Interest rate
How would you explain the concept of "interest rate"?
The cost of borrowing money, or the return earned from lending or investing money.
What is accounting mainly used for?
To record, organize, and understand a company’s financial information.
Why is inflation important for investors?
Because it reduces the real value of returns and the purchasing power of money.
What is the difference between a stock and a bond?
Stocks represent equity ownership in a company, whereas bonds are debt instruments issued by companies or governments to finance their activities.
How can the following accounting principles be defined?:
- Double-entry principle
- Allocation and depreciation principle
- Accrual principle
Double-entry principle
Every accounting transaction affects at least two accounts and must be recorded with equal debits and credits, ensuring that the accounting equation (Assets = Liabilities + Equity) always remains in balance.
Allocation and depreciation principle
The cost of an asset is allocated over the periods in which the asset generates economic benefits. For long-term tangible and intangible assets, this allocation is carried out through depreciation or amortization, rather than expensing the full cost at the time of acquisition.
Accrual principle
Revenues and expenses are recognized in the period in which they are earned or incurred, regardless of when the related cash is received or paid, providing a more accurate measure of financial performance for each accounting period.
Should the return on a stock or a bond compensate investors for both risk "insolvency risk" and "inflation risk", or only for one of them? Which one?
Yes, return paid should compensate both type of risks
What do we call the financial statement that shows what a company owns and owes at a specific point in time?
The balance sheet
What is a stock market index, why is it useful, and which ones have you heard of?
A stock market index is a measure that shows how a group of selected stocks is performing.
It is useful because it helps track the performance of the stock market or a specific segment of it and serves as a benchmark for investors.
Some well-known stock market indices include the S&P 500, Dow Jones Industrial Average, NASDAQ, FTSE 100, DAX, and Nikkei 225.
What is market capitalization (market cap) and how is it calculated?
It is the total market value of a company’s outstanding shares, calculated as the share price multiplied by the number of shares outstanding.
Indicate what the impact of an accounting entry related to the depreciation of industrial equipment would be on the accounting records (which financial statements would be affected and how).
An accounting entry for the depreciation of industrial equipment would affect:
Income Statement:
A depreciation expense is recognized, which increases operating expenses and reduces operating income and net income for the period.
Balance Sheet:
Accumulated depreciation increases, reducing the carrying amount (net book value) of the industrial equipment under property, plant, and equipment.
This example illustrates the allocation principle
In theory, if there were no risk and no inflation, interest rates should be zero.
No, it should be positive, reflecting the opportunity cost of forgoing the use of the funds while they are lent
What are the main classes of assets presented on the balance sheet?
On the balance sheet, assets are classified into:
Current assets, including cash and cash equivalents, accounts receivable, inventory, and other assets expected to be realized, sold, or consumed within one year or one operating cycle.
Non-current (long-term) assets, including:
Property, plant, and equipment (PPE)
Intangible assets (such as patents, trademarks, and goodwill)
Long-term investments and other non-current assets
Can you explain what is a mutual fund?
A mutual fund is a vehicle that pools money from many investors and invests the money in securities such as stocks and bonds.
The mutual fund prospectus contains information about the mutual fund’s investment objectives, risks, performance, and expenses.
What is a financial bubble in the stock market? Can you think of an example?
A financial bubble happens when stock prices rise very fast to levels that are not justified by fundamentals, mainly due to speculation.
An example is the dot-com bubble, when technology stocks became extremely expensive and later crashed
Indicate what the impact of an accounting entry related to Payment of a loan principal would be on the accounting records (which financial statements would be affected and how).
The company repays part of the principal of a bank loan.
Accounting entry:
Debit: Bank loan (liability) …… 10,000
Credit: Cash …… 10,000
Explanation
Cash (asset) decreases.
Bank loan (liability) decreases by the same amount.
There is no impact on revenues or expenses, so the income statement is not affected.
The entry only changes the composition of assets and liabilities on the balance sheet
What is the difference between simple and compound interest rate?
