bloomberg assessment test flashcards
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Bloomberg Assessment Test FlashcardsTRANSCRIPT
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bloomberg assessment test 226 terms by Ro3358
RolesofFinancialReporting FinancialReportingisusedtoprovideshareholders,potentialinvestors,lendersandcreditorsthenecessaryresourcestomaketheirdecisions.
IncomeStatement StatementofoperationsProfitLossStatement
Itisadynamicstatementitspansaperiodoftime.
Itisdividedinto3segments:revenues,expenses,andotherincome(gainsandlosses).
StatementofComprehensiveIncome: Reportsallchangesinequityexceptforshareholderstransactions(dividendsdistribution,buybacks...)
BalanceSheet Atapointintime
CashflowStatement Adynamicstatementthattrackschangesincash.
Thereare3categories:
OperatingCashflow(CFO):Cashgeneratedfromcoreactivities.
InvestmentCashflow(CFI):Buyingassetsforgeneratingrevenue(plants,equipment,etc.)
FinancingCashflow(CFF):Issuingdebt,dividends,etc.
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StatementsofChangesinOwnersEquity: Stockholders'equityfromlastyearisreconciledfromthisyear.
Buybackofshares,issuanceofshares,dividends,Netincomefromtheincomestatement,andothercomprehensiveincome(unrealizedgainsandlosses)
Whataretheimportanceoffootnotes? Basisofpresentations
Accountingmethodsandassumptions
Furtherinformationonamountinprimarystatements(moredetailslikepensionliability)
Businessacquisitionsanddisposals
Contingency(liabilityoffutureevents)
Legalproceeds
Stockoptionsandbenefitplans
Significantcustomers
Segmentdata(breaksdownkeyinformationlikesales,assets,operatingprofitsondivisionallevel)
Quarterlydata(IfitisaEuropeancompanytheyreportsemiannually)
RelatedPartyTransactions(anytransactionsbetweenemployees)
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ManagementDiscussionandAnalysis: NotAudited:(Thereforenotcompletelydependable)
Adescriptionofhowthefirmhasdoneinthepastandhowitwillpreforminthefuture.
Itbreaksdownitsoperationsandexplainshowtheyaredoingit.
Itisbasicallyanoverviewofthebusiness.
Cashflowtrends
Discussiononcriticalaccountingchoices(alsodiscussedhereaswellasatdisclosure.)
Uncertaintyandriskisdiscussedhere.
TheAuditReportObjective: TheAuditisanindependentreviewofthecompaniesfinancailstatements
AppointedbytheshareholdersItstrivestoreduceagencycost(makingsurethemanagementisn'thidinganythingfromtheshareholders.
ReasonableAssurance: Reasonableassurancethatthefinancialstatementsarefreefrommaterialerror.
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AuditOpinions Unqualified:Clean
Qualified:Exceptionstoaccountingprinciples.Theauditorsdisagreewithcertainpartsofthetreatmentofthefinancialstatements.
AdverseOpinion:Wedonotbelievetheaccountsaretrue.Thisstatesthatthefinancialstatementscannotbetrusted.
DisclaimerofOpinion:Thereisinsufficientdatatomakeanopinion.
WhatdoestheUSGAAPrequirefromauditors?
Aopiniononthecompaniesinternalcontrols.
AuditReport 1)ResponsibilityofmanagementtoprepareaccountsIndependenceofauditors.
2)ProperlypreparedinaccordancewithrelevantGAAP:IFRS(IS)orUSGAAP.
3)Accountingprinciplesandestimateschosenarereasonable.
SupplementarySourcesofInformation: Quarterly,semiannualreports.
ProxyStatements
Corporatereports,pressreleases
Economic,Industrydata.
Quarterly,semiannualreports. Updatesofmajoraccountingstatements(Balancesheet,cashflow,incomestatementandfootnotes.
ProxyStatements: Containinformationonwhatshareholdersarevotingon.
Economic,andindustrydata. Wallstreetjournalisanexample.
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FinancialStatementAnalysisFramework 1)Purposeandcontextofanalysis2)CollectData3)ProcessData4)Analyze/InterpretData5)Conclusionandrecommendations6)Updateanalysisonperiodicbasis.
RegardingthereportofofindependentauditorsunderU.S.GAAP,theauditreport:
Mustprovideopiniononcompaniesinternalcontrols.
OwnersEquityFormula: ContributedCapital+RetainedEarnings
CapitalatParValue Sharesatparvalue
AdditionalPaidinCapital Anyincreasesinsharevalue
ContributedCapital ContributedCapital=CapitalatparValue+AdditionalPaidinCapital
RetainedEarnings RE=LastyearsRE+/Earnings(Loss)Dividends.
