____=_______
return; interest rate
Bonds
I =
yield to maturity
=face amount of the bond, which is paid at maturity (assume 1000)
par value
=date the bond must be repaid
maturity date
=nominal rate of return earned on a bond held until maturity
yield to maturity
yield to maturity is also known as
promised yield
=amount paid by the issuer regularly
coupon
= stated interest rate (generally fixed) paid by the issuer. Multiply by par value to get dollar payment of interest
coupon interest rate
formula for coupon
coupon = coupon interest rate X par value
Fixed on a bond certificate and cannot be changed?
4 things
par value
coupon interest rate
maturity date
payment frequency
NOT fixed on a bond certificate
2 things
price of bond
yield to maturity
The value of financial assets:
Present value, P0 and rate of return have a ____ relationship
inverse
For bonds, CF would be the ____ ____ and payment of _________ _____ at maturity
coupon payments
par value
= the opportunity cost of debt capital and is the rate that could be earned on alternative investments of equal risk
discount rate (r)
the discount rate is also known as the ____ and the ____
required rate of return
yield to maturity
two annual bonds with the same maturity and same risk must have the same ___.
r
if present value is greater than par value
premium bond
if present value is lower than par value
discount bond
risk is the same, the bond will have the same what?
yield to maturity
present value equals par value
par bond
if yield = coupon rate
bond price = par value
if yield LESS than coupon rate
bond price GREATER than par value
if yield is GREATER than coupon rate
bond price less than par value
current yield formula
annual coupon/price
expected capital GAINS yield formula
P1 - P0 / P0
Premium bond would ____ until it met par value at maturity date.
investor would get?
compensated by?
decrease
capital loss
High annual coupon payment
discount bond would ____ until it met par value at maturity date.
investors would get?
compensated by?
increase
capital gain
lower annual coupon rate
semi annual bonds
Multiply ___ by 2
Divide ____ by 2
Divide ___ by 2
Years
interest rate
annual coupon
2 types of risk of a bond
investment risk
default risk
investment risk includes what 2 things
interest rate risk (price risk)
reinvestment risk
=concern that rising rd will cause the value of a bond to fall
interest rate (price risk)
All else being equal,
bonds with longer _____ have higher interest rate risk.
maturity
t/f longer maturity bonds are more sensitive to interest rate changes
TRUE
=the concern that rd will fall, and future CF's will have to be reinvested at lower rates, hence reducing income
reinvestments risk
short term bonds have high _____
long term bonds have high _____
reinvestment risk
interest rate risk
What does it mean when a issuer defaults?
investors receive less than the promised return
default risk is influenced by the issuers _____ strengths and terms of the _____ ____.
financial;
bond contract
bond _____ reflect the probability of a bond issue going into default
ratings
LECTURE 5: RISK AND RETURN
LECTURE 5: RISK AND RETURN
Most investors are ______
risk averse
=investors dislike risk and require rates of return to encourage them to hold riskier securities
risk-averse investors
t/f risk-averse investors will always choose the lowest risk investment
FALSE
=the difference between the return on a risky asset and a riskless asset
----serves as compensation for investors to hold riskier securities
risk premium
higher risk implies...
higher required return
rate of return on an investment formula
return = (ending value-amount invested)/ amount invested
Investment risk is related to the probability of _____ that is different from ______
earning a return
expected
Investment risk:
The ____ the chance of earning a return different from expected, the ____ the investment
greater; riskier
Two types of investment risk
Stand alone risk (total risk)
portfolio risk
=the risk that an investor would face if he holds only one asset or security
stand-alone risk (total risk)
=risk that an investor would face when he holds a portfolio with more than one asset or security
portfolio risk
=measures whether returns are likely to be close to the expected returns
measures stand alone (total risk)
standard deviation
tighter the distribution is,
the ____ the standard deviation is,
the less _____.
less; stand-alone risk
=contains all stocks in the market
market portfolio
Returns for each state of the worlds economy estimated based on future ____ and _____
cash flows; current price
T-bill is independent from the _____.
economy
MP moves with the economy.
During recession onward... ?
negative returns but gets better
Coll is ____ cyclical
meaning what
counter
postive to negative
HT moves...
with economy
Example of Coll
Debt collector
t/f: T bills provide a completely risk free return
FALSE
=a standardized measure of dispersion about the expected value that shows the risk per unit of return
coefficient of variation
coefficient of variation is useful when comparing investments with different __________.
expected returns
A portfolios expected return is a weighted average of the returns of the portfolios component _______.
assets
Will there always be diversification benefits when combining stocks?
depends on the _______ between the stocks
correlation coefficient
adding more stocks to a portfolio may reduce the portfolios risk. However diversification benefits exist as longs as stocks are not positively correlated meaning what
p=+1
If the correlation coefficient is less than 1, diversification benefits are _____ when two stocks are combined in a portfolio
, i.e., the standard deviation of the portfolio is _____ than the ________ individual stock's standard deviation.
