FIN435 Class Web Page, Spring '20

Jacksonville University

Instructor: Maggie Foley

The Syllabus

Exit Exam Questions (will be posted in week 10 on blackboard)

Weekly SCHEDULE, LINKS, FILES and Questions 

Week

Coverage, HW, Supplements

-        Required

 

Videos (optional)

Week

1

Marketwatch Stock Trading Game (Pass code: havefun)

Use the information and directions below to join the game.

1.     URL for your game: 
https://www.marketwatch.com/game/jufin435-20s    

2.     Password for this private game: havefun.

3.     Click on the 'Join Now' button to get started.

4.     If you are an existing MarketWatch member, login. If you are a new user, follow the link for a Free account - it's easy!

5.     Follow the instructions and start trading!

6.   Game will be over on 4/17/2019

 

Chapter 3 Financial Statement

 

ppt

 

Using a Balance Sheet to Analyze a Company (VIDEO)

What is an Income Statement? (Video)

How Do You Read a Cash Flow Statement? | (VIDEO)

 

Finviz.com/screener for ratio analysis (https://finviz.com/screener.ashx

 

 

image001.jpg

 


Balance Sheet Template 
 

http://www.jufinance.com/10k/bs

 

Income Statement Template  

http://www.jufinance.com/10k/is

  

Cash flow template

http://www.jufinance.com/10k/cf

 

Ratio Analysis   

http://www.jufinance.com/ratio

 

FCF calculator      What is free cash flow (video)

http://www.jufinance.com/fcf

image003.jpg

Capital expenditure = increases in NFA + depreciation

Or, capital expenditure = increases in GFA

 

Note: All companies, foreign and domestic, are required to file registration statements, periodic reports, and other forms electronically through EDGAR. 

 

 

 

 

Case study of chapter 3: 

·        Excel File here  (due with the first mid term exam)    ‘

·        Video available  on blackboard collaborate

And at http://www.jufinance.com/video/fin435_c3_case.mp4

 

 

 

***** How much does Amazon worth?”

FYI: Amazon.com Inc. (AMZN) https://www.stock-analysis-on.net/NASDAQ/Company/Amazoncom-Inc/DCF/Present-Value-of-FCFF

Chapter 4 Ratio Analysis

 

Ppt

 

Reference: Ratio Formulas

 

Reference: Commonly used ratio explained

 

 

 

 

****** DuPont Identity *************

 video 

 

 

 

ROE = (net income / sales) * (sales / assets) * (assets / shareholders' equity)

This equation for ROE breaks it into three widely used and studied components:

ROE = (net profit margin) * (asset turnover) * (equity multiplie)

 

 

Chapter 4 case study (updated, due with first mid term)

 

·        PPT affiliated with this case study FYI

·        Video is available on blackboard collaborate

 

 

Ratio Analysis  template

http://www.jufinance.com/ratio

 

 

 

 

Below are Benjamin Graham’s seven time-tested criteria to identify strong value stocks.

https://cabotwealth.com/daily/value-investing/benjamin-grahams-value-stock-criteria/

Value Stock Criteria List:

VALUE CRITERIA #1:

Look for a quality rating that is average or better. You don’need to find the best quality companies–average or better is fine. Benjamin Graham recommended using Standard & Poor’s rating system and required companies to have an S&P Earnings and Dividend Rating of B or better. The S&P rating system ranges from D to A+. Stick to stocks with ratings of B+ or better, just to be on the safe side.

VALUE CRITERIA #2:

Graham advised buying companies with Total Debt to Current Asset ratios of less than 1.10. In value investing it is important at all times to invest in companies with a low debt load. Total Debt to Current Asset ratios can be found in data supplied by Standard & Poor’s, Value Line, and many other services.

VALUE CRITERIA #3:

Check the Current Ratio (current assets divided by current liabilities) to find companies with ratios over 1.50. This is a common ratio provided by many investment services.

VALUE CRITERIA #4:

Criteria four is simple: Find companies with positive earnings per share growth during the past five years with no earnings deficits. Earnings need to be higher in the most recent year than five years ago. Avoiding companies with earnings deficits during the past five years will help you stay clear of high-risk companies.

