ECON 2013 Study Guide (2013-14 Leblanc)
- University of Arkansas - Fayetteville
- Economics 2013
- Le Blanc
- ECON 2013 Study Guide (2013-14 Leblanc)
Last Modified: 2014-06-25
Usually measures as at least 2 consecutive quarters with negative GDP.
2) Securities and foreign exchange
3) Government expenditure (G)
a) informing employees they can change their investment allocations
b) making investment info available upon request
c) providing description of risk and return characteristics of each investment
d) allowing employees the opportunity to add investments into the available options
e) monitoring performance of investments and replacing when necessary
All the above would be considered a fiduciary exercising investment control and allowing them the protections of the safe harbor provisions except for allowing employees to determine their own investments, the fiduciary can select a minimum of 3 investments and let the employee choose but he does not have to all the employee to add stuff to the 3 choices. 60/151
1) Work for pay and work more than 1 hour a week.
2) Works without pay for 15 or more hours per week in a family enterprise.
3) Has a job but has been temporarily without pay.
Slope of consumption function= MPC
Fed sells- rr up, dr up, ms down
2 - They do not trade on the secondary market (ie - they pay a fixed amt to the holder at maturity) 3 - They are classified as an investment company 2/47
A unmanaged investment company organized under a trust indenture. 3/48
1 - Not actively managed, no BOD and no investment advisor
2 - Shares must be redeemed by the trust
3 - UITs are considered investment companies
A management investment company actively manages a securities portfolio to achieve a stated investment objective. 5/48
A closed-end investment company registers a fixed number of shares with the SEC which are then traded on the exchanges. 7/49
As opposed to a open-end investment company that is tied to NAV (net assets per share) 8/49
(Ie - Germany fund or Mexico fund). They are typically organized as close-end companies. 9/49
Its price is determined by supply and demand and thus NAV is not as important as in open-end funds, however, it IS still computed once per week. 12/50
Close-end funds compute once per wk; open-end funds are directly tied to NAV and thus compute it daily. 13/50
(5% - no more than 5% in any one particular company)
(10% - can own no more than 10% of any one company's common stock). 15/50
These are known as specialized or sector funds. 16/51
Mutual funds shares can be redeemed at any time by the investor and the mutual fund company must allow the investor to redeem them at the NEXT computed NAV. 17/51
No one investor has a preferred status over any other investor b/c mutual funds only have one class of stock (common). 18/51
However, after being held fully paid for 30 days mutual fund shares may be used as collateral for a margin loan (i.e., is marginable). 19/51
The price will be based on the very NEXT NAV computation, which are done hourly. This is known as "forward pricing". 20/51
There are 3 types of sales charges associated with mutual funds, 1) front end loads, 2) back and loads, and 3) 12b-1 charges.
Publicly traded funds do not charge a sales %; investors pay a brokerage commission (ie - markup or mark down on the current price of the fund). 23/52
A. Mutual funds are also referred to as open-end investment companies.
B. When investors sell mutual fund shares, the shares are redeemed at their net asset value.
C. Mutual funds may continually issue new shares.
D. Mutual funds only allow investors to purchase full shares
Investors can purchase all or fractional shares in mutual funds, however, closed end funds do not allow investors to purchase fractional shares. This is one main difference between open and closed end funds. 24/50
Class B shares - "Back loads", investor pays fee at end, but the fee % declines every yr (if you hold share for 6-8 yrs the fee is usually 0%).
