Interest rates & the economy

Interest rates

• Central banks often change their target interest rates in response to economic activity
• Raising rates 
• when the economy is overly strong
• Lowering rates 
• when the economy is sluggish
• Lowering rates
• Makes borrowing money cheaper. 
• This encourages consumer and business spending and investment and can boost asset prices
• Lowering rates, however, can also lead to problems such as inflation and liquidity traps
• c.f. Liquidity traps
• A contradictory economic situation in which interest rates are very low and savings rates are high, rendering monetary policy ineffective
• During a liquidity trap, consumers choose to avoid bonds and keep their funds in cash savings because of the prevailing belief that interest rates could soon rise
• The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars. 
• When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy. 
• Businesses and farmers also benefit from lower interest rates, as it encourages them to make large equipment purchases due to the low cost of borrowing. 
• This creates a situation where output and productivity increase.
• Raising rates
• Higher interest rates mean that consumers don't have as much disposable income and must cut back on spending. 
• When higher interest rates are coupled with increased lending standards, banks make fewer loans. 
• This affects not only consumers but also businesses and farmers, who cut back on spending for new equipment, thus slowing productivity or reducing the number of employees. 
• The tighter lending standards also mean that consumers will cut back on spending, and this will affect many businesses' bottom lines.
• c.f., bottom line
• A company's earnings, profit, net income, or earnings per share (EPS).
• When inflation
• Inflation
• Refers to the rise in the price of goods and services over time. 
• It is the result of a strong and healthy economy.
• To help keep inflation manageable, the Fed watches inflation indicators such as the Consumer Price Index (CPI) and the Producer Price Index (PPI).
• c.f., CPI
• A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. 
• It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. 
• Changes in the CPI are used to assess price changes associated with the cost of living. 
• The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
• c.f., PPI
• A group of indices that calculates and represents the average movement in selling prices from domestic production over time.
• The PPI measures price movements from the seller's point of view. Conversely, the consumer price index (CPI) measures cost changes from the viewpoint of the consumer.
• When these indicators start to rise more than 2–3% a year, the Fed will raise the federal funds rate to keep the rising prices under control.
• Because higher interest rates mean higher borrowing costs, people will eventually start spending less. 
• The demand for goods and services will then drop, which will cause inflation to fall. 
• How affecting stock and bond market

Radar

Radar

• A detection system that uses radio waves to determine the range, angle, or velocity of objects. 
• It can be used to detect aircraft, ships, spacecraft, guided missiles, motor vehicles, weather formations, and terrain. 
• Configuration
• A radar system consists of a transmitter producing electromagnetic waves in the radio or microwaves domain, a transmitting antenna, a receiving antenna (often the same antenna is used for transmitting and receiving) and a receiver and processor to determine properties of the object(s). 
• How works
• Radio waves (pulsed or continuous) from the transmitter reflect off the object and return to the receiver, giving information about the object's location and speed.
• When developed
• Developed secretly for military use by several nations in the period before and during World War II.

Lockheed F-117 Nighthawk

F-117

• A retired American single-seat, twin-engine stealth attack aircraft that was developed by Lockheed's secretive Skunk Works division and operated by the United States Air Force (USAF) 
• It was the first operational aircraft to be designed around stealth technology
• Stealth technology
• also termed low observable technology (LO technology), 
• a sub-discipline of military tactics and passive and active electronic countermeasures, which covers a range of methods used to make personnel, aircraft, ships, submarines, missiles, satellites, and ground vehicles less visible (ideally invisible) to radar, infrared, sonar and other detection methods.
• Widely publicized for its role in the Persian Gulf War of 1991
• Design
• Faceted-angle surfaces provide significant reduction in radar signature
• The F-117 has a radar cross-section of about 0.001 m^2 (0.0108 sq ft).

