Finance Final

Budget

Estimation of Revenue/expenses over specified period

Discretionary Income

$ leftover after paying needs

50/30/20 Rule

50% Needs, 30% Wants, 20% Savings

Compound Interest

Value is never greater than what it is now / Interest on interest

Rule of 72

# of years it takes for a $ value to double - 72/rate = years

Credit Worthiness (3 C’s)

1) Character

2) Capital (item of value)

3) Capacity (you can pay)

Life Insurance

Provides protection for assets in case of death

Premiums (Insurance)

Monthly payments to insurance companies for cost of insurance (higher risk = higher rate)

Term Life (payment)

• limited amount time

• lower premium

• protection for times of need (mortgage/family)

Whole Life (investment)

• entire life

• cash value accumulates

• guaranteed income after retirement

401(K)

Private sector retirement plan

• contributions pretax (pay tax @ end)

• employer match % of contributions

• max: $22500/year

• withdraw @ 59.5-70.5

403(B)

Public sector retirement plan

• contributions pretax (pay tax @ end)

• employer no match contributions

• max: $22500/year

Roth IRA

• pay tax NOW ($ deposited is taxed)

• tax break lateR

• $60,000 max

• withdraw 59.5

TraditioNal IRA

• pay tax later ($ put in no taxed)

• tax break Now

• $6,000 max

• withdraw 59.5

Rule of 110

110 - age = % invested in stocks vs bonds

Dollar Cost Averaging

Decrease loss/volatility with payment plan - same investment same amount

Owning stock

become part owner of company

Public stocks

ANYBODY can own - ex: Nike, Amazon

Private stocks

Not traded on stock market - ex: Deloitte, KPMG

Initial Public Offering (IPO)

Company decides to sell to public by:

1) Investment banker underwrites stock offering

2) take responsibility/risk of selling certain amount of stock

3) Register with Securities and Exchange Commission (SEC)

Index

Measurement of group of companies

Dow Jones (DJIA)

30 Top companies

S&P 500

Baseline for stock of mutual fund (500 companies = more diversity)

NASDAQ

Technology index (3700+ companies)

Market Cap

Amount of Shares * Stock Price

Small Cap (20%)

$250M - $2B

Mid Cap (5-10%)

$2B - $10B

Large Cap (70%)

$10B >

Standard Deviation

How volatile? / Skew from average

Beta Number

Calculation to measure risk in stock

• <1 stable

• 1 average

• >1 volatile

P/E ratio

Price of Stock/Earning per Share (higher = riskier)

Earnings Per Share

Profit/# of Shares outstanding (want high)

Capital Appreciation

Buy/sell stock

Dividends

$ earned by holding onto company stock

• Tech companies usually no

• Big dividends = stable company

Stock Split

More shares without changing value

ex: $1M @ 50 Shares → $2M @ 25 Shares

Reverse Stock Split

Less shares without changing value

Conservative Investor

55-60, little change, bonds/high yield savings

Moderate Investor

Mid age, Crypto/bonds

Speculative investor

Younger, huge beta or P/E ratio

Short sell

Buy low sell lower (bet against company)

• buy on margin (loan)

• no limit to loss

  • margin fees

Market order

Buy security immediately @ price available

Limit order

Buy/sell @ price YOU determine

Margins

Borrow $ to trade

Bear Market

SUCK - decline of 20% or more of stock market index

Bull Market

GREAT - gains of 20% or more of stock market index

Financial Statements

fundamental statements

Balance Sheet

How much a company owns vs owes on specific date

Assets = liabilities + owner equity

Income Statement

$ made - net earnings/loses

Revenue - Expenses = Income/Loss

Cash Flow Statement

Inflow/Outflow of $

1) Operating Activities (lights, employees)

2) Investing (business investments, etc.)

3) Financing (loans, buying - building credit)

Working Capital

Ability to pay off short term liabilities

Current Assets - Current Liabilities

Current Ratio

Ability to pay off short term liabilities (higher = likely to pay off)

Current Assets/Current Liabilities

QuIck Ratio

Short term financial Strength (higher = better)

(Current Assets - Inventory) / Current Liabilities

Debt to Equity

Total Liabilities / Shareholder Equity (low!) - 0.5 low risk

ex: 3:1 ratio = $3 debt for every $1 shareholders invest

ReturN on Equity (ROE)

Measure profitability (high!)

Net Income / Shareholder Equity

Return on INvesteD capital (ROIC)

Profitability business must earn return on invested that exceed cost of capital (Want to be > cost = invested + working) - 15% good

(Net income - Dividends) / $ invested capital

Profit MaRgin

$ made / stuff sold (high!) ex: 20% = $0.20 for each $1 of sales

Net income (after tax) / Revenue

PEG Ratio

Stock’s value - lower = undervalued

PE Ratio / EPS Growth

Mutual Fund

Take and organize into one fund w/ different holdings + professionally managed

NAV

Price per share of fund

(Assets - Liabilities) / # of Shares

Value Fund

Seeks to invest in stocks that are deemed to be undervalued in price

Growth Fund

Capital Apperciation Stocks

Income Fund

Dividends

Index Fund

Tracks S&P / Index

• lower fees, average performance, little variation

Bond Mutual Fund

People = lenders to companies, gov, etc.

• Corporate

• State/local

• Government

Municipal Bonds

A security issued by or on behalf of a local authority

Government Bonds

• Treasury bonds – > 10 years

• T Notes – 1-10 years

• T bills – < 1 year

  • Zero-coupon bond (purchased at discount)

Bond ratings

• AAA - AA = high credit

• AA - BB = medium

• BB - C = low

• C - D = junk

Investment Grade

High ratings/stable/success

Callable Bonds

Redeemable prior to maturity

Junk Bond

Low rate, high yield (HIGH RISK, POTENTIAL HIGH REWARD)

Par/face value

Principal/Maturity value of a security on face of instrument

Coupon payment

% rate or yield

Coupon rate

Initial rate

Current rate

Rate based on market

Relationship between pricing and interest rates

Inverse

SD of 10 w/ average annual return of 10%

Range: 0% - 20% SD

R²

How close match index - 1.0 = perfect vs 0.0 = no coRRelation

Sharpe

Potential Return - Potential Volatility (higher = better)

1 = good, 2= better, 3 = excellent!

Bond amount > face value

Sell @ Premium

Bond amount < face value

Sell @ Discount