Conceptos Economía (2014)Apunte Inglés
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MICROECONOMY - FINANCIAL CONCEPTS
BROKERS: people who buy and sell money/ shares etc. for other people. There are
different types of brokers. In the context of the video (credit crisis), it talked about "lender
brokers" or "mortgage brokers" acts as an intermediary who brokers mortgage loans on
behalf of individuals or businesses.
Collateralised Debt Obligations (CDO): a collection of investment-grade securities backed by a pool of bonds, loans etc. They are divided into slices/ tranches with different levels of risk-the higher the risk, the higher the return for the investor.
Credit default swaps insurance (permuta de incumplimiento creditício): against default sold by banks and hedge funds to investment banks Frozen credit markets : a situation where no credit is available Generalsurpluses : a situation where a government has more income than expenditure Mortgage: an agreement which allows people to borrow money from a bank or similar organisation in order to buy property Mutual funds : a service where financial experts invest the money of many people in many different companies. Mutual funds are open-ended investment companies that pool investors' money into a fund operated by a portfolio manager. This manager then turns around and invests this large pool of shareholder money in a portfolio of various assets, or combinations of assets. Mutual funds may include investments in stocks, bonds, options, futures, currencies, treasuries andmoney market securities. Depending on the stated objective of the fund, each will vary in regard to content and risk.
Pension funds : a supply of money which people pay into, especially employees of a company, which is invested in order to provide them with a pension when they retire.
Examples of the largest 300 pensions funds in 2013.
Return On Investment (ROI) : to give a particular amount of profit in exchange for investment Sovereign funds : vestment funds owned by national governments and financed by the country’s foreign currency reserves. Some examples are the: Governement pension fund of Norway, Abu Dhabi Investment Authority, Hong Kong Monetary Authority Investment Portfolio, National Pensions Reserve Fund (Ireland).
Subprime mortgages: mortgage given to borrowers who have a poor credit rating with a high risk of defaulting LEVERAGE: The use of various financial instruments or borrowed capital, such as margin, to increase the potencial return of an investment A normal deal: Someone buys a box worth $10,000 for $10,000, sells it for $11,000 and makes a profit of $1000.
A deal using leverage: Someone with $10,000 borrows $990,000 to buy boxes worth $1,000,000 sells them for $1,100,000 and makes a profit of $90,000.
Down payment: A type of payment made in cash during the ones of the purchase of an expensive good/service. The payment typically represents only a percentage of the full purchase price; in some cases it is not refundable if the deal falls through. Financing arrangements are made by the purchaser to cover the remaining amount owed to the seller. Making a down payment and then paying the rest of the price through installments in a method that makes expensive assets more affordable for the typical person.
Commission: a percentage of the value of the deal Cascading trays: different levels of investments which are labelled SAFE, OKAY, RISKY.
It a financial strategy for investment types, according to risky levels.
Three slices of the cascading tray: Types of investment: safe (low ROI, medium ROI, higher rate of ROI).
Triple A rated investment: To guide the investor, there are the Credit Rating Agencies (Standard & Poor's (S&P), Moody's, and Fitch Group)., that will stamp the safest slice as a triple A rated investment.
HEDGE FUNDS: Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment.
Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year Credit Default Swap: For the safest slice, the banks ask a small fee called (obligación garantizada). To compensate the bank to guaranteeing you the payment.
To repay one's loan: To pay back and keep the margin. The investors prefer this safe investment to the low rates offered by investing in Treasury Bills.
Treasury Bills (Tbills): A short-term debt obligation backed by the U.S. government with a maturity of less than one year.
MICROECONOMY - Accounting concepts The two main financial documents are called: BALANCE SHEET INCOME STATEMENT (OR ALSO CALLED PROFIT AND LOSS ACCOUNT) The main differences between them are the following: INCOME STATEMENT: show profit or loss for a particular period of time.The income statement shows how much the company earned in turnover and how much they had to spend resulting in a profit or loss for a year BALANCE SHEET: give a report of the assets owned by a company and the debts it has as well as how much of the company is owned by shareholders at a point in time.
StartFragment The balance sheet shows the financial position of the company at a point in time so that an investor or creditor can see immediately how much the company owns and owes.
