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82 Cards in this Set
- Front
- Back
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Bottom-up stock pricing approach
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a forward-looking approach to evaluating securities in which trends are forecast based on an analysis of microeconomic or firm specific factors
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Dividend Discount Model (DDM)
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a technique for estimating the value of a stock issue as the present value of all future dividends
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Earnings Multiplier model
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a technique for estimating the value of a stock as a multiple of its expected earnings per share
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Growth Company
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a firm that has opportunities and the ability to earn rates of return on investments that are consistently above its required rate of return
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Investment Decision Process
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the comparison of the estimated value of an asset to its market price to determine whether or not to invest
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Perpetuity
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annuity payable forever; a preferred stock with no maturity
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Price-Earnings Ratio (P/E Ratio)
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Price-Earnings Ratio (P/E Ratio) – the number by which expected earnings per share is multiplied to estimate a stock’s value, also called the earnings multiplier
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Top-down stock pricing approach
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Top-down stock pricing approach – a forward-looking approach to evaluating securities in which trends are forecast based on a three-step analysis of macroeconomic factors; industry outlook and company analysis and valuation
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Valuation Process
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Valuation Process – part of the investment decision process in which the intrinsic value of an asset is derived using estimates of the required rate of return (the discount rate) and the stream of expected cash flows, earnings and dividends
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Bond-equivalent yield (BEY
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of the conventions for quoting yield to maturity for bonds that pay semiannual coupons…if you provide BEY, it is equal to the bond’s semiannual rate of return times 2
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Bond price volatility
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the percentage changes in bond prices over time
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Convexity
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a measure of the degree to which a bond’s price-yield curve departs from a straight line…this characteristic affects estimates of a bond’s price volatility
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Coupon Rate
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measures the annual income that a bond investor receives expressed as a percent of the bond’s par value
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Crossover point
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the price at which it becomes profitable for an issuer to call a bond…above this price, yield to call is the appropriate yield measure
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Current Yield (CY)
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a bond’s yield as measured by its current income (coupon) as a percentage of its market price
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Discount
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bond selling at a price below par value because it’s YTM is above its coupon rate
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Duration
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a composite measure of the timing of a bond’s cash flow characteristics taking into consideration its coupon and term to maturity
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Effective yield to maturity
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one of the conventions for quoting yield to maturity for bonds that pay semi-annual coupons…if you provide effective yield to maturity, you compound the bond’s semi-annual rate of return
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Ending-wealth value
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the total amount of money derived from investment in a bond until maturity, including principal, coupon payments, and income from reinvestment of coupon payments
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Fully taxable equivalent yield (FTEY)
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a yield on a tax-exempt bond that adjusts for its tax benefits to allow comparisons with taxable bonds
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Interest-on-interest
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bond income from reinvestment of coupon payments
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Internal Rate of Return (IRR)
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the discount rate at which cash outflows of an investment equal cash inflows
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Modified duration
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a measure of Macaulay duration adjusted to help estimate a bond’s price volatility
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Premium
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– a bond selling at a price above par value because it’s YTM is below its coupon rate
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Price-yield curve
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the relationship b/w the required return (yield) on a bond and its price…provides a set of prices for a specific maturity and coupon bond at a point in time using a range of yields to maturity (discount rates)
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Promised Yield to call (Yc )
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a bond’s yield if held until the first available call date, with reinvestment of all coupon payments at the Yc rate
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Promised Yield to maturity (Ym)
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the most widely used measure of a bond’s yield that states the fully compounded rate of return on a bond bought at market price and held to maturity with reinvestment of all coupon payments at the Ym rate
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Coincident index of economic indicators
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an index that consists of a set of economic variables whose values reach peaks and troughs at about the same time as the aggregate economy
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Competitive environment
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the level of intensity of competition among firms in an industry, determined by an examination of five competitive forces
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Competitive strategy
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the search by a firm for a favorable competitive position within an industry, which affects evaluation of the industry’s prospects
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Cyclical change
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a type of economic trend resulting from the ups and downs of the business cycle
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Discount rate
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the interest rate at which banks can borrow from the Federal Reserve
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Earnings yield
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rate of earnings per share divided by price; the inverse of the P/E ratio
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Econometric model
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a statistical estimation of mathematical relationships between economic variables as posited by economic theory
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Exchange rate
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the price of one nation’s currency in terms of another nation’s currency
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Expectational analysis
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a forecasting approach that includes an analysis of the current environment, the analyst’s assumptions and a procedure for monitoring data and events to identify changes in the environment or violations of the analyst’s assumptions
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Federal Funds Rate
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the interest rate banks charge each other for short-term loans
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Fiscal policy
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use of govt spending and taxing powers
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Gross Domestic Product (GDP)
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the sum total of the goods and services produced within a nation’s borders…the 5 major components of GDP are consumption spending, investment spending, govt expenditures, export production and import production
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Index of leading economic indicators
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an index consisting of a set of economic variables whose values reach peaks and troughs in advance of the aggregate economy