Over-the-top media service (OTT)

Over-the-top media service

• a streaming media service offered directly to viewers via the Internet. 
• OTT bypasses cable, broadcast, and satellite television platforms, the companies that traditionally act as a controller or distributor of such content
• Over-the-X means beyond the existing X.
• Business models
• SVOD (subscription video on demand) 
• AVOD (advertisement-based video on demand)
• TVOD (transactional-based video on demand)

Hedging

Hedging

• Somewhat analogous to taking out an insurance policy
• In the case of insurance, the policy holder would be completely compensated for her loss, perhaps less a deductible. 
• Unlikely, in the investment space, hedging is both more complex and an imperfect science.
• Definition
• An investment that is made with the intention of reducing the risk of adverse price movements in an asset.
• Hedge by derivatives
• The best way is to make another investment in a targeted and controlled way. 
• Popular hedging techniques involve taking offsetting positions in derivatives that correspond to an existing position.
• The most common way of hedging in the investment world is through derivatives. 
• Derivatives are securities that move in correspondence to one or more underlying assets. 
• They include options, swaps, futures and forward contracts. 
• The underlying assets can be stocks, bonds, commodities, currencies, indices or interest rates.
• For example, 
• if Morty buys 100 shares of Stock plc (STOCK) at $10 per share, he might hedge his investment by buying an American put option with a strike price of $8 expiring in one year. 
• This option gives Morty the right to sell 100 shares of STOCK for $8 any time in the next year. 
• Let's assume he pays $1 for the option, or $100 in premium. If one year later STOCK is trading at $12, Morty will not exercise the option and will be out $100. 
• He's unlikely to fret, though, since his unrealized gain is $100 ($100 including the price of the put). 
• If STOCK is trading at $0, on the other hand, Morty will exercise the option and sell his shares for $8, for a loss of $300 ($300 including the price of the put). 
• Without the option, he stood to lose his entire investment.
• Hedge by diversification
• Other types of hedges can be constructed via other means like diversification. 
• Strategically diversifying a portfolio to reduce certain risks can also be considered a hedge, albeit a somewhat crude one. 
• For example, Rachel might invest in a luxury goods company with rising margins. She might worry, though, that a recession could wipe out the market for conspicuous consumption. 
• One way to combat that would be to buy tobacco stocks or utilities, which tend to weather recessions well and pay hefty dividends.
• Delta (Hedge ratio)
• The effectiveness of a derivative hedge is expressed in terms of delta, sometimes called the "hedge ratio." 
• Delta is the amount the price of a derivative moves per $1 movement in the price of the underlying asset.
• e.g., if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1 per share, the option on it will rise by $0.65 per share, all else being equal.

Options vs. Futures

Options

• Options are financial instruments that are derivatives based on the value of underlying securities such as stocks.
• Call options 
• allow the holder to buy the asset at a stated price within a specific time frame.
• Put options 
• allow the holder to sell the asset at a stated price within a specific time frame.
• Each call option has a bullish buyer and a bearish seller, while put options have a bearish buyer and a bullish seller. 
• Investors will use options to hedge or reduce the risk exposure of their portfolio.
• Each option contract will have a specific expiration date by which the holder must exercise their option. 
• The stated price on an option is known as the strike price.
• Options contracts usually represent 100 shares of the underlying security, and the buyer will pay a premium fee for each contract. 
• For example, if an option has a premium of 35 cents per contract, buying one option would cost $35 ($0.35 x 100 = $35).
• Options are also one of the most direct ways to invest in oil.
• American options can be exercised any time before the expiration date of the option, while European options can only be exercised on the expiration date or the exercise date.

Futures

Subprime mortgage crisis

Mortgages

• A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments
• Debt instrument
• A tool an entity can utilize to raise capital
• e.g., credit cards, credit lines, loans, and bonds
•  If the borrower stops paying the mortgage, the lender can foreclose. 

Investment Banks & Mortgages

• Since year 2000's, investment banks have bought the “mortgage agreements” from the retail banks.
• This way, they become entitled to receive the monthly payments from the borrowers.
• Why investment banks buy loans? 
• To use them as Mortgage Backed Security (MBS).
• In traditional banking, there are only two agencies dealing with loans – borrower and lender (homebuyer and retail bank)
• But since year 2000’s, a third party got involved – investment banks.