Class C shares - "Level loads/12b-1 loads", investor pays a 1% back end fee and then pays a "12b-1 charge" every year (charge for fund promotion). 25/53
Rights of acculation (allows the investor to reduce sales charges based on add'l purchases)
**Full sales charge is 8.5%** 27/55
However, investment clubs/associations do not qualify for breakpoints, everyone else (person(s) and corporations). 28/55
The fund holds the extra shares purchased in escrow until the LOI is fulfilled. 29/55
The investor has 13 months to fulfill LOIs. Additionally bonds often permit customers to sign LOIs as late as 90 days after the initial purchase. 30/55
This however does not increase the 13 month requirement to fulfill the LOI which starts at the time of initial purchse. Thus if LOI is signed 60 days after initial purchase then investor only gets 11 more months to fulfill LOI. 31/55
Just like breakpoints do. 32/55
This is one main difference between a LOI and a right of accumulation, another is that rights of accumulation do not impose time limits like LOIs. 33/55
Righs of accumulation do not have any time limitations. Only LOIs. 34/55
There are no time limits on investing add'l funds and getting breakpoints (or rights of accumulation). The only time limits are placed on LOIs which have to be fulfilled w/n 13 months. 35/55
Investors may be able to group different funds within the family of funds in order to reach breakpoint benefits. Additionally there are no contingent deferred sales charges when shares of one fund in the "family" are exchanged for others. 37/56
The holding period stays the same when using exchange privileges w/n the same mutual fund company and there would likely be no additional sales charges. 40/56
2) Change in fund's investment objective
3) Changes in sales charges
4)Liquidation of the fund
All funds created after 2000 offer automatic reinvestment of capital gains and dividend distributions without sales charge per FINRA rules. 42/56
A custodian holds them. 43/56
Can invest as little as $500. 44/56
It requires a majority vote of the fund's outstanding shares (ie - the investors). 45/56
MFs looking for growth will invest in common stock. Any time the exam states that "growth" is the main objective common stock is the answer. 46/57
Mutual funds looking for income typically choose stocks of companies with long history of dividend payments, such as utility company stocks, large-cap stocks, and preferred stocks.
Growth MFs use common stock that typically do not pay a dividend and instead reinvest the money seeking further growth. 47/57
The larger the cap the more conservative b/c larger companies are more stable and diverse than small cap companies. If technology changes (Palm pilots crushed by IPhones) the small cap companies market then their stock will fall quicker and they will fail much quicker. 48/57
Usually from $300 million to $2 billion. Mid cap is $2 bil to $10 bil. Large cap is $10 bil and up. 49/57
Typically from $10 billion up is large caps. 50/57
Typically it ranges from $2 billion to $10 billion. Less than $2 billion is small cap, more than $10 billion is large cap. 51/57
International funds do NOT include any US securities by definition. 55/58
Bond funds are income oriented funds. Younger persons would want growth funds, special situation funds (high risk/reward), or index funds. 56/59
Any capital gains distributions from the fund is taxable just as any other mutual fund. 57/58
The fund manager will redistribute the allocation levels based on how the stock market is projecting. Meaning heavier weighted in stock when market is performing well, and heavier weighted and bonds when market is not performing well. 60/59
The sales fee can NOT exceed .25% in order to advertise itself as a no load. 61/59
Money market funds would be best for investors looking for liquidity b/c they are no load and investors can get in and out of them very quickly and easily. 63/59
In fact money market funds must disclose to investors that it is NOT guaranteed by the US gov't. 65/59
Also, investments are limited to securities with remaining maturities of 397 days or less, with average portfolio maturity not exceeding 90 days. 66/59
Costs (management fees & operating expenses)
Taxation (make sure dividends/cap gains are qualified)
Portfolio turnover (if funds only hold its securities for less than 1 yr then gains will not be qualified and thus have max taxes)
Services offered (conversion privileges, check writing privileges, ect) 67/60
All funds (both load and no-load) have expense ratio's associated with them that are included in the price in ADDITION to sales charges. Sales charge is not generally considered an expense when calculating a fund's expense ratio. 68/60
That mutual fund has not followed its investment objectives as it should have been investing in companies that re-invest all earning back into growing more, not paying dividends. 69/61
The shareholders will have to pay taxes on the capital gains and distributions immediately whether reinvested or not. Also the capital gains from a mutual fund are taxed at the capital gains rate of 15%. 70/61
25% turnover rate means they hold them for 4 years on average. High portfolio turnover means higher expense ratios. 71/61
Money market funds are considered safe but are not "protected funds"; the investor would want Gov't bond funds since they are backed by the US Gov't. 72/62
Technology stock funds would likely be considered "aggressive growth" funds and would usually only be suitable for investors who have high risk tolerance and/or long investing horizons. 73/62
Small cap stocks are more suitable for investors with high risk tolerances and a long time horizon. Large cap stocks would be more suitable for low risk tolerance. 74/62
These funds are not as speculative as smaller cap (aggressive) funds. 75/62
However if the investor could assume high risk and was looking for income they would be more appropriate for a high yield (junk) bond fund. 76/62
High risk = High reward
However if the investor only had moderate risk tolerance and wanted income they would be more suitable for a corporate bond fund. 77/62
If avoiding further taxes is the goal then municipal bonds that are tax-free would be a better choice. 78/62
Hedge funds contain speculative stocks (ones that have big volatility). 79/62
Lower risk tolerance
Conservative growth AND Conservative income
Large caps are kind of a hybrid for growth and income seekers. 81/62
The Gov't does NOT allow states to tax their bonds, however, they have no problem taxing their own bonds. 134/235
Capital gains are not taxed until they are "realized". (ie - stock is sold, not when stock price goes up).
