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bhdfbuygffihrnknsahoe > 1: Fun of Inv (Inv & Tr Ba) > Flashcards

1: Fun of Inv (Inv & Tr Ba) Flashcards

1
Q

the action or process of investing money for profit or material result.

A

Investments (from Dictionary)

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2
Q

the purchase of goods that are not consumed today but are used in the future to create wealth.

A

Investments (from Economics)

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3
Q

a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.

A

Investments (from Finance)

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4
Q

A commitment of a sum of money for a period of time to compensate for

A

Investments

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5
Q

Investments

A

Time, Inflation, Risk or Uncertainty → INTEREST / DIVIDENDS, GAINS, MATURITIES / SALE PROCEEDS → CASH

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6
Q

The Risk-Reward Rule

The potential for higher income is always ACCOMPANIED by higher probabilities of _______.

A

loss

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7
Q

Why do Capital / Financial Markets Exist?

A

Excess Cash/Source Need / Use Cash ➡️ Intermediaries/Financial + Capital Markets (The venue by which large amounts of money or capital are raised for long term use by governments and companies) ⬅️ Need / Use Cash

Commitments of Users of Funds ↔️ Nature and Certainty / risk of Cash Flow to Funder ↔️ ASSET CLASS Group of investments that have similar risk-return or cash flow characteristics

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8
Q

What is your PRIMARY GOAL in Investing?

A

→ Preserve the entire principal with income slightly higher than TD rates
→ Generate growth between principal and income over medium term
→ Aggressively grow the principal with less emphasis on income over long term

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9
Q

How long do you intend to keep your investment?

A

INVESTMENT HORIZON

→ Short-term (1 year or less)
→ Medium term (1-5 years)
→ Long-term (more than 5 years)

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10
Q

How important is immediate access to your invested funds?

A

LIQUIDITY

→ Highly dependent, I have no other resources
→ I have other resources, can stay invested in the medium term
→ I do not need the funds, I can stay invested long term

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11
Q

My attitude towards risk is best described by the following statement:

A

RISK APPETITE

→ I cannot accept investment losses
→ I am able to accept an average degree of risk in exchange for returns in medium term
→ I’m able to accept substantial amount of risk for potentially higher returns over the long term

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12
Q

What is your knowledge in investment?

A

EXPERIENCE & KNOWLEDGE

→ I have limited experience (less than 1 year) general knowledge on savings, time deposit
→ I have adequate experience (at least 1 year) and/or general knowledge ex. Fixed income, bonds, equities
→ I have extensive experience (more than 5 years) in all kinds of investments (structured, offshore)

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13
Q

A collection of various securities that exhibit similar traits as well as comparable responses to market fluctuations

A

Asset Classes (Franklin Templeton Investments)

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14
Q

Different Types of Asset Classes

A

Cash & Money Market Instruments ➡️ Liquidity
Fixed Income ➡️ Lending money to someone
Equity ➡️ Ownership into a business
Alternative Investments ➡️ Ownership of a physical space/item

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15
Q

Primary and Secondary Markets

A

Primary Issue
Bank B Purchase security from Bank A ↔️ ISSUER: GOVERNMENT / CORPORATE ↔️ Bank A Purchase security from Issuer

Secondary Trade
Bank A ↔️ Bank B

For Bonds - Philippine Dealing and Exchange (PDex)
For Equities - Philippine Stock Exchange (PSE)

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16
Q

What is Cash?

 Low returns but _________ of expected cash flow is ______.
 The financial asset is considered the ________ one because it is the __________________________.
 Not completely safe because it may lose value from _____________________, which is _________.

A

→ certainty; high
→ safest; least risky, but can only give limited earnings
→ increasing prices of goods; inflation

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17
Q

What can be considered as Cash?

A

 The bills and coins in your pocket
 Current account, savings account (CASA)
 Time Deposit
 Individual Savings account
 Special Deposit Account
 Money Market
 Treasury Bills
 Bonds that are nearing maturity

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18
Q

instrument that allows governments, companies, and other types of issuers to borrow money from investors.