Mortgage-Backed Securities (MBS)

• In year 2000's, (Investment) Bankers were busy inventing a low risk – high return investment option.
• The yield of government back securities (like treasury bonds) was very low.
• This gave rise to mortgage backed security (MBS).
• At a time when treasury bills were yielding less than 3.5% returns, MBS could promise 5-6% fixed returns.
• As MBS had ‘mortgage loans’ as their assets, it was considered safe.

How Does IB use MBS to make money?

• Several such mortgages that IB bought from retail banks were then clubbed together to form a Mortgage Backed Security (MBS). 
• This MBS was valued based on its future income potential, i.e., monthly payments received from the homebuyers.
• One MBS was divided into a multitude of share to be sold to many investors 
• These shares of MBS were then traded in secondary market (Wall Street).

Increased Demands for MBS and Loans to People with Low Credit Scores

• The demand for MBS skyrocketed.
• It was a perfect investment vehicle for matured economies (like USA, UK, Australia etc). 
• To feed the rising demand, MBS needed more mortgages.
• Retail banks started issuing loans (i.e., mortgages) to even not so credit worthy borrowers.
• But they charged higher interest rates on such loans.

Collateralised Debt Obligations (CDO)

• When retail banks started issuing loans to less credit worthy borrowers, investment banks knew the risk
• i.e., the high chance of default
• They created another investment vehicle called CDO’s.
• CDO
• Financial tools banks use to repackage individual loans into a product sold to investors on the secondary market, i.e., typically think of as the "stock market"
• A particular kind of derivative—any financial product that derives its value from another underlying asset.
• These CDO’s had a mix of mortgage backed securities
• Prime mortgages (Credit Rating A to AAA)
• Subprime mortgages (Credit Rating A- and below).
• This helped them to hide the so called “subprime mortgages” under the blanket of prime mortgages.
• The buyers of CDO’s were not common men. 
• They were purchased mainly by hedge funds, investment banks themselves, pension funds etc.
• Hence the public audit of subprime mortgages could be prevented. 
• Investment banks could keep it hidden for extended period of time.

The Boom of Real Estate Market

• As more people were becoming eligible for the mortgage, the demand for homes started increasing.
• This created a price bubble in the real estate sector. 

Credit Default Swaps

• Credit default swaps are basically insurance cover for the MBS.
•  It agrees to pay the outstanding amount of the bond if the lender defaults.
• In 2008-09, majority borrowers were defaulting on loans. 
• The insurance companies (Like AIG) could not cover this urgency. 
• They also declared themselves as bankrupt.

The Logic of Sub-prime Mortgages Borrowers

• They had near zero capability to payback the mortgage
• Their logic was, as the price of homes were only going up, they can use it to their advantage.
• e.g., Take a $100,000 loan, and buy a home. After few months sell the home for $102,000. Use the sale proceeds to pay back the loan, and pocket the balance as profit.

Bursting of the Housing Bubble

• The borrowers started defaulting on their loans.
• The cause was subprime mortgages.
• At a point in 2007-2008, there were more houses on sale than there were buyers for it. 
• This triggered a steady price fall.
• Because their property value started becoming smaller than the mortgage value. 
• This led to more loan defaults, leading to more foreclosures. 
• This further brought down the real estate prices.

Octane vs. Cetane

Gasoline vs. diesel engines

• Gasoline engines 
• the ignition temperature is very low. 
• So, it has the property of easily exploding with the heat generated when the piston compresses. 
• If the piston explodes without sufficiently compressing the fuel, the engine can of course not run normally. 
• So octane is a substance added to prevent the fuel from exploding before it reaches the specified compression ratio.
• Diesel engines 
• It is the opposite; Diesel does not ignite even if you put a lit matchstick. 
• It is a fuel with a high ignition point, and therefore, the desired ignition temperature can be reached only by applying high pressure. 
• Sometimes the explosion does not occur even when the desired pressure is applied; this happens mainly when the temperature is low or the quality of the fuel itself is poor. 
• Cetane, as opposed to octane, serves to lower the ignition point of diesel fuel.

Common features of octane rating and cetane rating

• The higher the number, the better the fuel burns within the engine of a vehicle. 
• The difference is that octane rating rates gasoline whereas cetane rates diesel.

