BMC Exam

BMC Which driver weakened the Swiss franc? (C) - ANSWERa) A surprise change in net export expectations b)A surprise change in interest rates expectations c)A surprise change in inflation expectations d)A surprise change in valuation expectations How accurately do GDP portray the economy and why? - ANSWERInaccurately because the scope of GDP measurements can change. Consider the formula GDP = C+I+G+(X-M). A country is undergoing a boom in consumption of domestic and foreign luxury goods. In one year, the dollar growth in imports is greater than the dollar growth in domestic consumption. Assuming nothing else has changed, what happened to GDP? - ANSWERIt went down Here is the most important economic data for Australia and Sweden. which economy did better yearover-year (YOY) in the fourth quarter of 2013 compared to the fourth quarter of 2012? Use the two charts to investigate. - ANSWERSweden performed better In the United States, why is there a strong correlation between unemployment and GDP? ANSWERConsumer spending accounts for two-thirds of the U.S. economy when the number of unemployed consumers rises, there is less consumer spending. Here is a chart showing both nominal GDP growth and real GDP growth for a country. Which of the following can be a true statement at the time the chart was captured? - ANSWERThe country has deflation. The bottom line is nominal growth and the top line is real growth. Which of the following lines is the best leading economic indicator? - ANSWERPMI 1/17 The "misery index" is often cited in the media as a way to measure consumer pain. It is defined as the inflation rate plus the unemployment rate..... - ANSWERArgentina What typically happens to nonfarm payrolls, the PMI indicator, and housing starts at the onset of a recession in the United States? - ANSWERNonfarm payrolls go down, the PMI indicator goes DOWN, the housing starts goes down. Which of the following qualities of economic indicators do investors prize the most? ANSWERTimeliness of release Why is the release of GDP statistics less interesting to investors than the release of other economic indicators? - ANSWERBecause GDP statistics are released well after other economic indicators. Which of the following important U.S. economic indicators is only available on a quarterly basis? ANSWERGDP Which economic indicator is most directly linked to unemployment? - ANSWERnonfarm payrolls Here is the economic calendar for the UK for august 2013. Examine indicators like PMI,...... ANSWERAbove expectations This chart was captured in mid-2014. At that point in time, which of the following terms..... ANSWERDeceleration How have economic forecasts for this county evolved? - ANSWERMinimal Change These charts show data for four countries as of early 2016. For each country, the purple line.... ANSWERRussia 2/17 What is the main reason that investment banks create estimates of economic indicators? - ANSWERTo know when specific economic data points are a positive or negative surprise. Which of the following is the biggest pitfall of economic indicators? - ANSWERThey do not consistently presage turning points. Here is a chart displaying estimates of the initial jobless claims indicator, one of the main unemployment.... - ANSWER260 Which country is the fourth biggest importer and exporter? - ANSWERJapan In 1994, the Mexican peso declined against the US dollar during so-called "Tequila Crisis.".... ANSWERBoth countries had large dollar-denominated debts Using the chart given, how many NZD can you buy with 100 AUD? - ANSWER107.89 Allison lives in America and has just retired. It is early 2016..... - ANSWERNorway Review the currency pair charts for the Barbadian dollar agains the Jamaican dollar...... - ANSWERHong Kong dollar against the Macanese pataca Which of the following is not an example of a failed peg? - ANSWERHong Kong dollar against the U.S. dollar in 1997. Use the cart below to answer the question. How many Danish crown (DKK) will buy 100 (JPY) ANSWER5.360 According to the Big Mac index screen, which of the following four countries' currency is the most undervalued? - ANSWERChina 3/17 What generally happens when a central bank unexpectedly increases interest rates? - ANSWERThe currency strengthens. Which driver weakened the Swiss franc? - ANSWERA surprise change in inflation expectations What does the Big Mac index show? - ANSWERHow currencies may be overvalued or undervalued. Which of the following are short-term drivers of currency valuation? - ANSWERSurprise changes in interest rates, inflation, and trade By what mechanism do interest rates affect currency values? - ANSWERGlobal investors are attracted by higher bond yields in high interest rate countries. Which of these headlines could move a currency pair? - ANSWERU.S. Stocks rally on Fed's Surprise reduction of Interest Rate. What is the most common target inflation rate for an advanced economy? - ANSWER2% What was the primary goal of Abenomics? - ANSWERTo halt the vicious cycle of deflation Here is the vicious deflationary cycle. What step connects the lower left gray arrow to the upper right blue arrow? - ANSWERprices decline Were the two oil crises in the 1970s linked to deflation or inflation? - ANSWERInflation on June 23. 