Some VOCABULARY ASSOCIATED TO ACCOUNTS TERMS: Bottom line (RESULTADO FINAL) = the final figure in the accounts of a company or organisation stating the total profit or loss .
Bottom out (TOCAR FONDO)= reach the lowest point in a changing level that is about to start increasing again. It can also be sad, the sales "HIT A LOW".
Fluctuation = a situation in which prices, levels or interest rates go up and down.
Soar = to increase quickly in amount or value. You can also say "RISE QUICKLY".
Level off (estabilizarse) = if an amount stops rising or falling and stays the same.
Plummet (caer en picado) = go down in amount or value very quickly and suddenly . A similar word to be used is "PLUNGED" Reach a peak (llegar a la cima) = a period in which something reaches its highest level.
Recover (recuperarse) = to improve after a difficult period Stagnate(estancarse) = to stop growing and not show any signs of activity Specifically there are some terms used in the Income statement: GROSS PROFIT = Beneficio Bruto.
NET OPERATING INCOME (NOI) = A company's operating income after operating expenses have been deducted but before income taxes and interest are deducted. If this is a positive value, it is referred to as net operating income; when it's negative, it is called a net operating loss (NOL). In Spanish it would be called BAII (Beneficio antes de intereses e impuestos) PROFIT BEFORE TAXES (PBT) = A profitability measure that looks at a company's profits before the company has to pay corporate income tax. This measure deducts all expenses from revenue including interest expenses and operating expenses, but it leaves out the payment of tax. Also referred to as "earnings before tax ". In Spanish it would be called BAI (Beneficios antes de impuestos).
FINANCE COSTS = The price of obtaining loan capital. In comparison, funding cost refers to the price of equity capital StartFragment EndFragment StartFragment EndFragment StartFragment EndFragment LOANS = (PRÉSTAMOS): a thing that is borrowed, especially a sum of money that is expected to be paid back with interest.
FINANCIAL DOCUMENTS - THE INCOME STATEMENT The income statement is a financial statement that measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year The income statement is the one of the three major financial statements. The other two are the balance sheet and the statement of cash flows. The income statement is divided into two parts: the operating and non-operating sections.
Net Sales : These all refer to the value of a company's sales of goods and services to its customers. Even though a company's "bottom line" (its net income) gets most of the attention from investors, the "top line" is where the revenue or income process begins.
Cost of Sales: For a manufacturer, cost of sales is the expense incurred for raw materials, labor and manufacturing overhead used in the production of its goods. While it may be stated separately, depreciation expense belongs in the cost of sales. For wholesalers and retailers, the cost of sales is essentially the purchase cost of merchandise used for resale.
For service-related businesses, cost of sales represents the cost of services rendered or cost of revenues. So, it can can include inventory you buy in order to sell it, raw materials, labour to produce the product, hiring machinery, tools, other production costs.
Gross Profit: A company's gross profit does more than simply represent the difference between net sales and the cost of sales. Gross profit provides the resources to cover all of the company's other expenses. Obviously, the greater and more stable a company's gross margin, the greater potential there is for positive bottom line (net income) results.
Selling, General and Administrative Expenses: Often referred to as SG&A, this account comprises a company's operational expenses. Financial analysts generally assume that management exercises a great deal of control over this expense category. The trend of SG&A expenses, as a percentage of sales, is watched closely to detect signs, both positive and negative, of managerial efficiency. The selling expenses can include advertising and promotional materials, commission paid to sales people, rents for offices, salaries, telephone costs. And the administrative costs can include general costs of running the company which are not directly related to sales such as the cost of an HR department, company executives, accounting departments, ICT departments as well as general office supplies .
Operating Income: Deducting SG&A from a company's gross profit produces operating income. This figure represents a company's earnings from its normal operations before any so-called non-operating income and/or costs such as interest expense, taxes and special items. Income at the operating level, which is viewed as more reliable, is often used by financial analysts rather than net income as a measure of profitability.
Interest Expense: This item reflects the costs of a company's borrowings. Sometimes companies record a net figure here for interest expense and interest income from invested funds. The finance costs for loans change when interest rates change, when the balance owed increases or decreases, or if terms of repayment are made longer or shorter.
Pretax Income: Another carefully watched indicator of profitability, earnings garnered before the income tax expense is an important step in the income statement.
