4/3/2023 Flashcards
Tax Free Equivelant Yield
Converting Taxable to Tax Free
Corporate Rate x (100% - Tax Bracket) = A Taxable Bond would need __% rate to be equal to a tax free bond
Tax Equivalent Yield
Converting Tax Free to Taxable
Municipal Rate / (100% - Tax Bracket) = A Tax Free Bond would need __% rate to be equal to a taxable bond
GNMA
Ginnie Mae
Government National Mortgage Association
A pool of mortgages packaged into Bonds then sold to investors
Issued and Backed By: US Treasury
(Safer Than Federal Agencies)
Pays monthly interest
FHLMC
Freddie Mac
Federal Home Loan Mortgage Corporation
A pool of mortgages packaged into Bonds then sold to investors
Issued and Backed By: Federal Agencies
Pays Semi-annual Interest
FNMA
Fannie Mae
Federal National Mortgage Association
A pool of mortgages packaged into BONDS then sold to investors
Issued and Backed By: Federal Agencies
Pays Semi-annual Interest
SLMC
Sallie Mae
A pool of STUDENT LOANS packaged into BONDS then sold to investors
Issued and Backed By: Federal Agencies
Pays Monthly Interest (Not Important for the test)
Bond Amortization
How much the bond worth decreases over time
Every year a bond gets closer to its maturity date its worth gets closer to the Par Value
every year
Premium Bonds - go down in price
Bond Accretion
How much the bond worth increases over time
Every year a bond gets closer to its maturity date its worth gets closer to the Par Value
Every Year
Discount bonds - go up in price
Has Phantom Interest
Phantom Interest
Having to pay interest on a securities growth that hasnt actually been paid to you
ie:
Bond Accertion inceases the value of the bond and so even though you didnt actually get paid the income it will be taxable
TAXED AS ORDINARY INCOME each year
When solving Questions W/ Bonds REMEMBER this
find out if its a 10,15 20 year bond
Parity Price
The Price in $s the common stock price would have to be in order to be equal to the conversion Price
If you bought a bond at a Premium/ Discount, you would have to get More/Less in stock $ value after converting to be equal to if you bought the bond at Par.
Parity Price is this $ amount it would have to be to be equal
How to solve for Parity Price
Not Actual
par/#of shares if converted = Conversion Price
Actual
CMV Bond/#of shares if converted = Parity Price
Draw the Parity Price Formula
Draw It
How to decide if you should convert a convertible security or not
if CMV of stock is greater than or equal to parity price then yes
When calculating the parity price do you use the par value or CMV of the Bond?
CMV
Convertible Bonds
Bonds that give you the option to convert the bond into shares of company stock
Only Issued by Corporations (Not the Government)
Par Value = Conversion Price x # of Shares you can convert
The ratio would be:
# of shares : 1 (one bond)
(shares to bond not bond to shares)
Open End Fund
a Type of Mutual Fund
Continuous Primary Offering
Can Buy Full or Fractional Shares
The company can only ISSUE Common Stock (of their company)
The funds can be whatever securities they want though (Bonds Stocks etc…)
No Secondary Market
Funds are redeemed to the fund company
Closed End Fund
A type of Mutual Fund
Has a single IPO
Can only buy full shares (no fractional)
Company can ISSUE Common Stock, Preffered Stock, or Bonds (of their company)
The funds can be whatever securities they want though (Bonds Stocks etc…)
Has a Secondary Market
Investor sells its shares to other investors
(not back to the investment company)
UIT
Unit Investment Trust
A Pool of Investor’s Funds that is invested
Then is NOT actively managed by the company
(basically they invest the funds then let it ride)
2 Types:
Fixed Portfolio - Contains
-Bonds
-Fixed Securities
Non Fixed Portfolio - Contains
-Mutual Fund Shares
(gives investors who cant reach mutual fund minimums a way to invest in them by pooling others money with theirs)
Fixed UIT
Fixed Portfolio - Contains
-Bonds
-Fixed Securities
Non-Fixed UIT
Non-Fixed Portfolio - Contains
-Mutual Fund Shares
(gives investors who cant reach mutual fund minimums a way to invest in them by pooling others’ money with theirs)
