Finance Articles and Investment Ideas

What is the net present value and internal rate of return for an investment costing $3.43 million that is expected to increase annual cash flows by 41 million for each of the next five years, using a cost of capital of 15%? (calculate the NPV and IRR) What is the geometric mean return for a fund with ten years of annual returns of 2%, 6%, 9%, 10%, 11%, 16%, 14%, 5%, and 8%? If there is a 25% probability of declining interest rates, a 60% probability of EPS of $10 and a 40% chance of an EPS of $8 if rates decline, and a 70% probability of an EPS of $6 and a 30% chance of an EPS of $4 if rates do not decline, what is the expected EPS? If a stock is selling for $50 and each year there is a 60% probability of an uptick in price of $1 and a 40% probability the price moves down $1, what is the probability that the price is $53 after 3 years? If the mean income of companies on a stock index is 42 million with a standard deviation of $3 million, which is closest to the standard error o...

Bond Yields We have noted that the current yield of a bond measures only the cash income provided by the bond as a percentage of bond price and ignores any prospective capital gains or losses. We would like a measure of rate of return that accounts for both current income and the price increase or decrease over the bond’s life. The yield to maturity is the standard measure of the total rate of return. However, it is far from perfect, and we will explore several variations of this measure. Yield to maturity In practice, an investor considering the purchase of a bond is not quoted a promised rate of return. Instead, the investor must use the bond price, maturity date, and coupon payments to infer the return offered by the bond over its life. The YTM is defined as the interest rate that makes the present value of a bond’s payments equal to its price. This interest rate is often interpreted as a measure of the average rate of return that will be earned on a bond if it is boug...

Accrual accounting: The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made or received. -recognize revenue when the earnings process is virtually complete and the value of an exchange of goods or services is known. - not at the time of collection but at the time of sale Recognize revenues when -delivery has occurred or services have been rendered -there is persuasive evidence of an arrangement for customer payment. - the price is fixed or determinable. - collection is reasonably assured. matching concept: Cash basis accounting can distort the measurement of net income because it soemtimes fails to properly match revenus with expenses. The problem is that cash is not always received or paid in the period when the revenue is earned or when the expense is incurred. The objective of accrual accounting is to improve matching of revenues with expens...

Bullet Strategy maturities concentrated around one point on the yield curve Barbell Strategy maturities of securities are concentrated at two extreme maturities Ladder Strategy Equal amounts of securities at each maturity Because you don’t want CDs to all mature at the same year roll it over. Dollar duration for barbell portfolio How do different bond portfolios perform when interest rates change? Depends on how much rates change and how the yield curve shifts. What happens to the relative performance between the bullet and barbell strategies when the rates change Parallel shift in the yield curve yield changes yield curve flattens For a parallel shift in the yield curve, bullet portfolio outperforms the barbell portfolio when yield on C falls by less than 100 bases points or rises by less than 125 basis points. For the nonparallel flattening of the yield curve, the barbell outperforms the bullet for any yield change. U...

Discount bonds and premium bonds  100,000 bond, 10%, 5 years                  ------ discounted to less than 100,000 100,000 bond, 12% 5 years Who is going to want to purchase the first bond? What does stores like Walmart do when something is not selling? They discount it. So the first bond gets discounted. So when the stated rate is less than the market rate, this is the discount bond. Now let's say that 100,000, 8%, 5 year duration and there is another 100,000 10%, 5 year duration. People will want the first bond. So if the stated rate is greater than the market rate then it is going to be trading at a premium. So that is how the discount and premiums work. discounts and premiums do not represent whether the bond is worse or better to buy.

Dollar General is worth considering for investment due to its niche moat , sound balance sheet , strong management and solid growth outlook . While management's growth outlook may be a bit bullish, the current price still offers solid return prospects, making it a BUY at present prices. DG's efficient store operations and business model enable it to offer a unique blend of value and convenience, giving it a niche moat within a competitive retail sector. Its efficient store operations come from its streamlined mix of products. Given its annual revenues of nearly $23 billion, this small product line enables it to purchase items in large quantities, thereby leveraging considerable pricing power compared to DLTR. furthermore, it makes stores extremely easy to keep organized and stocked (saving considerable sums of employee and supply chain costs). The company also enjoys an advantage in real estate costs due to its simple, cheap and minimal maintenance, rural-based small...

Interest rate risk : the risk that an investment will lose value based on a change in interest rates Interest rates are influenced by many macroeconomic forces: monetary policy, inflation, the strength of the economy When interest rates go up, things get more expensive: debts get more expensive, commodities get more expensive. Interest rate is the cost of money. Higher duration means higher sensitivity the bond has to interest rates. Duration is the "weighted average maturity for all future bond cash flows" It estimates the impact a 1% change in interest rates could have on a bond's price. The bond's coupon : Low coupon bonds tend to have higher durations and are more interest rate sensitive than equivalent higher coupon bonds. Note: lower yields also tend to equate to higher duration The bond's maturity : Long maturity bonds tend to have higher durations and are more sensitive than equivalent short maturity bonds A defensiv...

The bloomberg terminal has many useful economic functions. Some functions are ECOW, ECST, WECO, and ECOS. You can find data on some economic indexes. "Survey" indicates analysts forecasts, and "actual" indicates what was the actual data. For example, on the screen abvoe consumer confidence survey was 71.2 but the actual was 76.2. So the economy did better than predicted. In this case, the stock market is likely to go up. Another useful function is forecasts.  Here the screen gives economic forecasts of the Real GDP, CPI, Unemployment etc. These give a good idea of where the economy is going and what the financial markets will be like in the future.

Bloomberg functions To be more productive, faster, and more efficient when performing financial analysis or research it’s important to be proficient at using the Bloomberg Terminal. Whether you work in investment banking , equity research , or other areas of the capital markets you’ll have to learn how to use the Bloomberg Terminal for grabbing historical financial information about a company, share prices, transactions, bonds / fixed income information and much more. Here we have complied a list of what we believe are the most common and important functions, keystrokes and shortcuts to know on the Bloomberg Terminal inside out.  Bloomberg master is key to becoming a financial analyst . List of Bloomberg functions News Shortcut: N <Go> TOP & TOPCA  Top News Stories NI  Single News Item Search NI CNS & NI USS  Canadian & U.S. Stock Markets NI MNA  Mergers/Acquisitions TNI  Two News  Item Search TNI US OPN...