 

VALUE CRITERIA #5:

Invest in companies with price to earnings per share (P/E) ratios of 9.0 or less. Look for companies that are selling at bargain prices. Finding companies with low P/Es usually eliminates high growth companies, which should be evaluated using growth investing techniques.

VALUE CRITERIA #6:

Find companies with price to book value (P/BV) ratios less than 1.20. P/E ratios, mentioned in rule 5, can sometimes be misleading. P/BV ratios are calculated by dividing the current price by the most recent book value per share for a company. Book value provides a good indication of the underlying value of a company. Investing in stocks selling near or below their book value makes sense.

VALUE CRITERIA #7:

Invest in companies that are currently paying dividends. Investing in undervalued companies requires waiting for other investors to discover the bargains you have already found. Sometimes your wait period will be long and tedious, but if the company pays a decent dividend, you can sit back and collect dividends while you wait patiently for your stock to go from undervalued to overvalued.

One last thought. We like to find out why a stock is selling at a bargain price. Is the company competing in an industry that is dying? Is the company suffering from a setback caused by an unforeseen problem? The most important question, though, is whether the company’s  problem is short-term or long-term and whether management is aware of the problem and taking action to correct it. You can put your business acumen to work to determine if management has an adequate plan to solve the company’s current problems.

For class discussion: Times have changed. Mr. Granham’s book about value investing was published sixty years ago. Do you think the criteria in his book are still working in today’s environment?

Chapter 6 Interest rate

 

ppt

 

 

Market data website:

 http://finra-markets.morningstar.com/BondCenter/Default.jsp (FINRA bond market data)

 

Market watch on Wall Street Journal has daily yield curve and interest rate information. 

http://www.marketwatch.com/tools/pftools/

http://www.youtube.com/watch?v=yph8TRldW6k

 

The yield curve (Video, Khan academy)

 

 

 

Treasury Yields

NAME

COUPON

PRICE

YIELD

1 MONTH

1 YEAR

TIME (EST)

GB3:GOV

3 Month

0.00

1.53

1.56%

+0

-87

7:02 PM

GB6:GOV

6 Month

0.00

1.53

1.56%

+1

-94

7:02 PM

GB12:GOV

12 Month

0.00

1.49

1.53%

+2

-102

7:02 PM

GT2:GOV

2 Year

1.63

100.13

1.56%

-5

-98

7:02 PM

GT5:GOV

5 Year

1.75

100.70

1.60%

-5

-93

7:02 PM

GT10:GOV

10 Year

1.75

99.69

1.79%

-4

-93

7:02 PM

GT30:GOV

30 Year

2.38

102.98

2.24%

-2

-84

7:02 PM

 

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

 

In Class Exercise:

·         Please draw the yield curve based on the above information;

·         What can be predicted from the current yield curve?

 

 

For Daily Treasury rates such as the following, please visit https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield

 

Date

1 Mo

2 Mo

3 Mo

6 Mo

1 Yr

2 Yr

3 Yr

5 Yr

7 Yr

10 Yr

20 Yr

30 Yr

01/02/20

1.53

1.55

1.54

1.57

1.56

1.58

1.59

1.67

1.79

1.88

2.19

2.33

01/03/20

1.52

1.55

1.52

1.55

1.55

1.53

1.54

1.59

1.71

1.80

2.11

2.26

01/06/20

1.54

1.54

1.56

1.56

1.54

1.54

1.56

1.61

1.72

1.81

2.13

2.28

01/07/20

1.52

1.53

1.54

1.56

1.53

1.54

1.55

1.62

1.74

1.83

2.16

2.31

01/08/20

1.50

1.53

1.54

1.56

1.55

1.58

1.61

1.67

1.78

1.87

2.21

2.35

01/09/20

1.53

1.55

1.54

1.56

1.54

1.58

1.59

1.65

1.77

1.85

2.17

2.38

01/10/20

1.52

1.55

1.54

1.55

1.53

1.56

1.59

1.63

1.74

1.83

2.14

2.28

01/13/20

1.54

1.56

1.57

1.57

1.53

1.58

1.60

1.65

1.76

1.85

2.16

2.30

01/14/20

1.53

1.56

1.57

1.57

1.53

1.58

1.59

1.63

1.74

1.82

2.12

2.27

01/15/20

1.53

1.56

1.57

1.58

1.54

1.56

1.56

1.60

1.71

1.79

2.09

2.23

Date

1 Mo

2 Mo

3 Mo

6 Mo

1 Yr

2 Yr

3 Yr

5 Yr

7 Yr

10 Yr

20 Yr

30 Yr

01/02/20

1.53

1.55

1.54

1.57

1.56

1.58

1.59

1.67

1.79

1.88

2.19

2.33

For class discussion: Why do interest rates change daily? Who determines interest rate?