A

fixed-income security (CFA Institute)

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19
Q

Characteristics of Fixed Income Securities

A

• Bondholders have no ownership rights
• Fixed income securities take precedence over payment to shareholders upon bankruptcy
• Fixed income securities are, in theory, less risky than common shares
• Primarily used to generate higher and steady income

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20
Q

basically a debt or loan

A

Bonds

Example:
When the government issues bonds, they are basically borrowing money. Those who buy the government bonds serve as their lenders and are paid with interests.

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21
Q

How do Bonds Earn?

A

• Coupon payments (Interest)
• Price Appreciation (Increase in value of bonds)

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22
Q

Example of Bonds:

A

 GovernmentSecurities
→ Retail Treasury Bonds
→ Fixed Rate Treasury Notes
→ ROP Dollar Bonds
 CorporateBond
 Loans/PromissoryNote(PNs)

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23
Q

Why invest in Bonds?

A

 Income Payment
 Slow and steady predictable returns

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24
Q

entity who is offering bonds for sale to investors (e.g.government entities and corporations); responsible for committed payments of the investment contract

A

Issuer (Fixed Income Basics)

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25
Q

the date of time during which the debt instrument is outstanding

A

Term (Fixed Income Basics)

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26
Q

The date on which a debt becomes due for payment

A

Maturity

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27
Q

amount to be repaid to the investor at maturity

A

Principal

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28
Q

periodic interest payment made to the bondholder during the life of the bond

A

coupon

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29
Q

Percentage of the face amount paid at regular intervals

A

Coupon

Example: investment in a bond with a face amount of 100 and a 5% coupon

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30
Q

Bond prices and interest rates

A

When interest rates ⬇️, bond prices ⬆️
When interest rates ⬆️, bond prices ⬇️

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31
Q

ZERO BOND

• Does not pay ____________________ payments. Instead, bondholders merely receive the __________ of the bond when it reaches _________.
• On Issue date, bondholders purchase the bond typically at ______________ to the bond _________.

Example:
Face Value = Php 1.0 million
Settlement Amt = Php 900,0000
The difference of Php 100,000 is effectively the income of the investment in Zero Bond

A

• periodic coupon interest; face value; maturity
• deep discounts; face value

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32
Q

REGULAR BOND

• Pays _____________ to bondholders until _________.
• On ____________, bondholders purchases the bond at __________.

Example:
Face Value = Php 1.0 million
Settlement of Purchase = Php 1.0 million

• On ____________, bondholders receive the ___________________________.

A

• coupon interest; maturity
• issue date; Face Value
• maturity; face value + the last coupon interest payment

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33
Q

Bond at Cost

• When a bond is __________, bondholder pays at ______.

Example:
Face Value = Php 1.0 million
Tenor = 5 years
Coupon Interest = 5% p.a. , quarterly payment

• Bondholder pays ________ for the _________ of the bond
• Receives the coupon interest every _________ for _______ or _________ net of __________.

A

• first issued; cost
• P1.0 million; purchase
• quarter; P12,500; P10,000; 20% FWT

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34
Q

Bond Purchased at a Discount

• A bond that is currently trading for _______ its par value in the _______________, is a ____________
• A bond will trade at a _________ when it offers a coupon rate that is __________ prevailing interest rates.

A

• less than; secondary market; discount bond
• discount; lower than

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35
Q

Bond Purchased at Premium

• A bond that is trading ______ its par value (original price) in the ________________ * is a ____________
• A bond will trade at a ____________ when it offers a coupon rate that is _________ than the current prevailing interest rates being being offered for __________.
• This is because investors are willing to _________ for the bond’s ____________.

A

• above; secondary market; premium bond
• premium; higher; new bonds
• pay more; higher yield

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36
Q

This is the market wherein the trading of securities is done. It is where investors buy and sell securities they already own

A

→ Bond Purchased at a Discount
→ Bond Purchased at Premium

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37
Q

 Compounded rate of return of a security until maturity
 The discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal to the price of the bond.

A

Yield to Maturity (YTM)

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38
Q

Duration

• Measure of a _______________ to ______________.
• The ___________________ of a bond’s cashflow
• A _____________________

A

• bond’s sensitivity; interest rate changes
• weighted average maturity
• measurement of risk

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39
Q

This is an estimate of how the price of a bond will change for a given change in yield.