AccrualandValuationAdjustments Accruedexpenses(Liability)Bad/DoubtfulAccounts(Asset)Prepaidexpenses(Asset)AccruedRevenue(Asset)Impairment/Writedown(Asset)UnearnedRevenue(Liability)
FASB: FinancialAccountingStandardsBoard:
IASB: InternationalAccountingStandardBoard
SEC: ThelistingservicesofUS.
IOSCO: InternationalOrganizationofSecurityCommission
1)Protectinvestors2)Insuringmarketsarefair,transparent,andefficient.3)Reducesystematicrisk.
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ConvergenceofIFRSandIASB. 1)IncreaseComparability.
2)Decreasetheproblemsandexpensesinraisingcapitalinforeigncapitalmarkets.
3)Decreaseproblemsincreatingconsolidatedfinancialstatementsforforeignsubsidiaries.
BarriersinConvergence: 1)Differenceinviews
2)Pressurefromindustrygroups
3)Manydifferentcountriesinvolved.
IFRSFramework: 1)RelevanceTheinformationcaninfluenceusersopinion.Materiality
2)Characteristics:ComparabilityVerifiabilityTimelinessUnderstandability
IFRSFrameworkTradeoffs: Relevancevs.verifiability(moretimegivenwillgiveabetterideaofcertainaccounts.)
Benefitsvs.Costs
Excludenonquantifiableinformation.
IFRSAssets: Resourcescontrolledbytheentityresultingfrompasttransactions.
Probablefutureeconomicbenefitsflowtoenterprise
IFRSLiability: Obligationsresultsfrompastevents
Settlementresultsinprobableresourceoutflow
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IFRS(Equity) Shareholders'residualinterest
AssetsLiabilities
IFRS(Income): Resultinanincreaseinequity
IFRS(Expenses): resultinadecreaseinequity.
IASBRequiredStatements: BalanceSheetIncomeStatementStatementofComprehensiveIncomeChangesinEquityCashFlowStatementsAccountingPolicies,notes
IASBFundamentalPrinciples: FairPresentationGoingConcernAccrualBasisConsistencyMateriality
IASBPresentationRequirements AggregationwhereappropriateNoOffsetting(separateaddingupexpensesandrevenuesintoonetotal)ClassifiedbalancesheetMinimuminformationonfaceMinimumdisclosureComparativeinfo.Reportingfrequencyneedstobeatleastannual.
IFRS/U.S.GAAPDifferences FASBdefinesincomeandexpensesaselementsrelatedtoperformancewhileIASBalsoincludesgains,losses,andcomprehensiveincome.
FASBdefinesanassetasafutureeconomicbenefitwhereIASBdefinesitasaresourcesfromwhicheconomicbenefitscomesfrom.
FASBDoesnotallowupwardvaluation
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BarrierstoSingleFramework: Valuation:HistoricvalueReliableFairValueRelevant
StandardSettingPrincplebasedveryewspecificrulesabouttransactions
RulesbasesRespectivebutnotflexible
ObjectbasesCombinesprinciplesandruleswhatIFRSandUSGAAPuse.
Measurement:IFRSandUSGAAPmostlyfocusonthebalancesheetandtheincomestatementcomesasresidualofthat.
IASBRequirementsforRevenueRecognition:
1)Riskandrewardtransferredtonewowner.2)Nocontinuingcontroloverthegoodsold3)Reliablerevenuemeasurement4)Probableflowofeconomicbenefit5)Measurable.
SECAdditionalGuidanceforRevenueRecognition:
1)Evidenceofanarrangmentbetweenbuyerandseller.
2)Completionoftheearningprocess,firmhasdeliveredproductorservice.
3)Priceisdetermined.
4)Assuranceofpayment,abletoestimateprobabilityofpayment.
SalesBasisMethod: Usedforwhenagoodorserviceisprovidedattimeofsale.
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PercentageofCompletion: Aconstructionrevenuerecognitioncriteria.
Musthavereliableestimatesoftotalcosts,revenues,andcompletiontime.
SameforIFRSandGAAP.
Revenue=(TotalCosttoDate/TotalProjectCost)xSalesPrice
Profit=RevenueCostincurredthatyear
Rememberforsubsequentyearstodeducttherevenuethatyouhavealreadyrecorded.
CompletedContractMethod: Ifyoudon'thavereliableestimatesoftotalcosts,revenues,andcompletiontime.
Keepseverythingoutoftheincomestatementuntilthecontractisactuallyfulfilled.
Sojusttotalthecostsandsaleintheend!
NotallowedunderIFRS!USGAAPonly!