“ interest rates are determined by the Federal Open Market Committee (FOMC), which consists of seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight times a year to determine the near-term direction of monetary policy and interest rates.”

 

 

Who Determines Interest Rates?

https://www.investopedia.com/ask/answers/who-determines-interest-rates/

 

By NICK K. LIOUDIS  Updated Aug 15, 2019

 

Interest rates are the cost of borrowing money. They represent what creditors earn for lending you money. These rates are constantly changing, and differ based on the lender, as well as your creditworthiness. Interest rates not only keep the economy functioning, but they also keep people borrowing, spending, and lending. But most of us don't really stop to think about how they are implemented or who determines them. This article summarizes the three main forces that control and determine interest rates.

KEY TAKEAWAYS

  • Interest rates are the cost of borrowing money and represent what creditors earn for lending money.
  • Central banks raise or lower short-term interest rates to ensure stability and liquidity in the economy.
  • Long-term interest rates are affected by demand for 10- and 30-year U.S. Treasury notes.
  • Low demand for long-term notes leads to higher rates, while higher demand leads to lower rates.
  • Retail banks also control rates based on the market, their business needs, and individual customers.

 

Short-Term Interest Rates: Central Banks

In countries using a centralized banking model, short-term interest rates are determined by central banks. A government's economic observers create a policy that helps ensure stable prices and liquidity. This policy is routinely checked so the supply of money within the economy is neither too large, which causes prices to increase, nor too small, which can lead to a drop in prices.

In the U.S., interest rates are determined by the Federal Open Market Committee (FOMC), which consists of seven governors of the Federal Reserve Board and five Federal Reserve Bank presidents. The FOMC meets eight times a year to determine the near-term direction of monetary policy and interest rates. The actions of central banks like the Fed affect short-term and variable interest rates.

If the monetary policymakers wish to decrease the money supply, they will raise the interest rate, making it more attractive to deposit funds and reduce borrowing from the central bank. Conversely, if the central bank wishes to increase the money supply, they will decrease the interest rate, which makes it more attractive to borrow and spend money.

The Fed funds rate affects the prime rate—the rate banks charge their best customers, many of whom have the highest credit rating possible. It's also the rate banks charge each other for overnight loans.

The U.S. prime rate remained at 3.25% between Dec. 16, 2008 and Dec. 17, 2015, when it was raised to 3.5%.

 

Long-Term Interest Rates: Demand for Treasury Notes

Many of these rates are independent of the Fed funds rate, and, instead, follow 10- or 30-year Treasury note yields. These yields depend on demand after the U.S. Treasury Department auctions them off on the market. Lower demand tends to result in high interest rates. But when there is a high demand for these notes, it can push rates down lower.

If you have a long-term fixed-rate mortgage, car loan, student loan, or any similar non-revolving consumer credit product, this is where it falls. Some credit card annual percentage rates are also affected by these notes.

These rates are generally lower than most revolving credit products but are higher than the prime rate.

 

Many savings account rates are also determined by long-term Treasury notes.

 

Other Rates: Retail Banks

Retail banks are also partly responsible for controlling interest rates. Loans and mortgages they offer may have rates that change based on several factors including their needs, the market, and the individual consumer.

