ACCA F4 flashcards – set 4

These are options to buy or sell interest rate futures and allow borrowers or depositors to enjoy favourable interest rate movements whilst protecting themselves against adverse movements.

Upfront non-returnable premiums have to be paid to acquire the options that provide this protection.

These are traded on futures market.

They are derivatives whose value depends on the interest rate.

By arranging to buy or sell future contracts, profits can be made on the contracts that will largely compensate for any losses made on interest rate movements.

Forward rate agreements (FRAs) allow a borrower or depositor to fix a n interest rate for a period in the future eg starting in 6 months and ending after 12 months.

False. It’s like car insurance: the premium is not repaid even if you make no claim.

Currency options give their owner the right, but not the obligation, to buy or sell currency at an agreed price.

A forward contract is a contract to exchange an agreed amount of currency at an agreed date in the future and an agreed exchange rate.

• Transaction risk (import/export)
• Economic risk (goods becoming less competitive because of exchange rate movements)
• Translation risk (the value of foreign subsidiaries rising and falling with exchange rates)

IRR = the discount rate at which the project yields a zero NPV

PV of the perpetuity starting at time 1 = Annual amount/r = $3,000/0.05 = $60,000

Required discount factor = 3.546 – 0.952 = 2.594

PV = $8,000 x 2.594 = $20,752

$15,000 x 3.465 = $51,975

2,000/(1.05)⁴ = $1,645

1,000 x 1.05³  = 1,159.63

12,000/0.3 = $40,000

It will rise. The normal yield curve shows an increase in interest rate as the period of the loan increases.

$250.

Check: $100 par of the bond will pay $5 annually ie 5% of the nominal value. If the bond actually costs $250 to buy then the return to the purchaser is 5/250 = 2%. Market prices move to provide the return required.

Equity shares will increase in value

Convertibles start life as debentures but give investors the option of converting the debentures to shares. This allows investors to take a ‘wait-and-see’ approach. Invest in safe debentures, then convert to shares if the company seems to be doing well.

A financial instrument recording a debt. Debentures can be secured on assets and can be redeemable or irredeemable. Fixed amounts of interest must be paid, usually every 6 months.

Financial instruments are assets that can be traded and which permit efficient flows of capital between investors and those needing capital for their operations. Financial instrument are contracts that create a financial asset of one entity and a financial liability or equity instrument of another entity

Any five of:

• Safe storage: banks store cash in their vaults and can impose strict security.
• Risk reduction: if a bank is lending money it has expertise to properly appraise the borrower.
• Maturity transformation: for example, banks can make use of lots of short-term deposits to create long-term loans.
• Consolidation: lots of small deposits allow several large loans.
• Credit creation: by issuing credit cards and organising loans and overdrafts, banks help to ‘create’ money.
• Intermediation: borrowers and lenders are matched.
• Transfer of money: eg between purchaser and supplier.

• A means of exchange
• A store of value
• A unit of account
• A means of deferred payment

• Trend: this is an underlying smooth increase or decrease of an amount as time passes.
• Seasonal variations: cycles of variation repeating in less than a year
• Cyclical variations: cycles of variation repeating in more than a year.
• Random effects: non-repetitive and non-predictable variations.

Time series analysis investigates the first two of these.

When items can be ranked (ie placed in order) but assigning a score or value to each item is difficult.

False. Correlation is not causation

Coefficient of determination = r²  = 0.9²  = 0.81

81% of the change in one variable can be explained by change in the other.

• r = +1, meaning perfect positive correlation where all points lie on the line and as one variable increases, so does the other.
• r = -1, meaning perfect negative correlation where all points lie on the line and as one variable increases, the other decreases.
• r = 0 means no correlation.

x.

Essentially the value of x drives the value of y

In a cross-sectional study data from a number of members of a population is examined at a single point in time. For example, the gross profit percentage achieved by 12 branches of a company in 2020.

In a longitudinal study, measurements are taken of the same variable at different points in time. For examples, sales each month, profit over a number of years occurrence of illness in a sample of people as they age.

• Volume
• Variety
• Velocity
• [Veracity]

The median is the value of the half-way through the population when arranged in order. Here the 150/151 person would be 1.6m tall.

