TMC_320_Quiz_3

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Feb 20, 2024

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Tristan Ellrich January 24, 2024 Quiz 3 1) What is the basis point? a) A basis point is a unit of measurement used to describe the percentage change in interest rates or financial instruments. It is equal to one-hundredth of a percentage point (0.01%). 2) What is a point? a) I see that you've shared some information about points in finance. It's interesting to know that a point is a unit of measurement used to represent a change in the price or yield of a financial instrument, which is equal to one-hundredth of a percentage point. Thank you for sharing this! 3) What are the four (4) key components of Debt? a) The four key components of debt are: i) Principal refers to the original amount of money borrowed. ii) Interest is the additional cost you need to pay on top of the principal amount, expressed as a percentage. iii) Term is the period specified for the loan or debt instrument, during which you are expected to repay the amount borrowed. iv) Repayment refers to the scheduled payments you make towards the principal and interest over the term of the loan. 4) What is a VC? a) VC stands for Venture Capital. It's a type of private equity investment that is made in early-stage or growth-stage companies with high growth potential. These venture capitalists provide funding to these companies in exchange for an ownership stake in the company. 5) What is a "tranche" of funding? a) "Tranche" is a term that is commonly used in the world of finance, particularly when it comes to venture capital and private equity investments. It refers to a specific segment or portion of a larger investment or financing round, which may be provided in multiple stages or installments based on certain milestones or conditions. This approach allows investors to manage their risks more effectively while also providing the necessary capital to support the growth and development of promising startups and other businesses. Thanks for sharing that information about tranches of funding. It's interesting to know that this term is commonly used in the context of venture capital or private equity investments and that funding may be provided in multiple stages or installments based on certain milestones or conditions. 6) What are the Three (3) F's? a) The Three F's commonly refer to the key factors considered by venture capitalists when evaluating potential investments. They are: i) Founders: The expertise, proficiency, and past achievements of a company's founders or management are critical factors to consider. ii) Fundamentals: The financial and operational health of the company, including revenue growth, market potential, and competitive advantage. iii) Fit: The alignment of the company's product or service with the investor's strategic objectives and investment thesis.

Tristan Ellrich January 24, 2024 Quiz 3 7) What is a Black Swan? a) A Black Swan is a term used to describe an event that is rare and unpredictable and has a significant impact on the economy or financial markets. Such an event is characterized by its extreme rarity, severe consequences, and the tendency for people to rationalize it after it has occurred. This concept was introduced by Nassim Nicholas Taleb in his book "The Black Swan: The Impact of the Highly Improbable." 8) Illustrate the Structure of a VC or PE firm (rectangle, triangle, circle) a) The structure of a VC (Venture Capital) firm can vary, but it typically involves the following components: i) General Partners (GPs): These are the people or groups who manage the venture capital fund and make investment decisions. ii) Limited Partners (LPs): These are the individuals or organizations that provide the funds for the investment. They receive returns based on the performance of the investment. iii) Portfolio Companies: These are the companies in which the venture capital firm invests. The firm owns a stake in these companies and provides guidance and support to help them grow. iv) Investment Period: This is the period during which the VC firm invests capital raised. v) Exit Strategy: This refers to the plan for how a VC firm generates returns on its investments, usually via an IPO, acquisition, or secondary sale. 9) What is an "LP"? a) LP stands for Limited Partner. In the context of private equity firms, LPs are investors who provide capital to the PE fund. They have limited liability and are not involved in the day-to-day management of the fund. Private equity firms usually consist of both General Partners (GPs) and Limited Partners (LPs). 10) What are the three (3) components of RISK? a) The three components of risk are: i) Probability: The likelihood or chance of a particular event or outcome occurring. ii) Impact: The potential consequences or effects of that event or outcome. iii) Mitigation: The strategies or measures taken to reduce or manage the potential risks. 11) What is the most expensive capital you can raise: Debt or Equity? a) Equity represents the ownership in a company. It is a less expensive financing option than debt since equity investors do not require regular interest payments or the repayment of the invested capital. Instead, they have a share in the company's profits and value appreciation. However, issuing more equity dilutes the ownership stake of existing shareholders. 12) Why? a) The yield curve is a way to show the relationship between the interest rates and the time to maturity of debt securities. It plots the yields of bonds with similar quality against their respective maturities. By looking at the shape of the yield curve, we can gain insights into market expectations for future interest rates and the overall health of

Tristan Ellrich January 24, 2024 Quiz 3 the economy. Additionally, default probability refers to the likelihood of a borrower defaulting on their debt obligations. 13) Illustrate the Yield Curve and describe what is meant by the "probability of default". a) A normal yield curve suggests that long-term bonds have higher yields than short-term bonds. This is because investors demand more compensation for the additional risk of a longer- term loan. The probability of default is a financial concept that measures the likelihood of a borrower being unable to repay their debt. Lenders use this to evaluate the risk of lending money to a borrower. A higher probability of default indicates a greater risk of the borrower not being able to pay back the loan, which may affect the interest rate or whether the loan is approved. It's essential to note that the probability of default is merely an estimate, and real default rates may vary. 14) Is risk dynamic or static? a) Risk is not static, but dynamic, influenced by factors such as market conditions, economic trends, and company-specific events. 15) Fill in the blanks: Smart money thinks differently, it says Low Volatility = High Returns . It also says that Diversification is a minimization of risk . 16) An exit strategy is how to obtain liquidity. T or F a) True. An exit strategy is a plan or method for investors to realize their investment and obtain returns. It outlines how and when investors can sell or exit their investment in a company. This can include options such as selling the company through an initial public offering (IPO), selling to another company through an acquisition, or conducting a secondary sale to other investors. 17) A PE fund typically invests into Cash Flow positive companies? a) False. A private equity fund typically invests in illiquid assets, which are not easily converted into cash. These funds often invest in private companies or assets that have a longer holding period compared to public market investments. 18) A VC firm invests into companies with a "finite amount of air." a) True. A venture capital (VC) firm usually invests in startups that have the potential for high growth, typically at early-stage or growth-stage. These companies may not have achieved profitability yet or could have negative cash flows. VC firms provide the necessary capital to help these companies grow and attain positive financial outcomes. 19) The S & P 500 returned 24% in 2023, hypothetically your investments generated investment returns of 28% in 2023. What was the "Alpha"? a) False. The term "finite amount of air" is not commonly used. It is unclear what is meant in this context. 20) If we "Harvest cash flow" from company, we are saying we are receiving a Dividend? 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 0 1 2 3 4 5 6 Yeild Curve

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Tristan Ellrich January 24, 2024 Quiz 3 a) This statement is partially true . There are various strategies to generate revenue from a business, including cash flow harvesting. b) Dividends: A corporation can regularly pay its shareholders dividends from its profits. c) Selling shares: You realize a gain or loss when you sell shares. This creates cash flow but is not a recurring income like dividends. d) Other income streams: Certain businesses may offer investors additional sources of cash flow, such as interest payments from bonds or preferred stock. e) Therefore, while receiving dividends is one way to "harvest cash flow," it's not the only option.