For example, someone with a lower credit score may be at a higher risk of default, so they pay a higher interest rate. The same applies to credit cards. Banks will offer different rates to different customers, and will also increase the rate if there is a missed payment, bounced payment, or for other services like balance transfers and foreign exchange.

image004.jpg

image068.jpg

image064.jpg

image070.jpg

image072.jpg

 

What is interest rates

https://www.youtube.com/watch?v=Pod73wrvdSQ

 

 

Gerald Celente: Low Interest Rates are Building the Biggest Bubble in Modern History - 9/21/14

https://www.youtube.com/watch?v=pTpK6Te6tYI

 

 

 

How interest rates are set

https://www.youtube.com/watch?v=Oz5hNemSdWc

 

 

 

 

What happens if Fed raise interest rates

https://www.youtube.com/watch?v=4OP-3Ui6K1s

 

 

 

 

What Is the Relationship Between Inflation and Interest Rates?

By dated Dec 6, 2019

 

Inflation and interest rates are often linked and frequently referenced in macroeconomics. Inflation refers to the rate at which prices for goods and services rise. In the United States, the interest rate, or the amount charged by a lender to a borrower, is based on the federal funds rate that is determined by the Federal Reserve (sometimes called "the Fed").

By setting the target for the federal funds rate, the Fed has at its disposal a powerful tool that it uses to influence the rate of inflation. This tool enables the Fed to expand or contract the money supply as needed to achieve target employment rates, stable prices, and stable economic growth.

KEY TAKEAWAYS

  • There is an inverse correlation between interest rates and the rate of inflation.
  • In the U.S, the Federal Reserve is responsible for implementing the country's monetary policy, including setting the federal funds rate which influences the interest rates banks charge borrowers.
  • In general, when interest rates are low, the economy grows and inflation increases.
  • Conversely, when interest rates are high, the economy slows and inflation decreases.

 

The Inverse Correlation Between Interest Rates and Inflation

Under a system of fractional reserve banking, interest rates and inflation tend to be inversely correlated. This relationship forms one of the central tenets of contemporary monetary policy: Central banks manipulate short-term interest rates to affect the rate of inflation in the economy.

The below chart demonstrates the inverse correlation between interest rates and inflation. In the chart, CPI refers to the Consumer Price Index, a measurement that tracks changes in prices. Changes in the CPI are used to identify periods of inflation and deflation.

In general, as interest rates are reduced, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase.

The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save as returns from savings are higher. With less disposable income being spent as a result of the increase in the interest rate, the economy slows and inflation decreases.

To better understand how the relationship between inflation and interest rates works, it's important to understand the banking system, the quantity theory of money, and the role interest rates play.

Fractional Reserve Banking

The world currently uses a fractional reserve banking system. When someone deposits $100 into the bank, they maintain a claim on that $100. The bank, however, can lend out those dollars based on the reserve ratio set by the central bank. If the reserve ratio is 10%, the bank can lend out the other 90%, which is $90 in this case. A 10% fraction of the money stays in the bank vaults.

As long as the subsequent $90 loan is outstanding, there are two claims totaling $190 in the economy. In other words, the supply of money has increased from $100 to $190. This is a simple demonstration of how banking grows the money supply.

Quantity Theory of Money

In economics, the quantity theory of money states that the supply and demand for money determines inflation. If the money supply grows, prices tend to rise, because each individual piece of paper becomes less valuable.

Hyperinflation is an economic term used to describe extreme inflation where price increases are rapid and uncontrolled. While central banks generally target an annual inflation rate of around 2% to 3% as an acceptable rate for a healthy economy, hyperinflation goes well beyond this. Countries that experience hyperinflation have an inflation rate of 50% or more per month.

Interest Rates, Savings, Loans, and Inflation

The interest rate acts as a price for holding or loaning money. Banks pay an interest rate on savings in order to attract depositors. Banks also receive an interest rate for money that is loaned from their deposits.

When interest rates are low, individuals and businesses tend to demand more loans. Each bank loan increases the money supply in a fractional reserve banking system. According to the quantity theory of money, a growing money supply increases inflation. Thus, low interest rates tend to result in more inflation. High interest rates tend to lower inflation.

This is a very simplified version of the relationship, but it highlights why interest rates and inflation tend to be inversely correlated.

The Federal Open Market Committee

The Federal Open Market Committee (FOMC) meets eight times each year to review economic and financial conditions and decide on monetary policy. Monetary policy refers to the actions taken that affect the availability and cost of money and credit. At these meetings, short-term interest rate targets are determined.

