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Finance Quiz
Chapters 1,2,6,18
| Question | Answer |
|---|---|
| What is corporate finance? | It involves "projects" which are investments in property, stock, etc. They ask the question; do we invest in this "project". |
| What does EBITDA mean? | Earnings before interest and tax depreciation and amortization. (Sales - Operating Expenses = EBITDA) The goal of the firm or corporation is to maximize EAT or NI |
| Where does net income go? | Either retained earnings or dividends. |
| What are the main forms of businesses? | Sole Proprietorship, Partnership, Limited Partnership, S-Corporation, C-Corporation. |
| What are the characteristics of a sole proprietorship? | It is easy to set up, has one owner, and there is unlimited liability. |
| What are the characteristics of a general partnership? | Each partner shares part of the entity and shares the unlimited liability. |
| What are the characteristics of a limited partnership? | There is one general partner with others. It has limited liability and there is single taxation. |
| What are the characteristics of an S or C-corporation? | They have limited liability and have shareholder. Because of shareholders, there is almost always a separation of ownership and control which created agency problems. |
| How do shareholders measure wealth? | By the stock price. |
| What are financial markets? | Where financial instruments or securities trade. |
| What are securities? | Securities represent claims against the value of, or cash flow from, real estate. Bonds are a good example of this. They are long-term and give coupons annually. |
| How are bonds a strong claim about the company? | If the company doesn't pay their bonds, they'll go bankrupt. |
| What are the two major market dimensions? | Primary versus Secondary |
| What is a primary market? | Companies or the government sells stocks and bonds to the public and the companies or government gets cash. |
| What is an IPO? | Initial public offering. When new bonds/stocks are issued. |
| What is a secondary market? | Where securities are traded after issue (used securities). It provides liquidity and diversification benefits for investors and security valuation information for issuers. |
| What are money markets? | They trade debt securities or instruments with maturities for one year or less. Treasuries are one example. |
| What are capital markets? | They trade stock and long-term debt. Common stock has no maturities. |
| Describe foreign exchange markets. | They trade currency for immediate delivery (spot) or for some future delivery. They are subject to foreign exchange risk due to currency fluctuations. |
| What are derivatives? | Value is based on value of some other asset or security. |
| Describe the characteristics of derivatives. | Often highly leveraged and high risk. Include options and futures and are used for hedging and speculating. An example is a call option. |
| What is a call option? | It gives the buyer the right to buy something. |
| What do commercial banks do? | Take in deposits and make loans. Commercial bankers tend to be conservative or risk averse since they're making loans with other people's money. |
| What are thrifts? | They're savings and loans. They make mortgage loans, etc. and are an alternative to commercial banks. |
| Why do thrifts hire people right out of college? | To analyze financial statements or savings and loans opportunities such as insurance companies and mutual funds. |
| What are mutual funds? | They are an easy way to diversify. The investor can buy shares in that fund and the manager decides what to buy/sell. |
| What economic functions to financial institutions perform? | They transform financial claims. They monitor costs, provide liquidity, and price risk. |
| What is a financial intermediary? | It changes the nature of the claims it takes in. |
| What do investment banks do? | They buy x-number of shares and immediately sell them to the public. |
| What are fixed income securities? | Debt securities which promise to pay a series of fixed payments based on a fixed interest rate. Examples are bonds, bills, and notes. |
| Who borrows in the public? | Mostly governments such as federal, state, and foreign but also corporations and securitized loans. |
| What do rating agencies try to measure? | Default risk. S&P measure as BBB-AAA investment grade and BB and below as high yield/junk bonds. |
| What are interest rates? | Rent on borrowed funds. Affected by economic conditions and the FED. Usually quoted as nominal rates meaning they're not adjusted for inflation. |
| What are nominal interest rates? | The quoted rate affected by inflation, real interest rate, default and liquidity risk, provisions of security issuer, and term to maturity. |
| What is inflation? | Percentage increase in the cost of goods or sales over a given period of time. Interest rates increase in response to expected increase in inflation. |
| What is the nominal risk free rate or "RF"? | RF = (1+RR)(1+INF) - 1 RR = real rate and INF = inflation |
| What is deflation? | Percentage decrease in prices and asset values. |
| What does the FED do? | The federal reserve is charged with promoting max employment and stable prices. |
| What is the FED funds rate? | An average of transactions made. |
| What is the default risk premium calculation? | Credit risk premium = interest rate on a security issued by a non-treasury issuer (issuer j) of maturity m at time t - interest rate on a security issued by the US Treasury of maturity m at time t |
| What is a yield or credit spread? | A composition of market yields on securities assuming all characteristics except maturity are the same. |
| How do you get a yield curve? | Plot time to maturity against yield to maturity for fixed income securities of the same risk level where yield is annual percent return. |
| What relationship does the FED have with the yield curve? | If the FED thinks there will be inflation they raise interest rate and therefore the yield curve goes flat. |
| New York Stock Exchange | A secondary market where transactions occur. 1-3 letters implies trading on NYSE |
| What is the exchange traded funds? | Pulls together portfolios; creates shares percentage change |
| NASDAQ | Dealers and market makers entering bid ask/offer. Four or more letters represents stock traded on NASDAQ. |
| What does it mean if stock is liquid? | It is liquid if it can be sold immediately at the then market price. |
| What is short trading? | You sell something you don't own with the expectation of buying it back at a later date. |
| What are the steps to building a company? | Start, bank, angel investors, venture capital, IPO |
| Should private issuers be able to promote to general public? | It gives the public more options and the company has another avenue to finance. A con is that the public doesn't know enough about investing. |
| What was the start of the financial crisis? | Mortgages where people were taking loans they couldn't repay and the banks didn't care because they would get their money back by selling the mortgages on wall st. |
| What are the four basic financial statements? | Balance Sheet, Income Statement, Statement of Cash Flows, Statement of Retained Earnings |
| What are the characteristics of the balance sheet? | It reports the frims' assets, liabilities, and equity at a point in time. Assets are in order of liquidity, liabilities are in order of maturity, and equity is listed last. |
| What are current assets? | They can be converted to cash within 1 year: cash, accounts receivable, inventory |
| What are fixed assets? | They have a useful life longer than 1 year. |
| What are current liabilities? | Examples are, accruals, account payables, notes payable. |
| What is long term debt? | Long term debt and bonds. |
| What types of equity exist? | Preferred stock, Common stock, Retained Earnings |
| What is preferred stock? | It's a hybrid security with the characteristics of long term debt and common stock. There are fixed dividends paid first. |
| What is common stock and paid-in-surplus or capital? | Fundamental ownership claim in public or private company |
| What are retained earnings? | Cumulative earnings reinvested, not paid as dividends. |
| What is the fixed asset depreciation accounting method? | Used for reporting purposes. Firms often use straight line method. For tax purposes, firms usually use accelerated depreciation such as MACRS meaning a higher depreciation expense but lower taxable income. |
| What is net working capital? | Net working capital = current assets - current liabilities. It measures the firms ability to pay obligations. |
Created by:
efgreenberg
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