A

Modified Duration

40
Q

The higher the _____________ of a security, the higher its _______________ to __________________.

A

modified duration; price sensitivity; interest rate movements

41
Q

Modified Duration Properties

A

 Modified duration increases when the maturity increases.
 Modified duration decreases when the coupon increases.
 Modified duration decreases when the yield increases.

”The bigger the duration number, the greater the interest-rate risk or reward for bond prices.”

42
Q

Duration

• Duration of 5 means that the _______ of a fixed income instrument is expected to change by around _____ for every __________________ shift in the level of ______________.
• The higher the __________ of a fund, the higher its ____________________ (all other factors kept equal)
• An increase in __________ generally leads to a ______________________ (vice versa)

A

• price; 5%; 100 basis points (1%); interest rates
• duration; risk and potential return
• interest rates; decrease in fixed income prices

43
Q

A bond fund is worth Php200Mio with a duration of 5. Interest rate went up by 100 basis points. What will happen to the value of the fund?

A

Decrease in value

44
Q

A bond fund is worth Php200Mio with a duration of 5. Interest rate went up by 100 basis points. By how much will it decrease (in percentage)?

A

5%

45
Q

A bond fund is worth Php200Mio with a duration of 5. Interest rate went up by 100 basis points. By how much will it decrease in Peso terms?

A

P10,000,000

46
Q

A bond fund is worth Php200Mio with a duration of 5. Interest rate went up by 100 basis points. How much is the value of the fund given the 100bps increase in interest rates?

A

P190,000,000

47
Q

A bond fund is worth Php200Mio with a duration of 5. Interest rate went up by 100 basis points. Assume that interest rates went down instead by 50bps, what should be the value of the fund?

A

P205,000,000

48
Q

Assume there are 2 fixed income funds:
A. Bond Fund A with a duration of 1
B. Bond Fund B with a duration of 10

Which fund has a bigger return potential?

A

Bond Fund B

49
Q

Assume there are 2 fixed income funds:
A. Bond Fund A with a duration of 1
B. Bond Fund B with a duration of 10

Which fund has a bigger risk?

A

Bond Fund B

50
Q

Assume there are 2 fixed income funds:
A. Bond Fund A with a duration of 1
B. Bond Fund B with a duration of 10

Assume interest rates went up, which of the 2 funds would have suffered a lesser loss?

A

Bond Fund A

51
Q

Assume there are 2 fixed income funds:
A. Bond Fund A with a duration of 1
B. Bond Fund B with a duration of 10

Assume that you expect interest rates to go down, where would you invest in?

A

Bond Fund B

52
Q

The exception of this general trend lies when some investors have a bullish outlook on the economy while others have a bearish outlook

A

Fixed Income instruments usually move against Equities

53
Q

 By diversifying investments between stocks and fixed income, investors can diversify away certain risks
 Government securities which are “risk free” can be used to reduce a portfolio’s volatility while maintaining the same expected return (in comparison to that of a less diversified portfolio)

A

Fixed Income instruments are used to hedge against certain risks

54
Q

A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.

A

Equity (Investopedia)

55
Q

What are Equities?

 Also known as _______ or ______ of a company. You ______ a certain percentage of a company.
 ________ are primarily from ________________ although some stock may give ______________ in the form of _________
 Higher _________________ but very high ______________________
 Very __________________ cash flow

A

→ “shares”; “stocks”; own
→ Gains; stock appreciation; regular income; Dividends
→ long-run average returns; year-to-year volatility/ uncertainty
→ unpredictable

56
Q

What does it imply when you own stocks: OWNERSHIP

A

As part owner of a company…
 You will take part in a company’s profits and loss
 You may vote on major issues
 You may be part of the election of the board of directors.

57
Q

 Is the company earning? How? How well?
 Is it sustainable?
 How is it compared to similar companies?