UnderIFRSyoumatchexpenseswithsales,sonoprofit,untilcompletion.
So1styearexpense=1styearrevenueandsoonuntilcompletion.Atcompletionyouthenrecordaprofit.
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Installment: Allowsacustomertopayininstallments.
Usedwhenacompanycannotdeterminethelikelihoodofcollectionbutdoesknowrelativelytheexpensesitwilloccur.Thereby,theexpensesandsalesarematched.
Theamountofrevenuerecognizedduringaperiodiswhatevertheinstallmentamountis.However,theexpenseisapercentageofhowmuchtheinstallementispayingoff.
Forexample:ifthetotalsalevalueis30,000,totalexpenseis10,000,andtheinstallmentamountinthefirstyearis8,000then:revenue:8,000(installementamount)expense:2,666.67(8,000/30,000x10,000)
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CostRecoveryMethod: Therearetwosourcesofuncertainty:1)Whetherthecustomerwillpayyou.2)Youdon'tknowthetotalcostoftheserviceorgoodsprovided.
Matchcostsagainstrevenueandnotrecognizerevenuetilltheend.
Soforinstanceifthetotalsalevalueis30,000butyoudon'tknowtheexpensesquiteYETsoyouwritedowntherevenueandexpensesuntilthefinalyearwhenyouknowthetotalexpenses.
Firstyearsayyoureceived14,000.Revenue:14,000Expenses:14,000(yousimplymatch)
Secondyeartheprojectiscompletedandyourfigureoutthatthetotalexpensesincurredwere$18,000andyoureceiveasecondpaymentof16,000fromyourclient.
Revenue:16,000Expenses:4,000(whateverisleftfromthetotalexpenses).
Whateverleftisprofit,inthiscaseitis12,000.
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WhataretheeffectsofPOCvs.CCmethodinregardstotheincomestatement?Incomevolatility?Cashflow?
POCwillresultahigherincomestatement.
CCwillresultinasignificantlyhigherincomevolatilitysincetherewillbenorevenuerecognizeduntilthefinalyearwhereuponamassiverevenuerecognitionoccurs.Remember:volatilityisrisk!
Cashflowmethodsarenoteffected!Thereasonforthisisbecausenoactualcashisseenreceivedtheend.
InstallmentpaymentsunderIFRS: YourecordthePVvalueoftheinstallmentsandrecordwhateverdifferenceyouactuallyreceivefromtheinstallmentsasinterestearnedovertime.
Iftheoutcomeoftheprojectcannotbeestimatedreliably,revenuerecognitionunderIFRSissimilartocostrecoverymethod.
Barter: Anexchangeofgoodsandservicesinsteadofcash.
Recordsthesaleatthepriceofthefairmarketvalue.
Thevalueshouldbeatarmslength(notinsiders.)
IFRS:
USGAAP:Fairvalueonlyifthegoodsweresoldforcashinthepast,orotherwiseyouusethecarryingvalue(assetaccumulateddepreciation.)
Netreporting: Sellproductsbutneverholditintheirowninventory.
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USGAAPshouldreportgrossif: 1)Istheprimaryobligator2)Bearsinventoryrisk3)Bearscreditrisk4)Canchoosesupplier5)Haslatitudetosetprice
Giveexampleof"aggressiverevenuerecognition"
Percentageofcompletion(becauseyourecognizerevenuesooner.)
Conservative: Costrecovery.
Expense:Accrualbasis Matchexpensestorevenuesotheydon'tpileup.
COGSCalculation: BGNInventory+PurchasesEndinginventory=COGS
Amortizationforgoodwill: Itisn'tamortized.Insteaditischeckedforimpairment.
AccountingChanges:Principle Principle:forexample:LIFOtoFIFO
Youhavetoshowthepastfinancialstatementsrestatedunderthenewaccountingchanges.
AccountingChanges:Estimates Youdonothavetorestatepriorstatements.
PriorPeriodAdjustments: Typicallyrequiresarestatementoffinancialstatements
Mustdisclosethenatureoftheerror.
NonOperatingItems: InterestDividendsGainandLossondisposal.
SimpleCapitalStructure: Nopotentiallydilutedsecurity.
Adilutedsecurityisanysecuritythatisconvertible(convertiblebonds,warrants,etc.)
ComplexCapitalStructure: Youhavedilutedshares.
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Potentiallydilutedsecurities: Stockoptions(employee)WarrantsConvertibleBondsConvertiblepreferredshares
DilutivesecuritiesdecreaseEPSAntidilutivesecuritiesincreaseEPS
BasicEPS BasicEPS=(NetIncomePreferredDividends)/(Weightedaverage#ofcommonstock)
HowisstockDividendaccountedforinaweightedaverage#ofsharesquestion:
Itisappliedtotheamountofsharesoutstandingforthepreviousmonths.