Stock prices fluctuate daily based on investors perceptions of the company's business prospects.
Typically preferred stock is not subject to payment (dividend) variation as with common stock dividends; this makes preferred stock similar to a bond. 7/7
B/c its similar to a bond and has a fixed dividend payment, which is represented as the "par" value on the face of the preferred stock certificate.
This means a company can buy the preferred shares back from the investor at a stated price AFTER a stated time (stated on the certificate itself. 13/8
B/c the dividends can be changed quarterly to follow interest rates which tends to make the price of the stock remain relatively stable. 15/9
ADRs are bought and sold in the US securities market like any other stock. (ie - shares of Onkyoto a Japanese company, even if it produces and sales all of its products in Japan ONLY). 16/10
B/c ADRs represent shares in foreign companies if the currency of the company's country declines against the dollar the stock becomes less valuable.
It would also have country risk b/c if the country's government is overthrown it would severely impact foreign companies. 17/10
REITs are considered passive participation programs. 21/13
This means that real estate prices and the stock market frequently move in opposite directions. 22/14
Additionally the employer gets a tax deduction as a salary expense. Plus since it is income it is subject to full payroll taxes for both the employee and employer.
However, if the stock was exercised pursuant to a Incentive Stock Option (ISO) then the difference btw market price and exercise price would be taxed as capital gain (15%) but the employer would NOT get a tax deduction. 26/15
They are valued separately and trade on the secondary market.
Warrants are like rights in that they can also be traded on the secondary market, but are unlike rights in that their strike price is HIGHER than the market value when issued whereas right's strike price is typically LOWER than the market value at issue. 27/14
Warrants are considered long-term derivatives, whereas rights are considered short-term derivatives.
Meaning the exercise period on warrants are typically longer than exercise periods of rights.
For taxation purposes, all corporate bond interest is fully taxable as ordinary income on both federal and state tax returns. 31/17
2 - Corporations is next.
Whenever the word municipal security is used on the exam, it is referring to a security issued by state or other municipality. 36/17
Par value is even more important with bonds because not only does it represent what the interest payment is based on, but it also represents the amount of principal to be repaid at maturity. 38/17
2 - Taxes
3 - Typical secured creditors (mortg. bonds, equip trust certificates, collateral trust bonds, ect) 40/19
Order of Priority:
Wages, secured creditors, unsecured creditors, subordinated debt holders, preferred stockholders, then common stockholders. 42/19
An investor might purchase a $1,000, 26 week T-bill at a price of $980. So at the end of 26 weeks the investor makes $20, but obviously no interest is paid during the 26 week time period.
2 - Inflation Expectations
(aka - Seperate Trading of Registered Interest & Principle of Securities)
As opposed to zero coupon corporate bonds (may pay nothing at maturity if company is out of biz) there is no credit risk in STRIPS since the risk of default on a gov't security is nonexistent. 54/31
2 - Extremely high liquidity 56/34
2 - Extremely high liquidity 57/34
The are fully negotiable, if they had a prepayment penalty then they would not be "negotiable" CD's.
2 - Very safe
Many (but not all) money market instruments are issued at a discount instead of offering interest. 62/33
Ginnie Mae (only one "guaranteed by the US Gov't)
CMO's (collateralized mortgage obligations) 63/35
This is VERY similar to the Federal Funds Rate, which is the rate that member banks charge each other for overnight loans.
and the holders is subject to withholding tax.
Just as a Eurodollar bond is a US dollar denominated bond issued by a non-US entity outside the United States, a Yankee bond is a US dollar denominated bond issued by a non-US entity but in the US market. 67/38
1 - Require bank to keep more or less money on deposit w/ the FED
2 - Adjust the federal discount rates
3 - Buy or sell US Treasury securities
1 - There will be increasing in indicators such as sales, manufacturing and wages.