Using economic indicators such as the Consumer Price Index (CPI) and the Producer Price Indexes (PPI), the Fed will establish interest rate targets intended to keep the economy in balance. By moving interest rate targets up or down, the Fed attempts to achieve target employment rates, stable prices, and stable economic growth. The Fed will raise interest rates to reduce inflation and decrease rates to spur economic growth.

Investors and traders keep a close eye on the FOMC rate decisions. After each of the eight FOMC meetings, an announcement is made regarding the Fed's decision to increase, decrease, or maintain key interest rates. Certain markets may move in advance of the anticipated interest rate changes and in response to the actual announcements. For example, the U.S. dollar typically rallies in response to an interest rate increase, while the bond market falls in reaction to rate hikes.

chartPresentational grey line

Presentational grey line

chart

Chapter 6 Interest rate Part II: Term Structure of Interest rate

 

Calculator

 

image020.jpg

 

Question for discussion: If a% and b% are both known to investors, such as the bank rates, how much is the future interest rate, such as c%?

 

(1+a)^N = (1+b)^m *(1+c)^(N-M)

 

Either earning a% of interest rate for N years,

or b% of interest rate for M years, and then c% of interest rate for (N-M) years,

investors should be indifferent. Right?

 

Then,

 (1+a)^N = (1+b)^m *(1+c)^(N-M)θ c = ((1+a)^N / (1+b)^m)^(1/(N-M))-1

 

Or approximately,

N*a = M*b +(N-M)*(c)θ c = (N*a – M*b) /(N-M)

 

 

What Is Expectations Theory  (video)

Expectations theory attempts to predict what short-term interest rates will be in the future based on current long-term interest rates. The theory suggests that an investor earns the same amount of interest by investing in two consecutive one-year bond investments versus investing in one two-year bond today. The theory is also known as the "unbiased expectations theory.”

Understanding Expectations Theory

The expectations theory aims to help investors make decisions based upon a forecast of future interest rates. The theory uses long-term rates, typically from government bonds, to forecast the rate for short-term bonds. In theory, long-term rates can be used to indicate where rates of short-term bonds will trade in the future (https://www.investopedia.com/terms/e/expectationstheory.asp)

 

Expectations Theory

By CHRIS B. MURPHY  Updated Apr 21, 2019

 

Example of Calculating Expectations Theory

Let's say that the present bond market provides investors with a two-year bond that pays an interest rate of 20% while a one-year bond pays an interest rate of 18%. The expectations theory can be used to forecast the interest rate of a future one-year bond.

  • The first step of the calculation is to add one to the two-year bond’s interest rate. The result is 1.2.
  • The next step is to square the result or (1.2 * 1.2 = 1.44).
  • Divide the result by the current one-year interest rate and add one or ((1.44 / 1.18) +1 = 1.22).
  • To calculate the forecast one-year bond interest rate for the following year, subtract one from the result or (1.22 -1 = 0.22 or 22%).

In this example, the investor is earning an equivalent return to the present interest rate of a two-year bond. If the investor chooses to invest in a one-year bond at 18% the bond yield for the following year’s bond would need to increase to 22% for this investment to be advantageous.

  • Expectations theory attempts to predict what short-term interest rates will be in the future based on current long-term interest rates
  • The theory suggests that an investor earns the same amount of interest by investing in two consecutive one-year bond investments versus investing in one two-year bond today
  • In theory, long-term rates can be used to indicate where rates of short-term bonds will trade in the future

 

Expectations theory aims to help investors make decisions by using long-term rates, typically from government bonds, to forecast the rate for short-term bonds.

 

Disadvantages of Expectations Theory

Investors should be aware that the expectations theory is not always a reliable tool. A common problem with using the expectations theory is that it sometimes overestimates future short-term rates, making it easy for investors to end up with an inaccurate prediction of a bond’s yield curve.

Another limitation of the theory is that many factors impact short-term and long-term bond yields. The Federal Reserve adjusts interest rates up or down, which impacts bond yields including short-term bonds. However, long-term yields might not be as impacted because many other factors impact long-term yields including inflation and economic growth expectations. As a result, the expectations theory doesn't take into account the outside forces and fundamental macroeconomic factors that drive interest rates and ultimately bond yields.