IncomeTaxExpense= TaxesPayable+ChangesinDeferredTax
TaxLossCarryforward: Whenyouhaveanetlossyougetadeferredtaxfornextyear.
TaxBase: Netamountsofassetsorliabilitiesusedfortaxreportingpurposes
IncomeTaxExpense: Taxpayable+ChangeinDTLDTA(DeferredTaxAsset)
DTL: DeferredTaxLiability:Bypayinglesstaxesnow,youwillhavetopaymoreinthefuture.
DTA: DeferredTaxAsset:Payingmoretaxesnowwillresultinlesstaxesinthefuture.
YieldRatio: Exactlythesameasrelativespreadexceptno1
CreditSpread: Differencebetweenyieldsofbondsthatonlydifferincreditrating.
Oftenknownasaspreadtotreasuries.
Creditspreadsnarrowduringgrowthandwidenduringrecession.
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Calloption Callawayfromthebondholder.Thereforeitincreasesyieldinordertokeepthebondattractive.
LessLiquid= Moreyield&greatyieldspread
AfterTaxYield= TaxableYield(1Tax)
Y=7%Tax=30%=0.07(10.3)
TaxableEquivalentYield= Takesthetaxfreeyieldbackwardsinregardstotheaftertaxyieldformula:TaxfreeYield/(1tax)
LIBOR: LondonInterbankOfferRate:Mostimportantreferencerateforfloatingratesecurities.
FundedInvestor: BorrowingshorttermatLIBORtofinanceaninvestment.
ArbitrageFreeBondPricing: Theyieldcurverepresentsachangeinyieldthroughouttime.ByusingaspotrateitispossibletodiscountSINGLEfuturecouponpaymentsusingaspotrate.
Soforawholebondsincethereisabunchofcouponpaymentsyoudiscounteachcouponpaymentsatdifferentspotrates.
Thereisarbitrageinthissincethespotratecanbehigherthantheyield.
PV= FV/[(YTM/2)+1]
Howtoprofitofarbitrageinregardstobonds?
Ifthearbitratefreevalueishigherthenbutthebond,stripandsellthecoupons.
Ifthearbitragefreevalueislessthanthebondvaluethenbuythestrippedcouponsandmakeabond.
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YTMisalsoknownas... BEY:BondEquivalentYield
REMEMBERONTHEEXAMTHEYWILLTRICKYOU,ALWAYSMAKEITSEMIANNUALYIELDBECAUSEITSABOND!!!
soifit'sannualonyourcalc,transferitbacktosemiannual!!!
CurrentYield= AnnualCouponPayment/CurrentPrice
SovereignDebt: Bondsissuedbycentralgovernment.
TheUSTreasurysecuritiesareconsideredfreeofdefaultrisk.
Consideredriskfree.
RegularCycleAuctionSingleprice: Thehighestpriceatwhichtheentireissuecanbesold.
RegularCycleAuctionMultipleBid: Winnerbiddersreceivethebondsatwhateverpricetheybid.
AdHocSystem: Governmentauctionsnewsecuritieswhenthemarketconditionsareadvantageous.
TapSystem: Bondsareidenticaltopreviouslyissuedbonds.
Theyreleasethemwhenevertheyneedthem.
TBills: TreasuryBills.Purediscountsecurities,0couponbonds.
Simplybuythemforacertainprice,thenmatureatanother.
NotesandBonds: Offersemiannualcouponpayments.
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TIPS: TreasuryInflationProtectedSecurity:
CouponrateisfixedRealrateofreturnParvalueisadjustedforinflation.
1/2couponratexinflatedadjustedparvalue=Semiannualpayments.
LikeafloatingcouponrateexceptthePVisadjusted.
OntheRunIssues: Themostrecentlyissuedsecurity.Havethemostaccuratepricingandarethemostliquid.
OffTheRunIssues: Olderissuedsecurity.
StrippedTreasurySecurity: 0couponbondcreatedfromtreasurynotesandbondsthepiecesareseparated.
CouponstripsaredenotedCIPrinciplestripesaredenotedPI
Stripsaretaxedonexplicitinterest.
SecuritiesIssuedbyFederalAgencies: Federalrelatedinstitutions:GNMA,TVA...
GovernmentSponsoredEnterprises: SalieMae,FreddieMac,MannieMae
AgencySecurities: Verylittlerisk.
Debentures: Securitiesnotbackedbycollateralunsecuredbonds.