However, this does not imply that the portfolio will have a standard deviation lower than________ stock standard deviations.
obtained
less
weighted average
each of the individual's
Stand alone risk can be decomposed into two components
what are they
diversifiable risk
market risk
can be diversified through proper diversification
diversifiable risk
cannot be eliminated through diversifaction
market risk
=model linking risk and required returns
CAPM
CAPM suggest that a stocks required return equals the ______ plus a ___ that reflects the stocks risk after diversification
risk free return
risk premium
CAPM
the relevant riskiness of a stock is its market risk as measured by what
beta
additional return over the risk-free rate needed to compensate investors assuming an average amount of risk
market risk premium
depends on the perceived risk of the stock market and the investors degree of risk aversion
size
the greater the degree of risk aversion...
the higher the market risk premium
varies from year to year, but most estimated suggest that it ranges between 4% and 8% per year
value
measures a stocks market risk, and shows a stocks volatility relative to the market
beta
A stocks beta is the expected change in it return given 1% change in the return of the __________
market portfolio
Well diversified investors are primarily concerned with how a stock is expected to moved relative to the ..
market in the future
a typical approach to estimating beta is to run a regression of the securities _____ against the past returns of the _____
past returns
market
The slope of the regression line is defined as the ____ for the security
beta coefficient
beta = 1
security is just as risky as the average stock
beta greater than 1
riskier than average
beta less than 1
less risky than average
Most stocks have betas in the range of
0.5 to 1.5
describe slopes of HT, TB, and COLL
HT positive slope
TB horizontal slope
Coll: negative slope
graph representation of CAPM formula
plots what
the intercept is
the slope represents the
SML
expected return vs beta
the risk free rate
market risk premium
How to know whether a stock is undervalued or overvalued?
compare required returns with expected returns
expected return is GREATER than required return
undervalue
expected return is EQUAL than required return
fairly valued
expected return is LESS than required return
overvalued
Factors that change the SML
what if investors raised inflation expectation by 3%, what would happen to the SML
no change in the slope of the SML
the y-intercept would be shifted up by 3%
Factors that change the SML
What would happen to the SML if the investors aversion to risk increased, causing the market risk premium to increase by 3%
change in the slope of the SML
the y-intercept would not be affected
-returns an investor requires given the riskiness of the stock and returns available on other investments
required returns
=returns an investor who buys the stock expects to get in the future
expected returns
only buy the stock when expected returns is _____ than the required returns
greater
=returns you actually get
realised returns
expected and required returns are ______ while realised returns are _______
forward looking
historical
t/ f When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market
FALSE
When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market
While it is true that only market risk cannot be eliminated by diversification, it is not true that it would be constant in the market
This is due to the market risk of a stock being measured by ____ and shows stock ____ relative to the market
beta
volatility
t/f portfolio diversification reduces the variability of returns on an individual stock
False
portfolio diversification reduces the variability of returns on an individual stock
Portfolio diversification does not reduce the variability on_____ stocks but on the portfolio as a _____
individual; whole
t/f an investor who holds just one stock will generally be exposed to more risk than an investor who holds a diversified portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk
False
an investor who holds just one stock will generally be exposed to more risk than an investor who holds a diversified portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk
There will be no compensation as, there are __ risk involved and generally compensation is only required for _____
diversifiable
market risk
t/f Market risk refers to the tendency of a stock to move with the general stock market. A stock with above- average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0
TRUE
LECTURE 6: STOCKS AND THEIR VALUATION, AND STOCK MARKET EFFICIENCY
LECTURE 6: STOCKS AND THEIR VALUATION, AND STOCK MARKET EFFICIENCY
= shareholders share in the profits through dividend and stock price appreciation (capital gain)
-sometimes they also suffer losses when the stock price falls (capital loss)
Returns
outsiders estimate ____ to help determine which stocks are attractive to buy and sell
intrinsic value
stocks priced below its intrinsic value are
undervalued
stocks priced above intrinsic value are
overvalued
stocks with constant growth
discounted dividend model
stocks with non-constant growth
discounted dividend model
The constant growth model can only be used if what two things happen
rs >g
g is expected to be constant forever
Expected dividend yield formula
D1/P0
Expected capital gains yield
P1-P0/P0
expected total return formula
dividend yield + capital gains yield
a preferred stock is a ______
hybrid security
preferred stock
like bonds, preferred stockholder receive a fixed ____ that must be paid before dividend are paid to common stockholders
dividend
Preferred stock
companies can _____ preferred dividend payments without fear of pushing the firm into _____
omit
bankruptcy
What is the preferred stock formula?