Octane rating (or octane number)

• A measurement of the quality or performance of gasoline
• The higher the number, the better the fuel burns within the engine of a vehicle. 
• Higher performance vehicles require fuels with a higher octane rating.
• The octane rating represents how well a fuel can resist pre-ignition due to compression—ensuring the fuel ignites only from a spark from the spark plug.
• Gasoline engines which attempt to resist any ignition due to compression

Cetane rating (or cetane number)

• Measures the delay in the ignition time of the fuel. 
• In other words, it is how minimized the delay is between when the fuel is injected into the chamber and when the combustion begins. 
• Diesel engines rely on this compression ignition and thus no spark is involved. 
• A higher cetane number simply means the time between when the fuel is injected into the combustion chamber and when the fuel ignites is minimized.
• This shorter delay time results in more complete fuel combustion.
• Diesel fuel has a higher explosive power than gasoline, so it is a lot heavier as the main parts of the engine are made stronger to withstand the explosive power. 
• For this reason, the engine speed is lower than that of gasoline, but the efficiency of the fuel itself is higher than that of gasoline, and it has a strong explosive power, so it has been mainly used in trucks and SUVs.

Leveraged buyout(LBO)

Leveraged buyout

• the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. 
• The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company.
• The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

Private equity funds

Private equity funds

• privately managed by collecting money from minority investors and investing in stocks, bonds, companies or real estate. 
• When investing in companies, most of them make huge profits through leveraged buyout(LBO). 
• Unlike public equity funds that target an unspecified majority, membership composition is restricted. 
• In general, it is less regulated by the government and the expected rate of return is high, but the risk is also high.

Mutual funds

Mutual funds

• refers to a fund operated in the form of a corporation
• The value of the mutual fund company depends on the performance of the securities it decides to buy. 
• So, when you buy a unit or share of a mutual fund, you are buying the performance of its portfolio or, more precisely, a part of the portfolio's value.
• Just as a person who holds shares in Company A has the right to operate Company A as much as his or her shares, so a mutual fund investor has the right to operate as much as the shares invested in the mutual fund
• In contrast, common funds are contractual
• Pool money from the investing public and use that money to buy other securities, usually stocks and bonds. 
• Investing in a share of a mutual fund is different from investing in shares of stock. 
• Unlike stock, mutual fund shares do not give its holders any voting rights. 
• A share of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding.
• The average mutual fund holds over a hundred different securities, which means mutual fund shareholders gain important diversification at a low price. 
• Consider an investor who buys only Google stock before the company has a bad quarter. He stands to lose a great deal of value because all of his dollars are tied to one company. 
• On the other hand, a different investor may buy shares of a mutual fund that happens to own some Google stock. When Google has a bad quarter, she loses significantly less because Google is just a small part of the fund's portfolio.

Hedge funds

Hedge funds

• An investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction and risk management techniques to improve performance, such as short selling, leverage, and derivatives
• Their ability to make more extensive use of leverage and more complex investment techniques distinguishes them from regulated investment funds available to the retail market, such as mutual funds and ETFs. 
• They are also considered distinct from private-equity funds and other similar closed-end funds, as hedge funds generally invest in relatively liquid assets and are generally open-ended, meaning that they allow investors to invest and withdraw capital periodically based on the fund's net asset value, whereas private-equity funds generally invest in illiquid assets and only return capital after a number of years

Subprime mortgages

Subprime mortgages

• a housing loan that's granted to borrowers with impaired credit history. 
• Often, they have no credit history whatsoever. 
• Their credit scores don't allow them to get a conventional mortgage. 
• Subprime borrowers typically have low credit scores, such as a FICO of 660 or below
• They're subprime if they have gone bankrupt in the last five years
• Exotic mortgages
• Offers lower monthly payments in the first few years but is considered high-risk because of its higher future term payments
• These loans were cheap in the beginning but made profits for the banks later on. 
• Most had low "teaser" rates for the first year or two. 
• Many borrowers didn't realize that rate rose dramatically after that. 
• Others thought they could sell the house or refinance before then
• Types of subprime loans
• e.g., Interest-only loan 
• doesn't require that any of the principal be paid for the first several years of the loan. That makes it easier to afford than any other loan. Most borrowers assume they will either refinance or sell their house before the principal needs to be repaid. 
• That's very dangerous because that's when the monthly payment increases. They usually can't afford the higher payment. 
• If the value of the home drops, then they can't qualify for a refinance. They can’t sell the house either. In this case, they are forced to default because they can't make the higher payment.