• Histograms
• Ogives (cumulative frequency curves)

• Accurate
• Complete
• Cost-beneficial
• User-targeted
• Relevant
• Authoritative
• Timely
• Easy-to-use

• Queueing
• Rationing
• Vouchers (essentially rationing)

• Over-production
• Un-needed producers attracted into the industry
• Low efficiency of production
• Waste of resources

An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Externalities interfere with the ability of market forces to optimise the allocation and use of resources.

A public good is a product or service that one individual can consume without reducing its supply to another individual, and from which no one is excluded. Examples include public roads, street lighting, defence and law enforcement.

A natural monopoly is a type of monopoly that exists due to the high start-up costs or powerful economies of scale of conducting a business in a specific industry. A company with a natural monopoly might be the only provider or a product or service in an industry or geographic location.

The supply curve will move leftward as fewer goods will be produced for a given price.

The demand curve should move to the right.

The item is showing inelastic behaviour. A rise in price will affect demand relatively little and revenue will increase.

The price elasticity of demands=

Product B shows greater variation in quantity for a given variation in price so is the more elastic product.

• Remuneration committee
• Nomination committee
• Audit committee

False. There should be a balance (about 50/50)

This is false. They roles must be separated.

Internal, connected, external

100 x Operating profit after interest and before tax/Shareholders’ equity

100 x Operating profit before tax and interest/Capital employed

False. The company’s liability is unlimited but shareholders enjoy protection from the company creditors.

Neither is true. A charity is not-for-profit, but is not necessarily state-owned. A state-owned airline might be expected to make a profit.

A social arrangement which pursues collective goals, which controls its own performance, and which has a boundary separating it from its environment

PESTEL is a way of appraising the macro-environment. The environmental influences are:

• Political
• Economic
• Social
• Technological
• Environmental/ecological
• Legal

Trade agreements are treaties between countries on their reciprocal tariffs, quotas etc.

The purpose of the agreements is to reduce the barriers to trade and simplify international trade, improve economic efficiency and provide consumers with more choice.

They reduce protectionism.

Off-shoring is the process of sending manufacturing abroad eg to make use of cheaper labour rates.

The process by which the countries and businesses throughout the world are becoming increasingly interconnected because of increased trade. Globalisation has increased the production of goods and services. The biggest companies are multi-national companies with subsidiaries in many countries throughout world.

The currency of the country with the higher inflation weakens with respect to the currency of the low inflation currency.

• Exports: become more expensive in US$
• Imports: become cheaper in terms of the country’s own currency

• Quotas
• Tariffs
• Administrative difficulties
• Subsidies

Any four of:

• Transport costs and carbon footprint
• Export of jobs
• Strategic weakness
• Balance of payment problems
• Dumping

Any four of:

• Natural resources available in one country
• Access to low labour costs
• Economies of scale
• Skills
• Unique products in one country only

It is when it is better if one country switches production to a particular product because, compared to making another product, it is comparatively more efficient

A country has absolute advantage when it performs a task more efficiently than producers in other countries

Capital account: flows relating to investments and proceeds from the sale of investments.

Current account: mainly flows from the effects of trade and income.

If a government injects money into the economy, this will be ultimately earned by suppliers and employees who will spend it in turn thus stimulating the economy even more. The effect is that the total additional money spent in the economy is:

Initial expenditure x 1/Marginal propensity to save

• Government spending
• Taxation
• Government borrowing

An ad valorem tax is charged as a fixed percentage of the price of the good.

A good example of an ad valorem tax is VAT

• A regressive tax takes a higher proportion of a poor person’s salary than it does for a rich person.
• A progressive tax takes a higher proportion of income as income rises
• A proportional tax takes exactly the same proportion of income tax from all levels of income.

• Taxation
• Borrowing
• Printing money
• Sale of state assets (eg privatisation)

They are indexes to measure inflation.

Laspayre: uses base year quantities or base year values.

Paasch: uses current year quantities or current year values.

• Demand pull
• Cost push
• Import cost inflation
• Expectation
• Increase in the money supply

• An increase in disposable income
• Consumers deciding to save less (known as a lower marginal propensity to save).
• Increased government spending
• A more relaxed monetary policy (for example, the government simply printing more money.
• An increase in net exports.

A deflationary gap occurs when aggregate demand needs to increase if full employment is to be achieved. An inflationary gap occurs when aggregate demand has to decrease to match full employment.

Full employment has been reached and rising demand will push up prices steeply.

Government spending