Vp = D/rp
in equilibrium stock prices are ___ and there is no general tendency for people to buy versus to sell.
stable
Two conditions related to market equilibrium
1. The current _____ equals its _____
2. ______ equals _____
market stock price;
intrinsic value
expected returns;
required returns
if price is below intrinsic value...
the current price is too ____ and offers a ______.
___ orders will be greater than ___
The price will ___ until expected return equals required return.
low ; bargain
buy; sell
Equilibrim levels are based on the markets ________ and the markets ____. Which are both dependent on the attitudes of _____ investors.
estimate intrinsic value;
required rate of return
marginal
t/f
From an investor's point of view, holding a preferred stock is less risky than holding the bond issued by the same company and it is also less risky than holding the stock issued by the same company.
FALSE
From an investor's point of view, holding a preferred stock is less risky than holding the bond issued by the same company and it is also less risky than holding the stock issued by the same company.
FALSE
Like bonds, preferred stock has a fixed dividend that must be paid before dividends can be paid on the common stock.
However, the company can omit the preferred dividend without throwing the company into bankruptcy.
In the case of bonds, if the company omit the payments to bondholders, they can bring the company to court and it may go bankrupt.
Therefore, from an investor's point of view, preferred stock is riskier than _____ but has less risk than ______
bonds
common stocks.
=a market in which prices are close to intrinsic value and stocks seem to be equilibrium
efficient market
Market efficiency DOES NOT require the ____ to equal the ____ at every point in time
it just require that the deviation between the market price and intrinsic value are ______
market price; intrinsic value
random
t/f investors cannot beat the market except through good luck or better information
TRUE
concepts of market efficiency are related to the assumptions about what ________ is available to investors and reflected in the _____
information; price
it is also possible that some markets are efficient while others are not. The key facts are the ___ of the company, and the ___ between the company and the investors
size; communication
=The right to purchase new stocks on a pro-rata basis
pre-emptive right
=The notion that a stock's price reflect all available information
efficient market hypothesis
=The expected return is equal to the required return
market equilibrium
=Commonly-used multiple for comparing firms
P/E
=Model for calculating stock price of firm with constant growth forever
Gordon model
LECTURE 7: THE COST OF CAPITAL
LECTURE 7: THE COST OF CAPITAL
=analysis of potential projects
example: investments in tangible and intangible assets, marketing campaigns
capital budgeting
capital budgeting involves ____ decisions and large ________.
Long-term
expenditures
capital budgeting is very important to a firm's _______.
future
cost of capital is the ______ average cost of each type of financing.
weighted
When making an investment, the investment must give a return that is a least _____ to the cost of capital. Otherwise, equity holders make a loss
equal
3 common types of capital
long term debt
preferred stock
common equity
t/f long term debt includes any short term debt if it is used on a regular basis
TRUE
Common equity can come in 2 ways. What are they?
retained earnings
New common stock
=mix of debt, preferred stock, and common equity used to finance the firms assets
capital structure
=desired optimal mix of equity and debt financing that most firms attempt to maintain in the long run
target capital structure
WACC
should used weights calculated based on _____ rather than weight calculated on ______.
market value
book value
WACC
use ___ cost not ____ cost
marginal; historical
WACC
shareholders should focus on ____ capital cost
after-tax
WACC
Only rd needs adjustment, because interest is ________
tax deductible
=the marginal cost of common equity using retained earnings
rs
=the rate of return investors require on the firms's common equity using new common stock
re
When a company issues new common stock they also have to pay _____ costs.
flotation
Two methods to account for flotation costs
1. Add flotation costs to the initial ______ costs
2. Adjust the ________
project
cost of capital
=overall WACC for the whole firm
composite WACC
What factors influence a company's compostie WACC
1. ____ conditions
2. The firms _______ and ______
3. The firms ___ policy. Firms with riskier projects generally have a ____ WACC
capital structure
dividend policy
investment; higher
Projects should be accepted if and only if their _________ exceed their ______
expected returns
cost of capital
cost of capital is the _______
hurdle rate
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Related questions
QUESTION
Look at the below yield curve inversion chart. What is most likely to happen as a result of the most recent yield curve inversion shown?
QUESTION
What makes a relationship strong on scatterplot?
QUESTION
.... means that a company uses the same accounting principles and methods from year to year
QUESTION
Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is cost of goods sold?