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78 Cards in this Set

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Bank Discount Yield

Expresses the dollar discount from the par value as a fraction of the face value.

Money Market Yield

Makes the quoted yield on a T-bill comparable to yield quotes for interest-bearing money market instruments that pay interest on 360-day basis.

Confidence Interval

A range of values around the expected outcome within which we expect the actual outcome to be some specified percentage of the time.

90% Confidence Interval

1.65

95% Confidence Interval

1.96

99% Confidence Interval

2.58

Standardization

The process of converting an observed value for a random variable to its z-value.

Z-Value

The number of standard deviations a given observation is from the population mean.

Shortfall Risk

The probability that a portfolio value or return will fall below a particular value or return over a given time period.

Roy's Safety-First Criterion

The optimal portfolio minimizes the probability that the return of the portfolio falls below some minimum acceptable level (threshold level).

Student's t-Distribution

A bell-shaped probability distribution that is symmetrical about its mean.




The appropriate distribution to use when constructing confidence intervals based on small samples from populations with unknown variance and a normal distribution.

Income-Savings Curve

The negative relationship between real interest rates and real income for equilibrium in the goods market.

Liquidity-Money Curve

The positive relationship between real interest rates and income consistent with equilibrium in the money market.

Neoclassical School Economists

Believe shifts in both aggregate demand and aggregate supply are primarily driven by changes in technology over time.




The economy has a strong tendency toward full-employment equilibrium, as recession puts downward pressure on the money wage rate or as over-full employment puts upward pressure on the money wage rate.

Keynesian School Economists

Believe fluctuations in aggregate demand are primarily due to swings in the level of optimism of those who run businesses.




Shifts in aggregate demand due to changes in expectations are primary causes of business cycles.

New Keynesian School Economists

Assertion that the prices of productive inputs other than labor are downward sticky, presenting additional barriers to the restoration of full-employment equilibrium.

Monetarist School

Variations in aggregate demand that cause business cycles are due to variations in the rate of growth of the money supply.




Recessions can be caused by external shocks or by inappropriate decreases in the money supply.

Austrian School

Business cycles are caused by government intervention in the economy.

New Classical School

Introduced real business cycle theory - the effect of real economic variables such as changes in technology and external shocks, as opposed to monetary variables, cause business cycles.

Quantity Theory of Money

The quantity of money is some proportion of the total spending in an economy.

Velocity

The average number of times per year each unit of money is used to buy goods or services.

Liquidity Trap

If demand for money becomes very elastic and individuals willingly hold more money even without a decrease in short-term rates.

International Monetary Fund

Facilitates trade by promoting international monetary cooperation and exchange rate stability, assists in setting up international payments systems, and makes resources available to member countries with balance of payments problems.

World Bank

Provides low-interest loans, interest-free credits, and grants to developing countries for many specific purposes.




Provides resources and knowledge and helps form private/public partnerships with the overall goal of fighting poverty.

World Trade Organization

Goal of ensuring that trade flows freely and works smoothly. Main focus is on instituting, interpreting, and enforcing a number of multilateral trade agreements that detail global trade policies for a large majority of the world's trading nations.

Elasticities Approach

Focuses on the impact of exchange rate changes on the total value of imports and exports.

Absorption Approach

Analyzes the effect of a change in exchange rates focuses on capital flow.

J-Curve

When the domestic currency depreciates, the trade deficit gets worse initially but then improves over time.

Installment Sale

Occurs when a firm finances a sale and payments are expected to be received over an extended period.

Deferred Tax Assets

Created when the amount of taxes payable exceeds the amount of income tax expense recognized in the income statement.

Free Cash Flow to the Firm

The cash available to all investors, both equity owners and debt holders.

Free Cash Flow to Equity

The cash flow that would be available for distribution to common shareholders.

Common-Size Statements

Normalize balance sheets and income statements and allow the analyst to more easily compare performance across firms and for a single firm over time.

Vertical Common-Size Balance Sheet

Expresses all balance sheet accounts as a percentage of total assets.

Vertical Common-Size Income Statement

Expresses all income statement items as a percentage of sales.

p-Value

The probability of obtaining a test statistic that would lead to a rejection of the null hypothesis, assuming the null hypothesis is true.


