Finance Concepts: Ratios, Markets, Valuation and Risk
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Finance Concepts: Ratios, Markets, and Risk
1. Types of work in finance subareas
Be able to recognize the types of work in subareas of finance such as investments, financial management, international finance, etc.
2. Basic ratio categories to know
Know the basics of the different ratio categories (e.g., liquidity, asset management, profitability).
Liquidity — a ratio that measures the relationship between a firm's current assets and current liabilities.
3. Average collection period ratio
Know what the average collection period ratio measures.
The average number of days between the date a credit sale is made and the date the purchaser pays for that sale.
4. Time value of money concept
Know that money in the future is worth less than money today.
(Time value of money principle.)
5. Cause of the 2006 financial meltdown
What started the 2006 financial meltdown?
Subprime mortgage borrowers.
6. Interest rates and future values
How are future values changed by a change in interest rates — if rates go up, what happens to the future value of a sum of money?
The higher the rate, the higher the future value (FV).
7. Definition of corporate governance
What is corporate governance?
The process of monitoring managers and aligning their incentives with shareholder goals.
8. Who helps firms access financial markets
Who helps firms access financial markets (sell stocks and bonds)?
Investment bankers.
9. Perpetuity payment duration
How long does a perpetuity pay to its holder?
Periodically, forever.
10. Maximizing shareholder value
How do you maximize the value for shareholders? (profits? Stock price? Dividends?)
Management should first consider shareholder interests when making business decisions.
11. Loan amortization schedule contents
What is shown on a loan amortization schedule? (interest only, principal only, etc.)
Both interest and principal.
12. Who arranges primary market transactions
Who arranges most primary market transactions in the U.S. for corporations? (see 8 above)
Investment banks.
13. What is a money market instrument
What is a money market instrument (all short-term such as commercial paper, Treasury bills, bankers' acceptances)?
Money market debt securities maturing in less than one year.
14. What is a capital market instrument
What is a capital market instrument (all long-term such as bonds, mortgages, long-term notes)?
Debt securities maturing in more than one year.
15. Risk from inability to sell an instrument
What is the type of risk that causes the price of an instrument to be lower because you cannot sell it when you want at fair market value?
Liquidity risk.
16. Who issues bonds
Who all issues bonds?
Governments and corporations.
17. Who issues TIPS
Who issues Treasury Inflation-Protected Securities (TIPS)?
The U.S. government.
18. What are asset-backed securities
What are asset-backed securities (originate from other loans such as credit cards, home equity loans, mortgages, etc.)?
Debt securities whose payments originate from other loans.
19. How to find a bond's current yield
How do you find the current yield on a bond?
Annual interest earned divided by the current price of the bond.
20. Ratings for investment-grade bonds
What are the ratings for an investment grade bond?
AAA to BBB.
21. Compounding effect and time
Know that the longer time you have with an instrument, the greater is the compounding effect.
The longer you hold an instrument, the greater the compounding effect.