A

Profitability (Analyzing equities)

58
Q

 Does the company have what it takes to stay in business, operate profitably, and grow?
 Includes Human Resources: Wise and prudent board of directors, effective management, happy employees

A

Asset Base (Analyzing equities)

59
Q

 Does the company have what it takes to stay in business, operate profitably, and grow?
 Includes Human Resources: Wise and prudent board of directors, effective management, happy employees

A

Asset Base (Analyzing equities)

60
Q

is the most common benchmark used for investment in stocks listed in the Philippine Stock Exchange.📈

A

Philippine Stock Exchange Index (PSEi)

61
Q

is the most common benchmark used for investment in stocks listed in the Philippine Stock Exchange.📈

A

Philippine Stock Exchange Index (PSEi)

62
Q

Alternative Assets

A

 Derivatives
 Real Estate
 Art
 Commodities
 Jewelry
 Venture Capital

Note: Expressly prohibited uder UITF Regulations

63
Q

securities that derive/base their value on the value of another security

A

Derivatives

64
Q

 Fixes /guarantees the price of a security for future transaction
• Applies to a security price, interest rate or foreign exchange
 Swap area a series of Forwards

A

Forwards / Futures

65
Q

 Fixes /guarantees the price of a security for future transaction
• Applies to a security price, interest rate or foreign exchange
 Swap area a series of Forwards

A

Forwards / Futures

66
Q
A

→ Put Option
→ Interest Rate Floor
→ Step-Up Rates

67
Q

Option of the investor to sell to the Issuer at a specified price and date or period in the future

A

Put Option

68
Q

Lower limit to downward adjustments in coupon rates for floating rate bonds/notes

A

Interest Rate Floor

69
Q

Automatic adjustment of coupon rates if bnd is not redeemed on a certain date

A

Step-Up Rates

70
Q

In Comparison

A

Risk: Low | Medium | High
Possible Returns: Low | Medium | High
Beat Inflation: Improbable | Probable | Most Probable
How it earns: Interest on Deposits | CPN PMT & Price Appreciation | Price Appreciation & Dividends

71
Q

Types of Risks

A

→ Credit Risk
→ Counterparty Risk
→ Liquidity Risk
→ Interest Rate Risk
→ Market Risk
→ Sovereign Risk
→ Currency Risk
→ Reinvestment Risk

72
Q

The issuer will delay or not pay the interest and/or principal

A

Credit Risk

73
Q

The broker/dealer will commit error, fraud, or financial failure

A

Counterparty Risk

74
Q

The investor will not be able to liquidate or convert or sell his asset for cash

A

Liquidity Risk

75
Q

The value of securities will fall due to changes in interest rates

A

Interest Rate Risk

76
Q

Risk that comes from changes in the prices of assets due to events that affect the overall market

A

Market Risk

77
Q

Risk that the actions of a sovereign government or independent events (war, riots, etc.) may affect the ability of issuers in that country to pay off their debts

A

Sovereign Risk

78
Q

Risk associated with losses arising from exposure to foreign currency denominated assets

A

Currency Risk

79
Q

Risk associated with the possibility of having lower returns on earnings when maturing placements, or the interest earnings are reinvested.

A

Reinvestment Risk

80
Q

The risk that comes from the possibility that a borrower fails to repay his loan or meet a contractual obligation. Lenders (you or clients) are paid with interest by borrowers (company or government) for accepting credit risk. The higher the risk, the higher the interest rate paid to the lenders..

A

Credit Risk

Example:
When you buy a bond of San Miguel Corporation at 5%, you become the lender and SMC becomes the borrower. As a lender, you want to be paid interest and want your money back at the end of the term. A smaller, lesser known company like Tiny Inc. may offer you a bond with a much higher interest rate at 10%.
 Would you choose San Miguel Corporation or Tiny Inc?
 Who will you trust more to pay you back?

81
Q

This is the possibility for the Fund to be exposed to risks relating to the credit standing of its counterparties and to their ability to fulfil the conditions of the contracts it enters into with them. In the event of a bankruptcy or insolvency of a counterparty, the Fund could experience delays in liquidating the position and incur losses, including declines in the value of its investment during the period in which the fund seeks to enforce its rights, inability to realize gains on its investment during such period and fees and expenses incurred in enforcing its rights under the contracts. There is also a possibility that the above contracts are terminated due, for instance, to bankruptcy, supervening illegality or change in the tax or accounting laws relative to those at the time the contracts were originated.