Numerous and diverse techniques are available to companies to avoid and/or minimize taxes that affect their reported income. Because these actions are not part of a company's business operations, analysts may choose to use pretax income as a more accurate measure of corporate profitability.
Income Taxes: As stated, the income tax amount has not actually been paid - it is an estimate, or an account that has been created to cover what a company expects to pay.
Special Items or Extraordinary Expenses: A variety of events can occasion charges against income. They are commonly identified as restructuring charges, unusual or nonrecurring items and discontinued operations. These write-offs are supposed to be one-time events. Investors need to take these special items into account when making inter-annual profit comparisons because they can distort evaluations.
Net Income: This is the bottom line, which is the most commonly used indicator of a company's profitability. Of course, if expenses exceed income, this account caption will read as a net loss. After the payment of preferred dividends, if any, net income becomes part of a company's equity position as retained earnings.
Financial document - Balance Sheet The activity associated with the balance sheet aimed to introduce and to practice American terms used in balance sheets (Multinational companies terms). Also it aimed at fostering the carefully reading and interpretation of numbers in a balance sheet.
So, what is the purpose of a Balance Sheet? to report the financial condition of a company at a specific time.
How is it structured? It is divided into two areas or columns which must match each other. The first part shows what a company owns (its assets) and the second part shows what a company owes (its liabilities). The balance sheet can also be used to determine the sources of cash and how it is used.
RATIOS USED TO ANALYSE AND INTERPRET THE NUMBER SHOWN IN THE BALANCE SHEET: These ratios are used to determine solvency of a company, especially by creditors who are considering giving loans or reviewing existing loans and credit lines. The year-toyear comparison is important because creditors can see if there are changes in the company’s ability to pay its debts.
CURRENT RATIO: If the current ratio is much higher than the quick ratio, this indicates that the company’s assets are more dependent on its inventory. The higher the current ratio, the better position a company is in to cover its debts. If the current ratio is under 1.0, this suggests that the company could not meet its obligations if they came due at the time of the balance sheet. Creditors generally prefer the current ratio to be high, because their risk is reduced, while investors prefer it to be low, because this means the company has invested its assets for its continuing operations.
A current ratio of about 1.5 or higher indicates that a company can cover its operating needs successfully. If the figure is too high, they may be keeping back assets rather than using them for further investment in the future of the company. It is important, as well, to compare these year-to-year and note the trend.
Current ratio = índice de solvencia inmediata Quick ratio = prueba ácida QUICK RATIO: indicates short-term solvency and the higher it is, the stronger the liquidity position. It is more conservative than the current ratio because it excludes inventory.
THE EQUITY RATIO: Is common in central Europe and measures the amount of total assets financed by the stockholders and not by creditors. It is used to determine how much debt the company has. This is often expressed as a percentage as shown above. Creditors look for this figure to be positive as this indicates that a company is in a good position to stay solvent. A percentage of 20% and higher is a good sign for creditors; the higher the percentage, the lower the risk. However, comparing year-to-year is also important here to see the trend.
GEARING RATIO (LEVERAGE – US): It shows how heavily he company is leveraged or how much money they owe. In the exercise conducted in class, this ratio in 2011 was 1.42, and in 2012 this figure increased to 1.46, meaning liabilities were 46% higher than the equity meaning the company had accumulated more debt.
Useful vocabulary associated with the negotiation context: Buyer and seller - Employer /employee —> Parts in a negotiation process Agreement (el pacte/acord) —> An arrangement each party in a negotiation aims to reach Offer (oferta) —> Proposal made during the negotiation Counter-offer (contra oferta) —> An offer made by one party in response to another offer from the other party The bargain price (el preu més baix) —> Is the reduced price The bedrock price —> The lowest possible price you can get out of a negotiation Deal (pacte) —> A business transaction To quote (presupost)—> To make an estimated price A tender —> To make an offer of something for acceptance To figure out/to work out —> To calculate or to find a solution Different ways to say “yes” in a negotiation • I agree with you on that point • That’s a fair suggestion • You have a strong point there.
Different ways to say “no” in a negotiation • I understand where you’re coming from, however… • I’m prepared to compromise, but… • Is that your best offer? ...