2 - GDP increases.
3 - Business are increasing towards production capacity. 8/255
1 Increase in consumer demand for goods and services
2 Increase in industrial production
3 Falling inventories
4 Rising stock markets
5 Rising property values
6 Increasing GDP
1 Rising numbers of bankruptcies and bond defaults
2 Falling stock markets
3 Rising inventories (a sign of slacking consumer demand)
4 Decreasing GDP
Consumer Price Index; The CPI reflect the average cost of goods and services purchased by consumers, compared with those same goods and services purchased during a base period.
This tells economists whether those goods are becoming more or less expensive which indicates which way inflation is trending. 15/257
This is the concept that the rate of inflation does not immediately react to unexpected changes in the economic condition, rather it takes a pronounced change in market conditions before there is an effect on inflation. 18/257
1 - Excessive demand, when demand exceeds supply prices will rise.
2 - Monetary expansion, when the nation's money stock exceeds the nation's growth rate. So if too much money is printed in the dollar will weaken and thus the dollar's buying power is reduced. 19/257
* Prime rate
* Call rate
* Discount rate
* Federal funds rate
Prime = Best; Consumer banks can set their own rates, usually the smaller ones follow suit of what the largest consumer banks (ie - Bank of America) set their rates at.
A call loan rate is an interest charged on loans made to broker-dealers who use the funds to make margin loans to their margin account clients. 24/260
So Bank of America will borrow money from the Fed Res'v Bank at 2% and then loan the money to consumers at 4% which will net them 2% marginal income on the loan. 26/260
This is NOT a managed rate, but is rather established by supply and demand. 28/260
Another possible cause of deflation is a severe shrinkage in the money supply available to consumers, thus not as much money available to consumers means consumers cannot buy as many goods or services. 30/259
3 - length of time the money will be borrowed
4 - anticipated inflationary expectation of the banks
A bond is paying 5% interest, if rates go up to 8% investors will be drawn to "new" bonds that are having to be issued at the new rate of 8% and away from the "old" bonds that are only paying 5%, so the bond will "decrease" in value (ie - trade at a discount) in order to make it more attractive since its interest rate is now unattractive. 34/262
The President submits a proposed budget to Congress for approval. Together they determine fiscal policy through the process of budgeting and taxation.
The Board of Governors of the Federal Reserve System. 36/253
In reality the largest commercial banks (ie - Bank of America) set their prime rate and smaller banks follow suit.
However, the Fed's actions in changing reserve requirements, changing the discount rate, and buying or selling U.S. Treasury securities impacts all interest rates. 39/260
1 - Extracting and harvesting of natural products;
2 - processing, manufacturing and construction;
3 - services such as retail sales, entertainment and financial services;
4 - intellectual pursuits, like education.) 44/257
Secondary sector consists of manufacturing and construction.
Tertiary sector provide services, such as retail sales, entertainment, and financial services.
Quaternary sector is made up of intellectual pursuits, like education.
"Only counts goods produced by its people regardless of where they are"
Inflation and bonds move in OPPOSITE directions.
**Inflation and Interest Rates are TIED**
Fed Funds Rate = overnight rate banks charge each other, so this is the BEST answer for questions about what the best indicator of "short term" rates will be.
2 - The average work week in manufacturing.
The Fed Funds Rate (short term interest) is a market rate determined by the demand for bank reserves on the part of deposit-based financial institutions.
1) time value of money
2) reduced buying power of money resulting from inflation, (the money worth less when the bank gets it back)
3) the increased risk of default over a longer period of time,
4) loss of liquidity (ie - banks money is tied up longer).
2 - Employment rates
3 - CPI
The reasoning behind excluding food and energy prices when computing core inflation is b/c of their high short-term volatility.
CPI is the most COMMON measurement of the rate of inflation. 68/263
The simplest way is to invest in ADRs ( American Depository Receipts).
However, this is opposite when the dollar is strengthening as the value of the ADRs will probably decline.
2 - Coincident (or Current)
3 - Lagging
The leading indicators would turn up right before a expansion cycle, and would start to slightly turn down during peak, turn more sharply down during contraction, and then level out or slightly turn up at trough.