A

Counterparty Risk

Example:
When you place funds with ABC Bank and the bank goes bankrupt, as a depositor, it will take time for you to recover your cash deposits which recovery is subject to PDIC rules. That is counterparty risk.

82
Q

The risk that your investment cannot be immediately converted into cash

A

Liquidity Risk

Example:
Let’s say you own stocks of the company Tiny Inc. It is a small company and not a lot of investors want to buy its stocks. Suddenly, you needed cash for an emergency, but no other investors want to buy your stocks of Tiny Inc. This makes it hard to convert your stocks into cash. Hard to sell, hard to convert into cash. The risk that your investment cannot be immediately converted into cash

83
Q

The risk that comes from the fluctuating interest rates of bonds. The actual price of a bond (magkano mo binili / binenta) can potentially be affected by changes in interest rates. As rates go up, bond prices go down and vice versa

A

Interest Rate Risk

Example:
Let’s say you own a bond with 5% coupon rate (interest rate), and suddenly, someone else issues a bond that pays an 8% coupon rate. Your bond will now be less attractive because who would want to buy a bond with lower returns? Therefore, you will have to sell your bond at a lower price (discount).

84
Q

The risk that comes from changes in the prices of assets due to events that affect the overall market (stock market). An event that may affect the overall market is a recession.

A

Market Risk

Example:
Let’s say you buy stocks of San Miguel Corporation. We all know that SMC is a big and stable company. But, if the stock market crashes because of a terrorist attack, then all stocks will go down including SMC. Therefore, the change in the price is due to an event and NOT the performance of the company. That is market risk

85
Q

The risk that comes from a collection of risks that affect a foreign country you are invested in. This collection of risks include political risk, fx risk, economic risk, sovereign risk or transfer risk. This risk varies from country to country.

A

Country / Sovereign Risk

Example:
Let’s say you are planning to buy foreign bonds and you are choosing between Country A or Country B. However, there is a lot of political disputes and terrorism threats in Country A. Because of these issues, there is a bigger possibility that Country A will default on their debts, so you choose to buy bonds from Country B. This shows that Country A has more country risk

86
Q

The risk that comes from investments losing value because of the changes in currency rates. Usually, this affects business that import or export goods or investors that make international investments.

A

Currency / Foreign Exchange Risk

Example:
Let’s say the dollar exchange rate is currently $1:Php1. You buy a US bond for $1,000 with a 10% coupon rate. After a month, the exchange rate becomes $0.6:Php1. Now, the bond issuer still makes $100 coupon payments to you, but in reality, the value of this payment has decreased to just $60 because of the new exchange rate

87
Q

The risk that comes from lower available interest rates after a previously owned bond with a higher interest rate has been paid for completely. In other words, you cannot find rates as good as what you had before.

A

Reinvestment Risk

Example:
Let’s say you own a bond that earns 5% interest. However, when that bond matured, the highest interest rate that you can find from new bonds is just 4%. This shows that you can only reinvest your earnings from the previous bond in a new bond that offers a lower interest rate. This shows reinvestment risk

88
Q

The Power of Diversification

A

There is NOT A SINGLE product that address all these needs simultaneously
but….
Several investment product can be package together to achieve the required results

COMBINATION

89
Q

is the process of allocating investments in a way that reduces the exposure to any one particular asset or risk. It aims to maximize returns by investing in different area that would each react directly to the same event.

A

Diversification

90
Q

Importance of Diversification:

A

 Minimizing Risk of Loss
 Reducing Volatility
 Maximizing Potential Returns

91
Q

A systematic combination of investment instruments to produce an OPTIMAL COMBINATION of:


A

Portfolio Management

 Liquidity
 Returns
 Risk

92
Q

The Basic Principle of Modern Portfolio Theory

A

→ Horizon Matching
→ Cash Flow Matching
→ Goals Based Investing

93
Q

when do you need the cash

A

Horizon Matching

94
Q

are coupons/ dividends/maturities enough to meet cash liars

A

Cash Flow Matching

95
Q

what is the intentions? Income supplement, education of children, family home, retirement

A

Goals Based Investing

96
Q

Through diversification, investors ACHIEVE:

A

 Higher returns for the same level of Risk
 The same return for a lower level of risk

bhdfbuygffihrnknsahoe (6 decks)

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