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Chapter 3 SIE

Amortization The gradual reduction in the value of an intangible asset
Collateralized securities a security that is backed by a specific asset or pool of assets
Goodwill (balance sheet item) The value of a asset calculated by taking the difference between the price paid for the asset and its market price
Intangibles (balance sheet item) Nonphysical assets such as copyrights and patents
Maturity date the date a term or dollar bond pays par value, plus the last semi-annual interest payment serial bond the date the last payment is received
P/E Ratio Price to earnings ratio, computed by dividing the price per share of a stock by its earnings and used to gauge the value of a stock
Repurchase agreement also known as a "repo," a form of short-term borrowing for dealers in government securities. Created when a bank dealer sells collaterized securities with a promise to buy them back.
S&P (Standard & Poor's) 500 Index a market-weighted index of the 500 largest U.S. companies, providing a measure of overall stock market performance
Treasury Bonds also called Treasuries, long-term U.S. government bonds with maturities ranging from 10 to 30 years. Interest is paid semi-annually and is exempt from state ad local taxes.
Yield Curve a graph depicting the relationship between yields on short-term and long-term bonds
Fiscal Policy used in conjunction with monetary policy to influence the direction of the economy. Set by the president & congress. Implemented through government spending & taxes. Focus is stable economic growth & a high level of employment
Monetary Policy set by the federal reserve. Consists of actions aimed at influencing the money supply & interest rates.
Keynesian Theory Economy runs at an "equilibrium" level that is determined by income and spending, and aggregate demand.
Supply Side Economics as long as the government does not meddle with the economy, business will take care of itself. Stable interest rates, money supply, and low inflation achieved through monetary policies will enable business to drive the economy to full employment.
Federal Open Market Committee (FOMC) The Federal Reserve System's top monetary policy-making body. Buys or sells Treasuries in the secondary market through primary government securities dealers to help stimulate or slow the economy
Reserve Requirement An overnight cash reserve that each Federal Reserve member bank must maintain each night
Discount Rate the rate the main Federal Reserve Bank charges member banks for loans to meet their overnight reserve requirements.
Open Market Operations (OMO) the purchase and sale of securities in the secondary market by the central bank to implement monetary policy
Money Supply Total stock of money circulating in the economy. Includes currency and deposits held by the public at commercial banks and other depository institutions, such as credit unions.
M1 Cash and demand deposits, such as checking accounts
M2 M1 plus savings accounts and some money markets funds
M3 M2 plus institutional investments and money markets
discount a bond that is sold at less than par value
inflation demand for goods and services exceeds supply causing prices to rise
recession a slowing of economic activity- two consecutive quarters (6 months) of a decline in GDP
Federal Funds Rate A slightly higher rate and is the most sensitive money market indicator. It is the first rate to be affected by changes in the discount rate
Money Market Rates Usually slightly higher than fed funds. Banks earn these rates when they invest on a short-term basis. They are highly liquid with very short maturities.
Commercial Paper a short-term, unsecured money market instrument issues by big corporations with excellent credit ratings to finance short-term credit needs. Maturities range from 30 to 270 days.
Bankers' Acceptance a short-term fixed rate loan used to finance trade-related transactions.
Certificates of Deposit (CD Rates) Time deposits with a fixed maturity date and a fixed interest rate.
Prime Rate The interest rate that individual banks charge their most creditworthy commercial borrowers for unsecured loans. It is the lowest rate for commercial loans. It is based on the federal funds rate.
Broker Call Loan Rate the interest rate that banks charge broker/dealers for money that they lend to margin account investors
Balance sheet provides a snapshot of a company's assets, liabilities, and shareholder's equity at a specific point in time.
Income statement provides a summary of a company's income and expenses over a period of time, usually 1 year
Cash flow statement shows a company's inflows and outflows of cash over a specified period of time, indicating whether a company can meet its expenses
assets resources that a company owns, such as cash, inventory, accounts receivable, investments, land, buildings, equipment, as well as intangible assets like goodwill and trade names
Liabilities debts owed by a company, for example, money owed to lenders, suppliers, and employees.