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MPS: MortgagePassthroughSecurityisasecuritymadefromapoolofmortgages.Theownerofasuchasecuritygetsacertainpercentageoftheinterest,principle,andprepaidprincipleinreturnforpurchasingthesecurity.
Theriskwiththesesecuritiesisthatwheninterestratesgoup,prepaymentofprinciplegoesdownsincenoonewantstorefinanceamortgagewheninterestratesaregoingup.
CMO: CollateralizedMortgageObligations:
CreatedfromMPSwiththemaingoalbeingtolevelouttheriskfromtheprepaymentdropsduetointerestraterises.
TherearethreeTranchesshort,medium,andlongperiodandgetfilledupinthatorder.
BasicallywhenpaymentsstartcominginfromprepaymentsduetolowinterestraterisktheyareredirectedtowardsthesetranchesthatthenpayoutacouponpaymenttomaketheMPSattractiveagain.
PrepaymentRisk: Wheninterestratesfallprepaymentsstartcominginandthiscausesthelendertoreinvestthatmoneyatalowinterestrate.
MunicipalSecurities: Exemptfromincometaxinthestateofissue.
TaxbackedBonds: GeneralObligationBond,dependonthetaxingauthorityforpayments.
RevenueBonds: Dependsontherevenuegeneratedfromaspecificgovernmentproject,likeatollroad.
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InsuredBonds: Backedbyinsurancepoliciesintheeventofdefaults.
SecuredDebt: Likeamortgagebonditisassetbacked.
DebentureBond: Unsecuredbond.
RevenueBonds: Dependsontherevenuegeneratedfromaspecificgovernmentproject,likeatollroad.
InsuredBonds: Backedbyinsurancepoliciesintheeventofdefaults.
Prerefundedbond.: Bondsthathavetheirprinciplecashamountalreadyheldasidebytheoriginalissuerofthedebt.Asubsetofthemunicipalandcorporatebondclasses,thefundsrequiredtopayoffrefundedbondsareheldinescrowuntilthematuritydate,usuallybypurchasingTreasuryoragencypaper.
Refundedbondswilltypicallybe'AAA'ratedduetothecashbackingand,assuch,willofferlittlepremiumtoequivalenttermTreasuries.Thedateofrefundingwillusuallybethefirstcallabledateofthebonds.
SecuredDebt: Likeamortgagebonditisassetbacked.
DebentureBond: Unsecuredbond.
SeniorDebenture: Bondshaveapriorityofrepayment,seniorshavethehighestone.
CommercialPaper 2270days,notliquid,basicallycorporateIOU.
MediumTermNote: Continuouslyofferedbyanagent.Theycanbecreatedanytimeandareverycustomizable.
StructuredSecurity: MediumTermNotecombinedwithsomedebenture.
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NegotiableCB DaystoYears,Secondarymarket.
BankersAcceptance: Createdtoguaranteepaymentforshippedgoods.
Shortterm,Purediscount,Liquidityrisk.
ABS: AssetBackedSecurity:Backedbyfinancialassetlikereceivables.
SoldbycreatingaSPV:SpecialPurposeVehiclewhichasecurityformedfromAR.
ExternalCreditEnhancement: CertainABShaveahighdefaultrateandthereforeareunattractivetoinvestors.TomaketheABSmoreattractive,aexternalcreditenhancementisapplied.Itbasicallyisaguaranteeofpaymentviainsurance.
CDO: CollateralizedDebtObligation:Asecuritythatcanbecreatedbasicallyoutofanything.
PrimaryMarket: Newlycreatedsecurities:Firmcommitment:thebankerpurchasesawholeissueandresellsit.Besteffortbasis:Bankerattemptstosellasmuchashecan.PrivatePlacement:Theissuesaresoldprivately.
InterestRatePolicyTools: OpenMarketOperations,DiscountRate,BankReserveRequirements.
OpenMarketOperations: Buyingandsellingtreasurysecuritiesintheopenmarket.
DiscountRate: theratethatthebankborrowfromthefedinordertokeepuptheirreserves.
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BankReserveRequirements: Theamountofmoneyabankhastokeepinreserve.Iftheychangeitthishasaneffectonlendingratessincealowerbankreservewillfreeupmoneyforthebanks.
Bybuyingbondsintheopenmarkettheyputoutnewcashintothesystembecausebeforethatmoneywassittinginthetreasuryinaccessibletonongovernmentalpeople.
TermStructureTheory: 1)Pureexpectationtheory2)LiquiditypreferenceTheory3)MarketSegmentationTheory
Pureexpectationtheory: ThistheorysignifiesthataYieldgraphisanindicationofthemarketsexpectations.Forinstance,anincreaseinyieldinregardstomaturitysignifiesanexpectationofinterestraterise.
