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Saturday, February 21, 2009

Security Analysis:Chapter 1

In this chapter, we basically get a sense of what security analysis is, and what it is good for. We learn it's objectives, and five problems that every investor must keep in mind. We learn that there are two groups of securities:

- civil obligations
- stocks and bonds of corporations

Basically, this means that the securities are either issued from the government or from private companies.

Below I have devised a sample test with answers to help in your studies.

1. What are the objectives of security analysis?

a – to present facts regarding a stock or bond in an informative and useful way to a prospective buyer

b – used to reach dependable conclusions based on facts as to the safety and attractiveness of something at a current price

2. What are the 5 problems that concern every investor? Explain them.

The General Price Level – the general prices of everything in an economy (goods, services, etc) due to the effects of inflation and deflation.

Interest Rates – usually increase with government spending (deficit) due to inflation, but can be held artificially low. An investor is concerned with interest rates because, in the case of bonds, it will determine which types of securities he should invest in. If safer bonds have similar yields, then he should pick them. It is thought that there is correlation between bond yields and dividend yields on preferred and common stock, but in fact, only preferred stock had followed this trend.
There are two possibilities:
- Dividend yields should be compared with the return on Series E savings bond yields.
- They should also be compared with tax-free municipal bonds.

Business Conditions and Business Profits – the cycle of businesses (used to be
generally upward, but post 1929 had wide fluctuations)

Dividends – generally follow earnings

Security Prices – have followed a pattern since the civil war, except between 1927-1933, which were the result of mass speculative orgy like the South Sea Bubble and the Mississippi Bubble. There is no longer evidence that stock prices move upwards continuously, but it is shown that buying bear and selling bull is a good strategy.

1 – World War I caused ______.
a) sharp inflation, followed by severe deflation, then recovery at 50% above 1913
b) severe deflation, followed by sharp inflation, then stability at 50% above 1913
c) sharp inflation, followed by severe deflation, then recovery at a level just above that
of 1913
d) severe deflation, followed by sharp inflation, then recovery at a level just above that of 1913

2 – During the Great Depression, the general price level _______.
a) prices declined, then recovered to a level 50% above pre-1914
b) prices declined, and stayed depressed at a level slightly below pre-1914 until
c) prices declined, then recovered to a level only slightly above that of pre-1914
d) prices declined, then recovered to the level they were previously at

3 – During World War II ______.
a) prices immediately inflated, like what happened in WWI
b) prices were artificially controlled and were kept low throughout the war
c) prices were artificially controlled, but eventually gave way to sharp inflation
d) prices immediately inflated, but were later brought down by artificial price controls

4 – During World War I ______.
a) the interest rates were high due to government involvement and financing brought about by the war
b) interest rates were low because of the governmental involvement through financing the war
c) the interest rates stayed the same – government financing affects only the general price levels d) interest rates remained the same due to artificial controls placed on them

5 – In the late 1930s interest rates ______.
a) rose due to New Deal controls
b) dropped because of irregular business, despite the government going into debt from New Deal programs
c) business was returning to normal, so the interest rates dropped. The government debt from the New Deal should have caused an increase, but the New Deal also included interest rate controls
d) irregular business coupled with heavy government debt from the New Deal caused interest rates to rise sharply

6 – Interest rates in World War II ______.
a) Effects from the New Deal coupled with the war financing caused interest rates to rise.
b) Heavy war financing caused the interest rates to rise, despite governmental attempts to artificially keep the interest rate low
c) Heavy war financing caused no effect due to governmental controls
d) Interest rates dropped because of governmental controls

7 – Stock prices during the World Wars ____.
a) rose each time.
b) Were not affected
c) Fell each time
d) Rose during WWI but fell during WWII due to interest rate controls

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