Mortgage

Mortgage

• also known as "liens against property" or "claims on property
• Residential mortgage
• Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire purchase price up front
• A homebuyer pledges their house to the bank or other type of lender, which has a claim on the house should the homebuyer default on paying the mortgage. 
• In the case of a foreclosure, the lender may evict the home's tenants and sell the house, using the income from the sale to clear the mortgage debt.
• Mortgages come in many forms. 
• The most popular mortgages are a 30-year fixed and a 15-year fixed.

Acid Test Ratio

Acid test ratio

• An indicator of whether it has sufficient short-term assets to cover its short-term liabilities
• disregards current assets that are difficult to liquidate quickly such as inventory

Marketable securities

Marketable securities

• Assets that can be liquidated to cash quickly
• i.e., short-term liquid securities
• e.g., common stock, Treasury bills, and money market instruments, etc.
• Can be bought or sold on a public stock exchange or a public bond exchange
• Tend to mature in a year or less and can be either debt or equity
• Why having? 
• Instead of holding on to all the cash in its coffers which presents no opportunity to earn interest, a business will invest a portion of the cash in short-term liquid securities

Certificates of deposit (CD)

Certificates of deposit

• A periodic deposit certificate that can be transferred to a third party
• The period is more than 30 days, and some are over a year, but most are 90 to 180 days
• Anyone can withdraw a deposit by presenting a transferable deposit certificate to the bank on the maturity date
• In a simple way, unlike a savings passbook, CDs usually do not have a name written on the bankbook (at least in South Korea)
• Since it has no name, it can be sold to anyone

D/E ratio

D/E ratio

• compares a company’s total liabilities to its shareholder equity
• can be used to evaluate how much leverage a company is using
• Higher leverage ratios tend to indicate a company or stock with higher risk to shareholders
• difficult to compare across industry groups where ideal amounts of debt will vary

Balance sheet

Balance sheet

• reports a company's assets, liabilities and shareholders' equity at a specific point in time
• i.e., a snapshot of what a company owns and owes, as well as the amount invested by shareholders
• Formula
• Assets=Liabilities+Shareholders’ Equity
• a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholders' equity)
• Assets
• listed from top to bottom in order of their liquidity
• i.e., the ease with which they can be converted into cash
• Current assets
• Case and case equivalents
• e.g., hard currency (e.g., $), treasury bills, short-term certificates of deposit (i.e., CD)
• Marketable securities
• e.g., common stocks, treasury bills, etc.
• Accounts receivables
• Inventory
• Prepaid expenses
• e.g., insurance, advertising contracts or rent
• Non-current or long-term assets
• i.e., will not or cannot be liquidated in the next year
• Fixed assets
• e.g., land, machinery, equipment, buildings
• Intangible assets
• e.g., intellectual property and goodwill
• Liabilities
• Current liabilities
• due within one year
• e.g., bank indebtedness, interest payable, wages payable, customer prepayments, dividends payable, accounts payable, current portion of long-term debt
• Long-term liabilities
• due at any point after one year
• e.g., interest and principal on bonds issued, pension fund liability (i.e., pay into employees' retirement accounts), deferred tax liability
• Shareholders' equity
• i.e., the money attributable to a business' owners (i.e., net assets)
• Retained earnings
• i.e., the amount of net income left over for the business after it has paid out dividends to its shareholders
• Treasury stocks, etc.

