What Are the Limitations of Ratio Analysis

question 131

Essay

What are the limitations of ratio analysis?

Recognize the limitations of GDP as an all-encompassing measure of economic progress and quality of life.

Interpret the circular flow diagram, and understand the role of expenditure and income in the economy.

Learn how GDP is calculated, including understanding the components of GDP.

Distinguish between nominal and real GDP, and how to adjust for inflation.

---

Definitions:

Zero-Coupon Bond

A bond that does not pay periodic interest but is issued at a discount from its face value, and its return comes from the difference between the purchase price and the face value paid at maturity.

Investment Horizon

Investment Horizon denotes the period an investor expects to hold an investment before taking any return out of it.

Interest Rate Risk

The risk that the value of an investment will decrease due to a rise in interest rates, affecting especially interest-bearing assets like bonds.

Coupon Rate

The annual interest rate paid by a bond's issuer to its bondholders, usually expressed as a percentage of the bond's face value.