Asset test 2 Flashcards
Face Value
Principle of a bond
Coupon Rate
interest payment
Maturity
When you receive the principle
Yield to Maturity
Actual Return
Credit Rating
S&P - AAA AA
Moodys - Aaa Aa
Macaulay Duration
Measures effective bond maturity
weighted average of the times until each payment, with weights proportional to the present value of payment
Chart on OCT 6
Modified duration
duration: how sensitive to interest risk, find out more
Interest rate vs. price
higher price, more interest
Lower price, less interest fr
Discount and premium bonds
Premium Bond: when price>face value
Discount bond: when price<face value
comparing different rates of discount and premium bonds
write down chart on OCT 1st pp
investment grade bonds
Rated BBB and above by S&P or Baa and about by Moody
call feature
Allow issuer to redeem bond prior to maturity
convertible and calculation
holders have the option of converting the stock
CV=PAR/CP * Ps
municipal bonds
issued by munipalities
Non taxable at the federal state and local level if you live in the issuing state
Write this down-chart on OCT 1st
risk of bonds
Credit risk: risk of default Interest rate risk Exchange Rate risk Inflation risk Call risk
expectation hypothesis
yields to maturity determined solely by expectations of future short-term interest rates or inflation rates
liquidity hypothesis
investors demand a risk premium on long-term bonds
bond management strategies
Bullets: Mainly use Zero-Coupon bond
cash flow matching
generate cash outflow in a certain date
Barbells
owing both short and long term bond
Laddered strategy
cash management: relatively liquid
Reduce interest risk(hold till maturity)
immunization
Strategy to shield net worth from interest rate movements
two offsetting interest rate risks: price risk and reinvestment rate
Math the duration with the investment horizon
convexity
curvature of a price-yield relationship of bond
More convexity= greater price increases, smaller price decreases when interest rates fluctuate by larger amounts
IPO
Initial Public Offerings
Issuer and banker put on road show
IPOs are under priced at first
sells in primary market to institutional clients
money left on the table
and then under perform in secondary market
why firms issue stock
private company needs investment capital
Owner wishes to diversify wealth
Private investors/venture capitalist want to cash out
Private owner thinks more valuable public than private
Existing public firm wants more equity capital
Provides some voting rights
Board provides oversight and ensures managers look out for interest of shareholders
Stocks also give investors a right to dividends
type of orders
Market order: execute immediately at best price
Bid price: price at which dealer will buy security
Ask price: price at which dealer will sell security
WRITE SLIDE DOWN
when to pay dividends
WRITE DOWN SLIDE
dividend yield
% Return I get from dividends
dividend distribution
WRITE DOWN SLIDE
stock repurchase
firm buys back stocks on open market
increases value of remaining shres
stock splits
WRITE DOWN SLIDE
buying on margin
SLIDES
margin call
notification from broker that you must put up additional funds or have position liquidated
short sale
sale of shares not owned by investor but borrowed through broker and later purchased to replace loan
Write slide down
valuation ratios and characteristics
formulas write them down
constant-growth DDM
form of DDM that assumes dividends will grow at a constant rate Implies stocks value greater if: Larger dividend per share Lower market capitalization rate, k Higher expected growth rate of dividends
market indices and examples
SLIDES
price vs. value weighted
Value Weighting larger stocks dominate index performance characteristics reflect size Equal/Price wrighting smaller stocks more important tend to be more volatile, higher beta higher expected return
open-end fund and characteristics
slides
closed-end fund and characteristics
slides
REITs
slides
international funds
invest outside the US
regional funds focus on particular part of the world
Emerging market funds invest in developing nations
life cycle funds
Shift assets toward safety as retirement nears
Allocation changes are you age
Life cycle funds- diversified
Popular format is a target retirement fund
QDIA investment options
morning star style boxes
slides
Mutual fund market segments
SLIDES
BHB study
Slides
things that ruin returns
cash holdings size heavy trading and brokerage expenses Larger turnover and redemption Poor investor timing in funds
MF share classes (A, B, C, I)
slides
active vs. index fund
DONT KNOW
MF tax rules
Fund not taxed if diversified and income distributed
Investor taxed on capital gain and dividend distributions
Turnover: ratio of trading activity to assets of portfolio
Portfolio turnover may affect investors tax liability
ETFs.
Exchange traded funds Mainly fees and taxes, lower cash holding Traded in secondary market near NAV Passively managed Can trade like stocks Short, buy on margin
call option
/
put option
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when to use option
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why to use option
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intrinsic value
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gain or loss of option transaction
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in (or out of) the money
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