Shareholders' equity ownership interest- the difference between a company's assets and liabilities
Net worth the value of an individual measured by their total assets less total liabilities
preferred stock stock that has a preference over common stock with respect to dividends
Retained earnings represent the cumulative amount of earnings that the corporation has retained to reinvest, rather than paying them out to shareholders in the form of dividends.
income statement a financial statement that shows a company's performance over a specific accounting period (such as a fiscal year)
Sales gross revenues from the company's products or services
gross profits profits after subtracting the cost of making the product or providing the service
net operating income income after subtracting operating expenses related to selling, general and administrative, and depreciation and amortization
net income income resulting from operations and financing activities after paying taxes
dividend a payment of earnings of a corporation per share of stock
insolvent unable to meet financial obligations when due
working capital current assets minus current liabilities
Book value per share the liquidation value per common stock share
Business Cycle (Economic cycle) recurring patterns of expansions and contraction in the economy. It analyzes the economy, industries, and companies.
Expansion phase economy is prospering and growing. There is increased employment, economic growth and upward pressure on prices
contraction phase economic activity is in decline
contraction period economy is in a recession, business activity is slowing, unemployment is increasing, and economy is struggling
National Bureau of Economic Research (NBER) Founded in 1920, a private, nonprofit organization that conducts economic research and disseminates it to academics, public policy makers, and business professionals
Gross Domestic Product (GDP) total national output of goods and services in 1 year. It is a measure of a country's total economic activity .
Consumer Price Index (CPI) Gauges inflation by measuring costs in constant dollars
Stagflation a period of rising prices with no economic growth
Stagnation a slowing of the economy over a prolonged period of time. i
Deflation the persistent and appreciable decline in general price levels
peak phase economy is topping out or has stopped growing, there is little or no unemployment
Trough phase decrease in economic growth to its lowest level in the current economic cycle, high unemployment, low consumer demand.
economic indicators statistical data showing trends in the economy. They are important tools for identifying business cycles and signaling peaks and troughs in the business cycle.
Leading indicators indicators that exhibit predictive value. The signal a turning point in the business cycle in advance of any changes in aggregate economic activity (example: S&P 500 Index)
coincident indicators indicators that occur at the same time as the related economic activity
Lagging indicators indicators that become apparent after the activity has occurred. They reflect historical data and indicate the status of the economy the past few months (Example: The CPI- consumer price index)
cyclical industries industries that have regular, pronounced cycles of growth and contraction. Stocks of these companies perform nicely in a rising market, but suffer badly in a falling market. Examples: Auto, heavy equipment, and airplanes
countercyclical industries industries that prosper during economic declines and underperform when the economy is growing strongly. Examples: pawn shop and asset repossession industries
defensive industries industries that have less pronounced cyclical variation. stocks in these industries do not experience dramatic growth swings in up markets or declines in weak markets. Examples: food, alcohol, tobacco, pharmaceuticals, cosmetics.
Growth industries Industries characterized by rapid development. Typically fueled by new technological advances. Examples: tech, social media
Balance of payments (BOP) an accounting of the country's international transactions over a specified period of time, typically a calendar quarter or year. It represents the sum of all transactions between individuals, businesses and government agencies in the U.S.
Gross National Product (GNP) a broader measure of economic activity. Includes GDP plus income earned by residents from overseas, minus income earned within the domestic economy by overseas residents.
Exchange rate the rate at which one currency can be exchanged for that of another.
Spot exchange rate used when selling a fixed amount of one currency (base currency) to purchase another currency (counter currency)
Forward Rate an exchange rate that is quoted and traded today but for delivery and payment on a specified future date.
Fixed (pegged) system a system in which the exchange rate is set and artificially maintained by the government. The rate will not fluctuate day to day.
Trade deficit where trading with another country has more buying from the other country than selling to that country
Currency risk (exchange rate risk) a form of risk that originates from changes in the relative valuation of currencies which, in turn, can influence the overall investment returns.
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