Income statement

Income statement

• Primarily focuses on the company’s revenues and expenses during a particular period
• Also known as the profit and loss statement or the statement of revenue and expense
• Structure: Focuses on four key items—revenue, expenses, gains, and losses
• Net Income = (Total Revenue + Gains) – (Total Expenses + Losses)
• Revenues and Gains
• Operating revenues
• i.e., revenue achieved from the sale of the product
• Non-operating revenues
• e.g., revenue from interest, rental income from business property, income from strategic partnerships like royalty payment receipts, etc
• Gains
• e.g., the net income realized from one-time non-business activities, like a company selling its old transportation van, unused land, or a subsidiary company
• Expenses and Losses
• Primary activity expenses
• e.g., the cost of goods sold (COGS), selling, general and administrative expenses (SG&A), depreciation or amortization, and research and development (R&D) expenses
• Secondary activity expenses
• e.g., interest paid on loan money
• Losses as expenses
• e.g., one-time or any other unusual costs, or expenses towards lawsuits

Cash Flow Statement

Case flow statement

• A financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company
• Measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses
• The main components of the cash flow statement are cash from operating activities, cash from investing activities, and cash from financing activities.
• Cash from operating activities (business activities)
• Reflects how much cash is generated from a company's products or services
• Generally, changes made in cash, accounts receivable, depreciation, inventory, and accounts payable are reflected in cash from operations
• e.g., if accounts receivable decreases, this implies that more cash has entered the company from customers paying off their credit accounts
• Cash from investing activities
• e.g., a purchase or sale of an asset, loans made to vendors or received from customers, or any payments related to a merger or acquisition, etc
• Cash from financial activities
• e.g., payment of dividends, payments for stock repurchases, and the repayment of debt principal (loans), etc.
• Negative case flow
• Sometimes, negative cash flow is the result of a company's decision to expand its business at a certain point in time 
• This is why analyzing changes in cash flow from one period to the next gives the investor a better idea of how the company is performing
• Used for fundamental analysis
• The cash flow statement is important because it's very difficult for a business to manipulate its cash situation. 
• There is plenty that aggressive accountants can do to manipulate earnings, but it's tough to fake cash in the bank.

World of War I: Alliance vs. Entente

World of War 1

• A global war originating in Europe that lasted from 28 July 1914 to 11 November 1918

Triple Entente

• England, France, and Russia

Triple Alliance 

• Germany, Austria, and Italy 
• An alliance of mutual defense

EV/EBITDA

EV/EBITDA

• If EV/EBITDA is doubled, it means that when the company is purchased at the market price (EV), the principal can be recovered from the profit (EBITDA) earned over the next two years
• EV = market capitalization + total debt  - cash and cash equivalents
• Market capitalization = total number of outstanding shares x current market price per share
• EBITDA = Earnings before interests, taxes, depreciation, and amortization 

Stocks vs. bonds

Stocks

• Stocks are simply shares of individual companies. When a company issues stock, it is selling a piece of itself in exchange for cash
• Say a company makes it through its start-up phase and becomes successful. The owners wish to expand, but are unable to do so solely through the income they earn through their operations. As a result, they can turn to the financial markets for additional financing
• One way to do this is to split the company up into shares, and then sell a portion of these shares on the open market in a process known as an initial public offering, or IPO
• A person who buys a stock is buying an actual share of the company, which makes them a partial owner—however small. It's why stock is also referred to as equity
• The owner shares in the profits and losses of the company
• Someone who invests in the stock can benefit if the company performs very well and its value increases over time. 
• At the same time, they run the risk that the company could perform poorly and the stock price could fall or, in the worst-case scenario (bankruptcy), disappear altogether.

Bonds

• Bonds, on the other hand, represent debt. 
• When an entity issues a bond, it is issuing debt with the agreement to pay interest for the use of the money
• A government, corporation, or other entity that needs to raise cash will borrow money in the public market and subsequently pay interest on that loan to investors
• Each bond has a certain par value (say, $1,000) and pays a coupon to investors. For instance, a $1,000 bond with a 4% coupon would pay $20 to the investor twice a year ($40 annually) until it matures. 
• Upon maturity, the investor is returned the full amount of their original principal, except for the rare occasion when a bond defaults (i.e., the issuer is unable to make the payment).
• Bonds lack the powerful long-term return potential of stocks, but they are preferred by investors for whom income is a priority. Also, bonds are less risky than stocks.
• While their prices fluctuate in the market, the vast majority of bonds tend to pay back the full amount of principal at maturity, and there is much less risk of loss than there is with stocks.