2016, the UK voted to leave the EU..... - ANSWERThey are probably heavy exporters 4/17 In early 2016, the same Germany machinery company has interest from four prospective clients..... ANSWERIndonesia What is the median estimate for the number of Japanese yen per euro for calendar year 2020? ANSWER126 What is the difference between Norma and RBC's estimate for the Japanese yen/euro... - ANSWER40 yen Imagine you are a Dutch diamond dealer who sources diamonds from south africa - ANSWEREUR 4,717 more Why would Jack Welch suggest putting all company plants on barges? - ANSWERTo respond quickly to changes in the currency markets. Samsung is based in South Korea and reports in South Korean won.... - ANSWERDollar Legendary investor Warren Buffett said, "Gold gets dug out of the ground..... Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." Based on this quotation, what quality of gold is he referring to? - ANSWERIts storage costs Which of the following options is the best way for investors to manage currency risk? - ANSWERBy locking in forward rates for known foreign payments. What does the Big Mac index show? (A) - ANSWERa) How currencies may be overvalued or undervalued b) How the Economist magazine estimates inflation c)How the law of one price is true of consumer products d)How interest rates and inflation affect value 5/17 Which of the following are short-term drivers of currency valuation? (A) - ANSWERa)Surprise charges in interest rates, inflation, and trade b)Surprise changes in interest rates, inflation, and gold c)Surprise changes in relative prices, trade, and gold d)Surprise changes in relative prices, inflation, and trade By what mechanism do interest rates affect currency values? (C) - ANSWERa)High interest rates slow an economy and make it less attractive to investors b)Changes in interest rates directly influence the value at which a currency is pegged c)Global investors are attracted by higher bond yields in high interest rate countries d)High interest rates make the currency safer According to the Big Mac index screen, which of the following four countries' currency is the most undervalued? (D) - ANSWERa)United States b)Thailand c)Brazil d)China What generally happens when a central bank unexpectedly increases interest rates? (D) - ANSWERa)The currency weakens, then strengthens. b)The currency strengthens, then weakens. c)The currency weakens d)The currency strengthens What is the most common target inflation rate for an advanced economy? (C) - ANSWERa) 3% b) 1% 6/17 c) 2% d) 0% What is the median estimate for the number of Japanese yen per euro for Calendar year 2020? (D) ANSWERa)115 b)163 c)132 d)126 What is the primary goal of Abenomics? (B) - ANSWERa)To strengthen the yen to foster consumption of luxury goods b)To halt the vicious cycle of deflation c)To reduce inflation by increasing unemployment d)To reign in GDP by reducing business confidence Here is the vicious deflationary cycle. What step connects the lower left gray arrow to the upper right blue arrow? (B) - ANSWERa)Workers demand pay increases b)Prices decline c)Employment declines d)Workers expect prices to increase Were the two oil crises in the 1970s linked to deflation or inflation? (C) - ANSWERa)Deflation b)Both deflation and inflation c)Inflation d)Neither deflation nor inflation 7/17 On June 23, 2016, the United Kingdom voted to leave the European Union...... (D) - ANSWERa)They are probably heavy importers b)Their CEOs probably voted to leave the EU c)Their CEOs probably voted to remaining the EU d)They are probably heavy exporters In the early 2016, the same Germany machinery company has interest from four prospective clients from emerging markets: Indonesia, Brazil, Russia, and South Africa..... (C) - ANSWERa)South Africa b)Russia c)Indonesia d)Brazil What is the difference between Nomura and RBC's estimate for the Japanese yen/euro currency pair for the end of Q1 2018? (D) - ANSWERa)40 percent b)40 dollars c)40 euros d)40 yen Imagine you are a Dutch diamond dealer who sources diamonds from South Africa...... (A) - ANSWERa) EUR 4,717 more b) EUR 4,717 fewer c) ZAR 4,717 more d) ZAR 4,717 fewer Why would Jack Welch suggest putting all company plants on barges? (A) - ANSWERa)To respond quickly to changes in the currency markets b) To avoid using any domestic currencies 8/17 c) To locate the cost base in the most favorable tax regimes d) To purchase materials for the plant more quickly Samsung is based in South Korea and reports in South Korean won.... (A) - ANSWERa) Dollar b) Euro c) Real d) Yuan Legendary investor Warren Buffett said, "Gold gets dug out of the ground..... Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." Based on this quotation, what quality of gold is he referring to? (A) - ANSWERa) Its storage costs b) Its durability c) Its Scarcity d) Its physical attractiveness Which of the following options is the best way for investors to manage currency risk? (D) - ANSWERa)By investing purely in ver large stocks in their home market b)By investing in pegged currencies c)By vacationing each year in a country with a weak currency d)By locking in forward rates for known foreign payments What do the green bars at the bottom signify? (B) - ANSWERa) High revenue b) Surplus c) Growth d) Deficit 9/17 According to the table, who owns approximately 1.3% of actively trades US debt? (D) - ANSWERa) Canada b) Russia c) India d) Taiwan What quality of U.S. government bonds causes investors to buy them when market volatility rises? (C) ANSWERa) US