Crowding-Out Effect

Increased government borrowing will tend to increase interest rates, and firms may reduce their borrowing and investment spending as a result, decreasing the impact on aggregate demand of deficit spending.

What are the three objectives of financial market regulation under IOSCO?

1. Protect investors


2. Ensure fairness, etc.


3. Reduce systemic risk

Prior Service Costs

Arise when changes in the terms of a defined benefit pension plan increase the future benefits due to employees based on their prior employment with the company.

Sales-Type Lease

Treated as if the lessor sold the asset for the present value of the lease payments and provided a loan to the buyer in the same amount.

Direct Financing Lease

No gross profit is recognized by the lessor at the inception of the lease.

Capitalize

The cost as an asset on the balance sheet.

Duration

A measure of a bond's interest rate risk or sensitivity of a bond's full price to a change in its yield.

Modified Duration

Provides an approximate percentage change in a bond's price for a 1% change in YTM.

Convenience Yield

The value of having the physical commodity for use over the period of the futures contract.

Contango

If there is little or no convenience yield, futures prices will be higher than spot prices.

Backwardation

When the convenience yield is high, futures prices will be less than spot prices.

Roll Yield

The yield due to a difference between the spot price and futures price, or a difference between two futures prices with different expiration dates.

Angel Investing

Investments made in the "idea stage and the funds are used for business plans and assessing market potential

Seed Stage

Investments made for product development, marketing, and market research.

Early Stage

Investments made to fund initial commercial production and sales.

Mezzanine-Stage Financing

Capital provided to prepare the firm for an IPO.

Put/Call Ratio Indicator

Increases in the put/call ratio indicate a more negative outlook for the price of the asset.

Volatility Index Indicator

Measures the volatility of options on the S&P 500. High levels suggest investors fear declines in the stock market.

Margin Debt Indicator

Increases in total margin debt outstanding suggest aggressive buying by bullish investors.

Short Interest Ratio Indicator

High short interest ratio means investors expect the stock price to decrease and implies future buying demand when short sellers must return their borrowed shares.

Mutual Fund Cash Position Indicator

High mutual fund cash ratio suggests market prices are likely to increase.

Golden Parachutes

Rich severance packages for top managers who lose their jobs as a result of a takeover.

Poison Pills

Provisions that grant rights to existing shareholders in the event a certain percentage of a company's shares are acquired.

Greenmail

Use of corporate funds to buy back the shares of a hostile acquirer at a premium to their market value.

Diversification Ratio

The ratio of the risk of an equally weighted portfolio of n securities to the risk of a single security selected at random from n securities.

Capital Allocation Line

The line of possible portfolio risk and return combinations given the risk-free rate and the risk and return of a portfolio of risky assets.

Capital Market Line

Optimal CAL for all investors. Expected portfolio return is a linear function of portfolio risk.

Security Market Line

The relationship between risk and return for individual assets using covariance as a measure of systematic risk.

Statutory Voting

Each share held is assigned one vote in the election of each member of the board of directors.

Cumulative Voting

Shareholders can allocate their votes to one or more candidates as they choose.

Notching

Credit rating agency practice of assigning ratings to debt issues that differ from the issuer's credit rating.

Trade Sale

Selling a portfolio company to a competitor or another strategic buyer.

Water Mark Fees

Based on increases in investors' accounts above their highest previous value.

Hurdle Rate

Minimum return a fund must achieve in a given period before fund managers receive incentive fees.

2-and-20 Structure

Fund managers receive a 2% management fee and a 20% incentive fee.

Unbiased Estimator

Has an expected value equal to the true value of the population parameter.

Consistent Estimator

More accurate the greater the sample size.

Efficient Estimator

Has the sample distribution that is less than that of any other unbiased estimator.

Nash Equilibrium

The choices of all firms are such that there is no other choice that makes any firm better off.

Confirmation Bias

The tendency to search for, interpret, or recall information in a way that confirms one's beliefs or hypotheses.

Escalation Bias

Putting more money into a failure that they feel responsible for rather than into a success.

Zero-Volatility Spread

Measure of the spread that the investor would realize over the entire Treasury spot rate curve if the bond is held to maturity.