2 - Building permits
3 - Average weekly initial claims for unemployment insurance
4 - Manufacturing capacity rates
5 - Manufacturers new orders for consumer (durable) goods
6 - Manufactures new orders for (nondefense) capital goods
7 - Stock prices 75/265
2 - Personal income, minus Social Security, veterans benefits and welfare payments Industrial production
3 - Manufacturing sales in constant dollars
2 - Ratio of consumer installment credit to personal income
3 - Ratio of manufacturing inventories to sales
4 - Average prime rate
5 - Change in the CPI for services
6 - Total amount of commercial loans outstanding
7 - Change in the index of labor costs per unit of output
Fundamental = predictions based on broad based economic and market analysis.
Technical = predictions based on stock specific analysis (charts) of its trading patterns.
It evaluates a stock based on broad-based economic trends, current business and market conditions and then the quality of a particular corporations business including finances and management. (Ie - P/E ratios, Earning ratios, Dividends, ect)
You attempt to predict the direction that the stock will go based on charts reflecting trading price and trading volume patterns without regard to the company's overall profitability. You don't care about PE ratios or income statements, you just care about the companies trading patterns.
Beta is the measure of a stocks "volatility" in relation to the market.
Conversely a stocks with a beta of less than 1 will conversely be less volatile than the overall market.
The higher the alpha the better the return.
This is a legal strategy that generates a guaranteed profit from a transaction.
However, if investment advisor bought (for his client) in one market and sold in a different market at the exact same price this would be considered "churning" and is unethical. 84/267
So if your mutual fund or portfolio has a higher rate of return than the S&P 500 it would be "outperforming" that index.
The price of the stock divided by its earnings per share.
Primary reason for issuing these bonds is that they are free from the requirement to register with the SEC resulting in lower issuance costs.
2 - They are rated by US rating agencies so the risk to the investor is clear
3 - They may offer higher yields than domestic bonds from the same issuer (b/c of foreign political and country risks)
2 - They have political and country risk associated
3 - They have less liquidity than domestic issues 4 - Currency risk (if the nominated and a currency other than one's home country)
Meaning the portfolio's average return that is in excess of the risk-free rate DIVIDED by the standard deviation of the portfolio.
This is a volatility measurement, but NOT volatility as compared with the market, but rather volatility relative to its own historical trading patterns.
It's the risk associated with the macro economic factors that affects all assets. Systematic risk can NOT be diversified away.
Systematic risk plus unsystematic risk equals total risk. 98/268
The specific risk associated with an investment that is not related to general market factors or risks.
This risk CAN typically be diversified away. 99/268
2 - Financial risk
3 - Liquidity risk
4 - Political risk
5 - Regulatory risk
Since these are all unsystematic risks they can all be diversified away in a well diversified portfolio. 289/324
Because they generally declined less in recessions and bear markets.
Conversely they also advanced less during expansions and bull markets.
a) Cyclical industries
b) Growth industries
c) Defensive industries
a) Defensive industries
b) Cyclical industries
c) Growth industries
Most cyclical industries produce durable goods (heavy machinery and automobiles, and raw materials such as steel).
Typically growth companies (technology and bioengineering companies) retain their earnings in order to fuel more growth and thus usually pay little to no dividend.
This includes identifying the company's assets and liabilities, and thus the difference between those 2 figures is the corporations net worth. 108/270
The balance sheet is a snapshot of the company's current value/position; it does NOT project numbers for the future.
1 - Current assets
2 - Fixed assets
3 - Intangible assets
2 - Fixed assets
3 - Other/Intangible assets
These are not easily converted into cash and they have limited useful lives due to wear and tear which eventually reduce their value. For this reason fixed assets must be depreciated over their useful life.
(Ie - intellectual property items.)
1 - Accounts payable
2 - Accrued wages payable
3 - Current long-term debt/Notes payable
4 - Accrued taxes
5 - **Deferred tax credits**
2 Accrued wages payable
3 Current long-term debt (the portion of long-term deficits payable within 12 months such as interest)
4 Notes payable
5 Accrued taxes
6 **Deferred tax credits**
Test Topic Alert
Both preferred and common stock have par values, but common stock's par value is arbitrary value with no relationship to actual market price.
If the entity is taxed as a corporation then taxes are not paid on retained earnings until distributed to shareholders.