Accounts receivable vs. accounts payable

Accounts receivable

• Any money your customers owe you for goods or services they purchased from you in the past. 
• This money is typically collected after a few weeks, and is recorded as an asset on your company’s balance sheet.
• Accounts receivable are classified as an asset because they provide value to your company. (In this case, in the form of a future cash payment.)

Accounts payable

• Accounts payable on the other hand are a liability account, representing money that you owe another business.

Money market vs. capital market

Money market

• Also known as the short-term financial market used by market participants to adjust for temporary imbalances in the supply and demand of funds 
• It is a market in which financial products with maturity of one year or less are traded
• The call market, the Bank of Korea redemption conditional securities trading market, the redemption conditional trading market, the transferable deposit certificate market, and the corporate paper market are included in the money market
• The call market is an ultra-short market that is within a day to a maximum of 30 days in which temporary funds and shortages are adjusted between financial institutions

Capital market

• A market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc. 
• The buying/selling is undertaken by participants such as individuals and institutions. 
• Capital market consists of primary markets and secondary markets. 
• Primary markets deal with trade of new issues of stocks and other securities, whereas secondary market deals with the exchange of existing or previously-issued securities. 
• Another important division in the capital market is made on the basis of the nature of security traded, i.e. stock market and bond market

Liquid assets

Liquid assets

• Cash on hand or an asset other than cash that can be quickly converted into cash at a reasonable price. 
• In other words, a liquid asset can be quickly sold on the market without a significant loss of its value.

Market capitalization

Market capitalization

• An index that evaluates the value of a listed company 
• by multiplying the stock price and the number of issued shares. 
• A large market cap means not only earnings, but also high expectations for future growth

EBITDA

EBITDA

• Earnings before interest, taxes, depreciation, and amortization
• This is the net income before interest, taxes, depreciation, and amortization are subtracted.
• Simply put, it can be obtained by adding interest expenses, taxes, and tangible and intangible depreciation expenses to net income in a company's income statement
• often used as an indicator of a company's real cash-generating power

Amortization vs. Depreciation

Both

• Amortization and depreciation are two methods of calculating the value for business assets over time.

Amortization

• Amortization is the practice of spreading an intangible asset's cost over that asset's useful life.
• Intangible assets include:
• Patents and trademarks, franchise agreements, copyrights, cost of issuing bonds to increase capital, organizational costs, etc
• Typically expended on a straight line basis 
• meaning the same amount is expended in each period over the asset's useful life

Depreciation

• Depreciation is the expensing of a fixed asset over its useful life. Fixed assets are tangible assets
• Tangible assets include: 
• buildings, equipment, office furniture, vehicles, land, machinery, etc
• Depreciation of some fixed assets can be done on an accelerated basis 
• meaning that a larger portion of the asset's value is expensed in the early years of the asset's life. 
• For example, vehicles are typically depreciated on an accelerated basis. 

EBITA

EBITA

• Earnings before interest, taxes, and amortization (EBITA) is a measure of company profitability used by investors
• Amortization refers to the process of writing down the value of an intangible asset 
• It is helpful for comparison of one company to another in the same line of business. 
• In some cases, it also can provide a more accurate view of the company's real performance over time

P/E ratio

The P/E ratio

• The stock price/earnings ratio is the price divided by the earnings per share (EPS). 
• For example, if a company with a stock price of 10,000 won earned a net profit of 1,000 won per share, the PER would be 10x. 
• If a company with a stock price of 5,000 won earned a net profit of 1,000 won per share, the PER would be 5x. 
• In other words, the two companies have the same profit, but the former company is valued at twice the share price.
• Often used with PER (Price Earning Ratio)
• Negative opinions 
• not effective in determining the stock value of innovative companies that are expected to grow rapidly 

Polar bears & the global warming

The survival crisis of polar bears 

• The cause
• The global warming
• Details
• Polar bears are the top predators
• The main prey is a seal
• It is estimated that the maximum distance that polar bears swim for prey hunting is about 100km after the global warming becomes severe
• Increased drowning of polar bears
• No place to rest in the middle of the ocean during food hunting
• Reference URL: https://youtu.be/9Lu_VjRHRv4