Government bonds are denominated in dollars b) US Government bonds are stored in bank vaults c) US Government bonds are considered low risk d) US Government bonds are underwritten by global taxpayers Why is fixed income called Fixed income? - ANSWERBecause the repayment amounts and timings are fixed for ordinary bonds Why does the United States have a strong reputation for creditworthiness? - ANSWERbecause it has the right to tax the wealthiest population on earth What is one reason why foreign governments lend to the U.S. government? - ANSWERTo build liquid FX reserves What does one yellow bar depict in this debt distribution diagram? - ANSWERCoupon repayment Which one of the following actors benefits when interest rates go up? - ANSWERAn investor who is about to buy bonds. When investors doubt the creditworthiness of a borrower, how do they alter their calculation of the bond yield to take into account these doubts? - ANSWERInvestors do not after the calculation 10/17 As a general rule, what percentage of debt to GDP will make a government's bond yields spike? ANSWERThere is no general rule What is true of both the U.K. and the U.S.? - ANSWERBoth countries are highly creditworthy. Which would you prefer? - ANSWERA 4% annual yield on a credit risk-free 10-year government bond from the mythical country of Utopia. Which would you prefer? - ANSWERA 5% annual yield on an investment in 10-year U.S. government bonds What is the primary reason for U.S. government bond yields to ripple through the bond market? ANSWERThe large government bond market competes for investors attention via yields A rise in which of the following measures would typically send a government bond price up? ANSWERCreditworthiness How do investors compare bonds? - ANSWERby comparing the yields of single bonds Which of the following countries shown makes the greatest relative use of short-term government financing? - ANSWERNorway Which of the following is the strongest driver of inflation? - ANSWERwartime activities This chart shows the output gap in the US from 1949 to 1973. What was the output gap in 1973? ANSWER+3.0% 11/17 Here is a chart from the ILBE function displaying US 10-year inflation expectations as of early 2017.... ANSWER0.0239% above Investors who fear rising inflation may buy Treasury Inflation Protected Securities (TIPS). How do TIPS shield lenders from inflation? - ANSWERBy compensating investors for inflation What is the Federal Reserve's favorite inflation gauge? - ANSWERCore PCE Here is the output gap in the US in early 1975. What was likely the fed interest rate policy? - ANSWERTo cut interest rates Why does the yield curve naturally slope upwards? - ANSWERTo compensate leaders for the greater risk of long-term loans compared to short-term loans Why did the corporate spread significantly widen during the 2008 market crash? - ANSWERCorporate bond issuers go bankrupt more frequently then governments, as they do no have a tax base to fall back on in hard times What impact will a tightening of the corporate spread most likely have on a company?` - ANSWERA tendency to expand the borrowing capacity of the company. What are the three main transmission mechanisms by which the yield curve affects the economy? ANSWERCorporate impact, global impact, consumer impact. What is the 10-year to 3-month term premium of the following yield curve? - ANSWER2.398% The purchase of which of the following products is most affected by interest rates? - ANSWERA house What is the primary driver of the left-hand end of the yield curve? - ANSWERCentral bank interest rates 12/17 Which yield curve is most likely linked to a booming economy - ANSWERB Why does the yield curve tend to invert shortly before a recession? - ANSWERAn inverted yield curve means that bond traders are predicting interest rate cuts, and interest rate cuts happen in response to a recession. The two yield curves in the chart are from September 10, 2001 (yellow) and October 10, 2001 (green)...... - ANSWERCut interest rates Why do companies do IPOs? - ANSWERIPOs incentivize entrepreneurs to innovate as IPOs provide a way for entrepreneurs to monetize their work. Why do company manager-owners smile when they ring the stock exchange bell at their IPO? ANSWERan IPO crystallizes the value of the manager-owners stake. The Dow Jones industrial average index has an unusual weighting methodology. Unlike the S&P 500, it is weighted by share price..... - ANSWERGoldman Sachs Here is a chart of the index value for the S&P 500 and the United Kingdom's main equity index the FTSE 100, from the end of 2008 to early 2015..... - ANSWERThe S&P 500 in 1999, James Glassman and Kevin Hassett published a book called "Dow 36,000".... - ANSWERThe sum of the share prices of all 30 Dow Jones Members will triple What is the prime reason that Jenny's discretionary income is more volatile than her salary? ANSWERHer mortgage payments and necessities are fixed 13/17 A wedding planning company has a high fixed-cost base and a lot of debt. Who would you rather be? ANSWERA shareholder in a booming economy. The S&P 500 stood at 1848 at the end of 2013. According to the chart, what would the approximate return be on the S&P 500.... - ANSWER170% Assuming that an investor in the S&P 500 reinvests his dividends. According to the chart,..... ANSWER200% Why are equities volatile? - ANSWERDue to the residual nature of earnings