What is a Common Stocks Par Value
Par Value = What Its Worth
Price = What it Costs
Mutual Fund has what types of employees
Board of Directors - defines investment objectives
Investment Advisor - manages the investment portfolio
Custodian Bank - holds the funds cash and securities
The transfer agent - issues cancels and redeems shares
Duration
How quickly Until we get our investment back
Coupon Rate = High => Lower Duration
Time to Maturity = High => Higher Duration
Margin
Means Buying a Securities w/ a Loan
Required to put down 50% of the Securities price
the other 50% can be loaned
Components:
DB (Debt balance)
+Down
+Excess Equity
=LMV (Long Market Value)
Regulation T for Buying on Margin
When buying on Margin you must put down 50% of the price on your own
If Margin Excess Equity is positive
You can borrow up to 50% of this amount aswell as the amount that you initially put down
If Margin Excess Equity is negative
You must have 25% minnimum Equity in account at all times
SMA
Special Memorandum Account
When buying on Margin if the Securities are up in value you can use 50% of the excess equity to buy even more on margin
Margin Maintenance Requirement
When buying on Margin whether the securities go up or down in value you must maintain at least 25% in equity at all times
If not you will get issued a margin call
Margin Call
if your margin LMV ends up with less than 25% in actual equity you get issued a margin call
the company demands you put more money or securities into the account to reach at least 25%
if paid in cash it can be 100% all cash
if paid in more securities only 50% added counts toward the amount needed
(because they are more securities they are counted for Regulation T’s 50% rule)
Bond Ratings Companies
Moodies and S&P
Where is the line between Investment Grade and Junk Bonds
Moddies - above Baa = Investment grade
S&P - above BBB = Investment grade
Statutory Voting Rights
Cannot Pool Votes
Favors Large Investors
Cumulative Voting Rights
Can Pool Votes
Favors Small Investors
Preemptive Rights
Also Known as Anti-Dilution Rights
gives you the option to maintain your current % ownership of the company
you have to pay (buy more securities) to maintain that ownership
NOT offered to preferred Stock holders only common
Difference between stock Rights and Warrants
Rights - Short term usually 2 yrs or less
Warrants - Long term 5-10 years (or forever)
Ex-Rights
The subscription Period for the rights is over
Prior Rights
The subscription period is still in effect
This means to calculate anything you have to increase the # of rights by 1
Cum Rights
Same as Prior Rights
The subscription period is still in effect
This means to calculate anything you have to increase the # of rights by 1
The subscription period for warrants and rights
is the period of time where you can still exercise the right/warrant to gain stock in the company
Formula forRights and Warrants
of rights + Conversion Price = Price of on Stock
Preferred Stock Par value
$100 unless otherwise stated
Cumulative Preferred Stock
The company has to pay ALL missed dividends that should have been paid to PREFERRED STOCK holders before they can pay dividends to any COMMON STOCK holders
Non-Cumulative Preffered Stock
The company DOES NOT have to pay all missed dividends that should have been paid to PREFERRED STOCK holders before they can pay dividends to any COMMON STOCK holders
But they do have to pay that years dividend to preferred stock before they can pay one to common
Adjustable Preferred Stock
—On the test—
Same as Variable Preferred
Company can adjust the dividend % semi-annually and the change is linked to an index (ie S&P 500)
Variable Preferred Stock
—On the test—
Same as Adjustable Preferred
The company can adjust the dividend % semi-annually and the change is linked to an index (ie S&P 500)
what is the compound interest formula
P(1+(i/n)^(n*t)
P - Principle Value
i - Interest rate
n - number of times it compounds per year
t - number of years
Use this when calculating TIPS questions