Aflatexpectsinterestratetostayflat.
Adeclineexpectsinterestratefalls.
LiquiditypreferenceTheory: Similartopurseexpectationtheory.Sincelongermaturity=morerisk.
MarketSegmentationTheory: Therearesegmentationtotheyieldcurveinregardstoshort,medium,andlongtermdurations.Somecompaniesworkintheshorttermwhileothersinthelongterm.
Thereisasupplyanddemandineachsegmentandacurvecanbeanyshape.
TreasurySpotRates: theappropriatediscountrateatapointinthefuture.
AbsoluteSpread: AbsoluteSpread=Highyieldlowyield
RelativeSpread: Yieldonsubjectbond/yieldonbenchmarkbond
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GDP: GrossDomesticProduct.
Itisthetotalmarketvalueoftheproductsproducedinacountryoreconomyduringaperiod.
Thiscountsforfinalproductsonly.Separatecomponentsdonotcount.
GDPalsoincludesrentalvalueforowneroccupiedhousing.
Governmentservices(atcost).
GDP:IncomeApproach. +Earningofallhouseholds+business+government=GDP
GDP:ExpenditureApproach C=Consumptionspending+I=businessinvestment(capitalequipment+changeininventories)+G=Governmentpurchases+X=ExportsI=Imports
Sumofmarketvaluesofallfinalgoodsandservicesproducedintheeconomy.
or
Sumalltheincreasesinvalueateachstageoftheproductionprocess(Valueadded).
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FinalValueAdded:Giveexampleandexplain:
Material>FabricatorFabricator>AssemblyAssembly>Consumer
Eachofthesestagesaddedvalue.Thisvaluecanbelookedatintwoways:asatotalofthevalueaddedandasafinalpricegiventoconsumers.Thefinalpricegiventoconsumershouldbeequaltothevalueadded.
NominalGDP: (QtxPt)P=PriceQ=Quantity
RealGDP: Withbaseyear=t5:(QtxPt5)UsesbaseyearpricesbecauseifitdidnotPcouldrisewhileQisdecreasingtherebygivingtheillusionthattheGDPisnotchanging.ThereforeabasepriceisgiveninordertogivetherealGDP.
GDPDeflator: NominalGDP/RealGDP
Thisisreallyameasureofinflation.
GDP =NationalIncome+CapitalConsumptionAllowance+statisticaldiscrepancy(notinCFA)
CapitalConsumptionAllowance: Theoutputthatgoestoreplacethestockthatiswearingout.
Basicallylikeallocatingmoneytowardsdepreciationofmoneymakingobjects.
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NationalIncome= =EmployeewagesandBenefits++corporateandgovernmentprofitspretax+Interestincome+unincorporatedbusinessowners'income+rent+indirectbusinesstaxessubsidies.(taxesandsubsidiesincludedinfinalprices)
PersonalIncome: =NationalIncome+TransferpaymentstohouseholdsIndirectbusinesstaxesCorporateincometaxesUndistributedcorporateprofits
PersonalDisposableIncome: =Personalincomepersonaltaxes=Aftertaxincome.
Thismoneycaneitherbesavedorspent.
FundamentalRelationship: S=I+(GT)+(XM)Savings=Investment+GovernmentExpendituresTaxCollections+ExportsImports
Savingsareeitherinvested,usedtofinancegovernmentdeficit,prusedtofundatradesurplus,whenbothexist.
Whatismonetarysupply? Themanagementofmoney&creditsupply.
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Howdoesmonetarypolicywork? Throughexpansionaryandcontractionaryactions.
Expansionaryrefererstotheincreaseinmoneysupplywhichcanbeviewedasanincreaseininventoryforbankswhichtherebyreducesborrowingcosts(lowerinterestrate).Contractionaryisjusttheopposite.
WhatarethetoolsofFiscalPolicy? Fiscalpolicyimplementsspendingandtaxrevenue.
Expansionaryincreasesspendinganddecreasestaxes.
Contractionarydecreasesspendingandincreasestaxes.
Whatisthepolicycalledwhenabankhavetokeepacertainamountofmoneythatitlendsoutinthereserves?
FractionalReserve.
DescriptiveStatistics: Describethepropertiesofalargedataset.
InferentialStatistics: Useasamplefromapopulationtomakeprobabilisticstatementsaboutthecharacteristicsofapopulation.
Population: Acompletesetofoutcomes.
Samples: Asubsetofoutcomesdrawnfromapopulation.
NOIR: Nominal,Ordinal,Interval,Ratio.
Nominal: Onlynames(bird:robin,parrot,seagull)
Ordinal: Ordered(large,mid,small).
Interval: Gobyintervals(040,4180,81120).