(Current assets) - (current liabilities) = Working Capital
1 Earning profits
2 Sale of a long-term debt security (sale of a note or mortgage being held)
3 Sale of a noncurrent asset (sale of a mortgaged piece of equipment)
2 Paying off a long-term debt (paying the mortgage off on the companies office building)
3 Net operating loss
It takes (current assets) and divides them by (current liabilities) which gives you the current (liquidity) position stated in a ratio form.
Also the quick asset ratio does NOT include the company's inventory since it may or may not be convertible into cash within 12 months. 131/274
"meet short term liabilities"
Liquidity tells you how quickly a company can convert current assets into cash.
Why or Why not?
However utilities companies with their relatively stable earnings and cash flows can be more highly leveraged without subjecting stockholders to undue risk.
It tells you what percentage of the company's total capital is represented by debt capital.
Meaning if you sold all of the company assets, paid back all the creditors owed, and then split what is left among the stockholders, what is split between the stockholders in the "book value".
Other operating costs
It is not technically an "operating expense" but it does reduce taxable income in the same manner. Interest payments are technically classified in "interest payments".
Total expenses = (operating expenses) + (interest payments)
2 Cost of goods sold
3 Pretax income
Think of it like this: the income statement shows 1) what came in, 2) what went out, and 3) how much is left before taxes.
Because they are taxable as income to the company and then taxable as dividends to the stockholders.
The term "fiscal" is generally defined as something that pertains to financial matters (ie - a calendar year does not pertain to financial matters). 157/279
This is among the most widely used valuation ratio used when comparing companies.
Number of Shares
Remember, earnings are the remaining earnings after the yearly preferred dividend has been paid.
Total Common Shares
Dividend per Share
Market Value of Stock
Growth = lowest
Investors are more willing to pay more per dollar of current earnings if a company's future earnings are expected to be dramatically higher than earnings for stocks that rise and fall with business cycles. 164/282
Earnings per share (EPS) relates to common stock only since preferred stockholders have no claims to earnings beyond the stipulated preferred stock dividends. 165/280
The theoretical value of a company, stated in dollars per share, in the event of liquidation.
P/E = price to earning
P/E ratios are typically compared to other stocks w/n the company's industry to determine if the stock is priced high or low based on its earnings.
However, it is not entitled to earnings per share as that relates only to common stock; preferred stock is only entitled to receive their dividend.
Net Income =
minus (Cost of Goods Sold)
minus (Interest Expense)
minus (Income Tax)
Investing activities are not classified as operating activities b/c they have an direct relationship to the ongoing operations of the business. 173/283
Whereas cash flow from financing activities will use balance sheet items. You MUST make sure you know which one the test question is asking about. 175/284
Whereas cash flow from operations will only use items from the income statement. You MUST make sure you know which one the test question is asking about. 176/284
Form 10-Q is a quarterly report that contains on audited financial statements.
Not unless it directly affects the company, such as the sale of the subsidiary. 181/285
Although few companies do this b/c the separately prepared annual report is more geared towards marketing w/ some numbers thrown in it. 183/285
During periods of rapidly rising stock prices the market must pause to consolidate the gains or it runs the risk of being overbought. 188/286
If it goes below 3% of its trading range get out b/c it is going to fall until it finds a new support level.
But it must penetrate it by more than 3% to be "confirmed". 191/288
The analysts believe that once a breakout has confirmed there will be a rapid price movement in the direction of the breakout until a new resistance level is determined. 192/288
Aggressive = high betas
This means that the index weights all members of the index based on the percentage of the specific stock's capitalization in relation to the total combined capitalization of all stocks listed on that index. 195/290
It is "price weighted".
It covers over 3,000 over the counter companies.
Essentially they are "unlisted stocks" b/c they are too small to meet the criteria for getting onto one of the major indexes such Dow Jones, NYSE, ect. 198/290
Today it has around 6,400 and b/c it includes virtually EVERY company listed on any stock exchange it is the "broadest" barometer of the stock market. 199/290
Low - bearish
Thus you can have the market decline by 100 points and still be bearish b/c 2-3 stocks may have completely tanked causing the big point drop although generally most other stocks were up. 203/291
However, technical data could NEVER be used to get a abnormal return under ANY of the forms (weak, semi-strong, or strong). 207/292
However, technical data could NEVER be