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Industry
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a set of businesses producing similar products used by customers for similar purposes
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Industry life-cycle analysis
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an analysis that focuses on the industry’s stage of development
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Lagging Index of economic indicators
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an index consisting of a set of economic variables whose values reach peaks and troughs after the aggregate economy
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Monetary Policy
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the use of Federal Reserve Board’s power to affect the money supply and aggregate economic activity
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Open Market Operations
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the most frequently used tool of monetary policy in which the Federal Reserve Board buys or sells securities from any market participant
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Overweighed
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condition in which a portfolio, for whatever reason includes more of a class of securities than the relative market value alone would justify
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Reserve Requirement
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the ratio of required reserves to total deposits at a bank
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Structural Change
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a type of economic trend resulting from a major organizational change in the economy or in how it functions
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Underweighted
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a condition in which a portfolio, for whatever reason includes less of a class of securities than the relative market alone would justify
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Balance sheet
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a financial statement that shows what assets the firm controls at a fixed point in time and how it has financed these assets
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Business risk
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the variability of operating income arising from the characteristics of the firm’s industry…two sources of business risk are sales variability and operating leverage
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Common size statements
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the normalization of balance sheet and income statement items to allow for easier comparison of different sized firms
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Cross-sectional analysis
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an examination of a firm’s performance in comparison to other firms in the industry with similar characteristics to the firm being studied
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DuPont System
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a method of examining ROE by breaking it down into 3 component parts
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Extended DuPont System
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a method of examining ROE by breaking it down into 5 component parts
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Financial Risk
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the variability of future income arising from the firm’s fixed financing costs, for example, interest payments…the effect of fixed financial costs is to magnify the effect of changes in operating profit on net income or earnings per share
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Free cash flow
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a cash flow measure that equals cash flow from operations minus capital expenditures and dividends
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Generally accepted accounting principles (GAAP)
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accounting principles formulated by the Financial Accounting Standards Board and used to construct financial statements
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Income statement
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a financial statement that shows the flow of the firm’s sales, expenses, and earnings over a period of time
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Internal Liquidity (solvency) ratios
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relationships between items of financial data that indicate the firm’s ability to meet short term financial obligations
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Operating efficiency ratios
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ratios that measure a firm’s utilization of its assets and capital
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Operating leverage
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the use of fixed-production costs in the firm’s operating cost structure…the effect of fixed costs is to magnify the effect of a change in sales on operating profits
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Operating profitability ratios
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ratios that measure the ability of the firm to earn returns on sales
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Statement of Cash Flows
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a financial statement that shows the effects on the firm’s cash flow of income flows and changes in its balance sheets
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Sustainable growth potential
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a measure of how fast a firm can grow based upon a firm’s retention rate (RR) and its return on equity (ROE)
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Time-series analysis
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examination of a firm’s performance data over a period of time
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Trading turnover
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the percentage of outstanding shares traded during a period of time
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Declining trend channel
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the range defined by security prices as they move progressively lower
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Flat trend channel
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range defined by security prices as they maintain a relatively steady level
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Moving average
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the continually recalculated average of security prices for a period, often 200 days, to serve as an indication of the general trend of prices and also as a benchmark price
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Peak
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culmination of a bull market when prices stop rising and begin declining
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Relative Strength (RS) ratio
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the ratio of a stock price or an industry index value to a market index, indicating performance relative to the overall market
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Resistance level
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a price at which a technician would expect a substantial increase in the supply of a stock to reverse a rising trend
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Rising trend channel
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range defined by security prices as they move progressively higher
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Support level
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a price at which a technician would expect a substantial increase in price and volume for a stock to reverse a declining trend that was due to profit making
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Technical analysis
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estimation of future security price movements based on past price and volume movements
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Trough
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the culmination of a bear market at which prices stop declining and begin rising
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Realized (horizon) yeild
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The expected compounded yield on a bond that is sold before it matures assuming a sales price and the reinvestment of all cash flows at an explicit rate
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Term structure of interest rates
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The relationship between term to maturity and yield to maturity for a sample of comparable bonds at a given time. popularly known as the yield curve
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yield
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The promised rate of return on an investment under certain assumptions
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Yield illusion
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The erroneous expectation that a bond will provide its stated yield to maturity without recognizing the implicit coupon reinvestment assumption related to the Ym calculation
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Yield Spread
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The difference between the promised yields of various bond issues or market segments
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