Ratio: Ratiosmakesense,absolutezero.
Parameter: Describeacharacteristicsofapopulation.
Samplestatistic: Describesacharacteristicofasample.
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FrequencyDistribution: atablethatsummarizesalargedatasetbyassigningtheobservationstointervals(Histogram).
Relativefrequencydistributions: Atableorderedbypercentage
CumulativeFrequencyDistribution: Showsthepercentageofobservationslessthantheupperboundofeachinterval.
PopulationMean: Mew
SamplesMean: Xbar
GeometricMean(Descriptionandformula):
Usedtocalculatecompoundgrowthrates.Ifthereturnsareconstantovertime,geometricmeanequalsarithmeticmean.
Thegreaterthevariabilityofreturnsovertime,themorethearithmeticmeanwillexceedthegeometricmean.
AlsoknownasAverageAnnualCompoundRateofReturn
PeriodicR=[(1+R1)(1+R2)...(1+Rn)^(1/n)]1
sqroot^nof(x1x2x3*xn)example:2,3,4Gmean=sqroot^3(2x3x4)=2.88
WeightedMean: Placesapercentageweightonsectionsofaproblem.Ameaninwhichdifferentobservationshavedifferentproportionalinfluenceonthemean.
X=sumofWixRi=W1R1+W2R2+....WherebyWistheweight(%)
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HarmonicMean: Usedtofindouttheaveragecostpersharesovertime.
Xharmonic=N/sum(1/Xi)
T1=3,000@$20/shareT2=3,000@$25/shareXharmonic=6,000/270shares=$22.2/share
Arithmeticmean: =(x1+x2+x3+...+xn)/n
Example:=(2+3+4+5+6+7)/6
Median: Itismidpointofapopulationofnumbers.Ifthereisanevennumberthenyouadd2middlenumbersanddivideby2.
Advantages:resistanttooutliers.
Mode: Themostcommonobservation.
Example:1,2,3,3,4,4,4,4,4,5,5,6,7,8,8,9.Modeis4becauseitappearedthemost.
Therecanbemorethanonemode(bimodal).
Quantiles: Likefromstandardizedtests.
Example:"Youareinthe75thpercentile."
"60%ofthedatapointsarelessthanthe6thpercentile."
Range: Rangeofthedata.
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MeanabsoluteDeviation: Averageoftheabsolutevaluesofdeviationsfromthemean.
[I(X1mean)I+I(X2mean)I+...+I(Xnmean)I]/n
StandardDeviationandVariance: Howspreadoutthedatais.Thebiggerthestandarddeviation,thebiggerthedeviationfromthemean.
Variance=sum[(Ximean)^2]/nStdDiv=sqroot(Variance)
Example:Mean=2X1=2,X2=3X4=5=[(22)^2+(32)^2+(42)^2]/3=1.33
StdDiv=sqroot(1.33)
SampleVariance: Sameequationasthemeanexceptyouadd1tothen.Variance=sumof[(Ximean)^2]/(n1)
Chebyshev'sInequality: Specifiestheminimumpercentageofobservationsthatliewithinkstandarddeviationofthemeanappliestoanydistributionwithk>1.
Min%=1(1/k^2).
Example:Theminimumpercentageofobeservationsofanydistribtuionsof2standarddeviationsofthemean?=1(1/2^2)=75%
Remember,thisisforANYdistribution.
CoefficientofVariance. Riskperunitofmeasure.Therefore,thelowerthebetter.CV=StdDiv/Mean
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SharpeRatio: Excessreturnperunitofrisk.Morethebetter.
(RpRf)/StdDivP
Rf=AverageriskfreerateRp=MeanPortfolioRiskStdDivP=PortfolioStandarddeviation
RandomVariable UncertainNumber
Outcome RealizationofrandomVariable
Event Setofoneormoreoutcomes
Mutuallyexclusive Cannotbothhappen.
Exhaustive Setofeventsincludesallpossibleoutcomes.
Empirical: Basedonanalysisofdata.Usingpastinformationtomakeapredictionaboutafutureoutcome.
Subjective: Personalopinion.
APriori: Basedonreasoning,notexperience.
Oddsfor: Example:20%ofthetimeahorsewillwin.
Oddsagainst: Example:80%ofthetimeahorsewilllose.
Unconditional: Probabilityofaneventthatisindependentofotherevents.P(A).
Conditional: Aprobabilitythatisdependentonotherevents.P(A|B):ProbabilityofAgivenB.
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Whataretheprobabilityrules? Additionrule:P(AorB)=P(A)+P(B)P(AB).