With simple interest, you earn interest only on the original amount invested, while with compound interest, you earn interest on both the original amount and past interest.
What information does an income statement (profit and loss statement) report over an accounting period?
It reports, for the period:
Net sales (revenues)
Cost of goods sold (COGS)
Gross profit
Operating expenses (excluding depreciation and amortization):
Selling, general, and administrative expenses (SG&A)
Research and development (R&D), if applicable
EBITDA (earnings before interest, taxes, depreciation, and amortization)
Depreciation and amortization
EBIT (operating income / income from operations)
Other income and expenses
Interest income
Interest expense
Income before income taxes
Income tax expense
Net income
Technical note:
EBITDA is not a measure defined under US GAAP. It is a widely used non-GAAP performance measure that approximates operating cash-generating capacity, but it should be interpreted with caution and reconciled to GAAP net income when presented.
Do you know what an ETF (Exchange-Traded Fund) is and how it differs from a traditional investment fund?
An ETF is an investment fund that holds a basket of assets and is traded on the stock market like a share.
Unlike traditional mutual funds, ETFs can be bought and sold throughout the trading day. In many countries, they also differ in taxation, as mutual funds may offer tax deferral advantages that ETFs usually do not.
What is the supervisory body of the U.S. securities market, and what are its main objectives regarding investors, markets, and corporations?
The U.S. Securities and Exchange Commission (SEC). The SEC has a three-part mission:
Protect investors
Maintain fair, orderly, and efficient markets
Facilitate capital formation by connecting investors with companies raising capital
Indicate the accounting records of a purchase of equipment ($50,000) financed partly with cash ($20,000) and partly with a long-term loan ($30,000). Which financial statements would be affected and how?
Accounting entry:
Debit: Property, plant, and equipment …… 50,000
Credit: Cash …… 20,000
Credit: Long-term bank loan …… 30,000
Explanation
Property, plant, and equipment (asset) increases.
Cash (asset) decreases.
Long-term bank loan (liability) increases.
No revenues or expenses are recognized at acquisition, so the income statement is not affected.
The transaction affects multiple balance sheet accounts while respecting the double-entry principle.
What is the impact of interest rate changes on consumption and investment?
Higher interest rates tend to reduce consumption by increasing the incentive to save and by raising borrowing costs for households, especially for durable goods. At the same time, they reduce business investment by increasing the cost of capital and lowering the profitability of investment projects, even if higher household saving increases the supply of financial funds. Lower interest rates have the opposite effect, stimulating consumption and investment.
Using a T-account framework, how do debit (left side) and credit (right side) entries affect asset accounts, liability and equity accounts, and revenue and expense accounts?
The rule of debits and credits states that:
- Asset accounts increase when debited and decrease when credited.
- Liability and equity accounts increase when credited and decrease when debited.
- Revenue accounts increase when credited and decrease when debited.
- Expense accounts increase when debited and decrease when credited.
Debit (Left) | Credit (Right)
---------------------------------------------------
Assets Increase | Decrease
Liabilities Decrease | Increase
Equity Decrease | Increase
Revenues Decrease | Increase
Expenses Increase | Decrease
Can you explain what annuities are?
Annuities are financial contracts issued by insurance companies in which an individual makes a lump-sum payment or a series of payments, and in return receives regular payments either immediately or at a future date, typically to provide income over time, often during retirement.
How would you define the financial system in an economy?
The financial system is the set of institutions and markets in a country whose role is to move funds from suppliers to demanders, while regulating and supervising financial activity to ensure the system works properly.
Give an example of a double-entry accounting entry that only affects the income statement
The company recognizes a training expense that is reimbursed through an operating subsidy in the same period.
Accounting entry:
Debit: Expense – Training costs …… 1,000
Credit: Other operating income (training subsidy) …… 1,000
Both entries affect only income statement accounts (an expense and an income).
There is no direct impact on assets, liabilities, or equity at the time of recognition.
The net effect on profit for the period is zero, while still complying with the double-entry principle.