Which of the following statements is true? - ANSWERWhen you buy an equity, the most you can lose is 100% and your potential gain is unlimited. In the example highlighting the differences between bond holders and shareholders, we equated surgeon Jenny...... - ANSWERD You buy the stock of four consumer goods companies at the end of 2004 and hold them until August 2010..... - ANSWERProcter & Gamble What does the release of earnings announcements have in common with the release of economic indicators? - ANSWERBoth are estimated in advance by analysts. The number at the bottom right of each supplier's box shows the portion of Boeing's total costs in the last year that went to that supplier... - ANSWERUnited Continental Which company is most exposed to the ups and downs of the aircraft engine industry? - ANSWERMTU Aero Engines 14/17 Engines are the most expensive, heavy component on an aircraft and are designed with detailed specifications. Which of the following would likely be the best theme for a Rolls-Royce analyst research note to help a portfolio manager decide between investing in Rolls-Royce or United Technologies? ANSWERA comparison of the commercial prospects of new aircraft models You are building a financial model of a bifocal lens manufacturer. Which of the following is the best driver to use? - ANSWERMedian age of society Here is a table from the Bloomberg Intelligence aluminum dashboard which shows the different enduses of aluminum in China..... - ANSWERChina's Aluminum Demand Weathers Real-Estate Slowdown so far When an analyst is looking at a company for the first time, which of the following four activities does he do first? - ANSWERDefines the industry or industries in which the company operates. Here is a table from the Bloomberg Intelligence copper dashboard which shows the different end-users of the "red metal.".... - ANSWERChina's construction of.... Here is a breakdown of post-it note inventor 3M's revenue by industry. Which of the following industry drivers.... - ANSWERThe change in postal Volumes Company X was expected to have earnings per share of $0.52 for the upcoming quarter. On the day of the results, the company reported earnings per share of $0.83. What happened to the share price when the stock market opened? - ANSWERThere is not enough information to tell. Which company is worth more, Coca-Cola or Pepsi? - ANSWERCoca-Cola because it has a higher market capitalization Widget Co has a market capitalization of $100 million. it does a 10-for-1 stock split. it then does a 1-for16 reverse stock split. Finally, it does a 35-for-1 stock split. Nothing else changes. what's the new market cap? - ANSWER$100 million 15/17 What input do both absolute valuation and relative valuation typically require? - ANSWERShort-term forecasts Which of the following is most likely to be the most challenging part of this first step of the absolute valuation process? - ANSWERMaking the assumptions upon which the project future performance What is a reason one discounts future cash flows as part of the absolute valuation process? ANSWERFuture profits are uncertain. What role does beta play in absolute valuation> - ANSWERIt determines how risky a stock is in comparison to the overall stock market Here is the capital structure of Microsoft. What part of the $42.03 share price (to the nearest dollar) is represented by cash? - ANSWER$11 How is enterprise value calculated? - ANSWEREnterprise value = market cap - cash + debt Which of the following stocks is most sensitive to the movement of the overall stock? - ANSWERAmazon Which of the following assigns the same relative weightings to short-term and long-term outcomes as the absolute valuation process? - ANSWERA fishery exceeding fishing quotas Here is the WACC function for US drug company Pfizer....What is the WACC? - ANSWER8.2% A rise in which of the following inputs will increase an absolute valuation? - ANSWEREarnings estimates 16/17 how do earnings yields differ from bond yields? - ANSWERThe cash flow from equities can continue indefinitely while the cash flow from most bonds comes to an end. At its peak at the end of 1999, Microsoft has a market cap of $600B. PC sales were booming and most PCs ran on Microsoft software..... - ANSWERThe decline in P/E ratio more than offset earning growth and this pushed the market cap down What is one possible weakness of this peer approach to valuation? - ANSWERThe estimated growth can be dramatically wrong. What may be a problem of comparing the P/E of a stock to the P/E of the overall market? - ANSWERA stock's P/E ratio can remain above or below market average for extended periods. Here is a chart of the Nasdaq Composite, the world's main technology index. It peaked in the dotcom bubble on March 10, 2000. The P/E.... - ANSWEREarnings grew substantially, meaning that the P/E ratio in early 2015 was only around 30.3x The World Equity index function shown contains two valuation metrics for the S&P 500. The Nike description page contain the same two valuation metrics. - ANSWERNike is more expensive than the S&P 500 on both a P/E and dividend yield basis If the earnings per share of a company is $1 and the earnings yield is 2%, What is the price per share? ANSWER$50.00 This chart shows a scatterplot with the x-axis being the estimated sales growth and the y-axis being the estimated P/E multiple.... - ANSWERChubb 17/17