Multiplication(JointProbability):P(AB)=P(A|B)xP(B)
Multiplication(IndependentPr.):P(AB)=P(A)xP(B)
TotalProbabilityRule: P(A)=P(A|B)xP(B)+P(A|Bc)xP(Bc)
P(A)=P(AIS1)xP(S1)+P(AIS2)xP(S2)+...
Giveexampleofajointprobability: P(Interestrateincreased)=P(I)=0.4P(Recessiongivenatarateincrease)=P(R|I)
Theprobabilityofarecessionandanincreaseinrates=P(R|I)xP(I)=0.7x0.4=28%
Giveequationforjointprobabilityeventsandexplainit.Howisthisdifferentfrommutuallyexclusive?
P(AorB)=P(A)+P(B)P(A|B).
YoumustsubtractP(A|B)becauseifyoulookataVenndiagramyouwillnoticethatyouhavecountedtheoverlappingsectionoftwocirclesmorethanonce.Mutuallyexclusiveeventsdonotrequirethefinalsubtraction.
DependentEvents: Knowingtheoutcomeofonetellsyousomethingabouttheprobabilityoftheotherevent.
IndependentEvents: Occurrenceofoneeventdoesnotinfluencetheoccurrenceoftheother.
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Covariance: Ameasureofhowtwovariablesmovetogether.Thevaluerangefrom+infinity,toinfinity.
[(xmean)/(Sx)]
Correlation: p(Ri,Rj)=(Cov(Ri,Rj)/(Ri)(Rj)
Smallprepresentscorrelation.
ExpectedValue: P*x
Example:75%chancethatyouwillreceive$125,000.Theexpectedvalueis93,750.
PortfolioExpectedValue: WeightedAveragebasically.
PortfolioVarianceandStandardDeviation. Var(Rp)=w+w+2wwp
note:piscorrelation.Derivedfromcorrelationformula.
Factorial: Example:3!=3x2x16!=6x5x4x3x2x1
WhenshouldyouusenCrandwhenshouldusenPr?
nCrwhenorderdoesnotmatter.nPrwhenorderdoesmatter.
Signforsamplemean? Samplemean=xbar
Signforpopulationmean? Populationmean=
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Explainthegeometricmeanformula: SimplymultiplyallthenumbersgivenX1xX2xXn...thentaketheroottothepowerofhowevermanyobservationsthereare(n).
Sinceyoucannottaketherootofanegativenumberyoumustinsteadaddeachreturnby1thenmultiply(X1+1)x(X2+1)x(Xn+1)...thentaketherootofthattothepowerofn.
WhatisMADandhowisitdifferentfromvariance?
MADusesanabsoluteandisnotsquared.
MAD=[|X1mean|+|X2mean|+|Xnmean|]/n
Variance=[(X1mean)^2+(X2mean)^2+(Xnmean)^2]/n
So,basicallyinsteadofabsolutesyouhavesquares.
Standarddeviation= Squarerootofthevariance.
What'sthedifferencebetweenthesamplevarianceformulaandthevarianceformula?
the1atthedivisor.
CoefficientofVariation? StDiv/Mean.Notbloodyhard.
SharpeRatio? Thesharperatioissimplythemeanreturnfromaninvestmentminusariskfreerate(likeatbill)alldividedbythestandarddeviationofthatinvestment.
Theinvestmentcanbeaportfolio.
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Kurtosis?Leptokurtic?Platykurtic?Mesokurtic?
Kurtosisisameasureofthepeeklikeqinafrequencyfilter.
Leptokurtic=morepeek.Platykurtic=lesspeek.Mesokurtic=normalpeek.
SampleSkewness? Howskewedthesampleis.(1/n)[(X)^3/(^3)]
SampleKurtosis? Sameassampleskewnessbutreplacethe3swith4s.
HowtodetermineiftheIRRisacceptableforaproject?
Itishigherthanthegivendiscountrate.
HoldingPeriodYield: Theactualreturnaninvestorwillreceiveifthemoneymarketinstrumentishelduntilmaturity.
HPY=Profit/Purchaseprice
Example:100,000TBillboughtfor98,000.2,000/98,000=2.041%
rMM anannualizedHPYonthebasisof360daysanddoesNOTincorporatetheeffectsofcompounding.
Rmm=HPY/(#ofdaysheld/360)
EAY anannualizedHPYonthebasisof360daysanddoesNOTincorporatetheeffectsofcompounding.
EAY=(1+HPY)^(365/150)1
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BondEquivalentyield 2timesthesemiannualdiscountrate.ThisconventionstemsfromthefactthatyieldsonU.S.bondsarequotedastwicethesemiannualrate,becausethecouponinterestispaidintwosemiannualpayments.
[(1+HPY)^2]1