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RPA 4 > Assignment 10 - Inv. Mgmt: Income Generation > Flashcards

Assignment 10 - Inv. Mgmt: Income Generation Flashcards

1
Q
  • type of cash-equivalents
  • $-denominated acct or CD issued by branches of foreign banks in the U.S.
A

yankee CD

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2
Q
  • type of inv. comp. that invests in a fixed portf. of securities, w/ a stated date for termination
  • generally buy/hold a relatively fixed portf. of stks, bonds or other securities
  • not actively managed
  • expenses are low due to low turnover of inv.
  • most have been municipal bond funds
A

unit investment trust (UIT)

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3
Q
  • type of cash-equivalents
  • $-denominated accts or CDs in Europe that are issued by foreign banks or foreign branches of U.S. banks
A

eurodollars

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4
Q
  • type of guaranteed principal fixed income inv.
  • fixed income inv. provided under a contract w/ a life ins. company or other fin. instit. where the issuer guarantees the P&I of the fund for a specified period
  • relies on the fin. soundness of the issuer providing the guarantee
A

stable value funds

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5
Q
  • bonds purchased in the open mkt after issuance at a price less than the face amt (sold at a discount)
  • includes any kind of bond
  • int. pd is still based on face amt
A

market discount bonds

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6
Q

total return from a bond over time is…..

A

mkt price at end of the period

minus

mkt price at beginning of the period

plus

interest paid

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7
Q

bond purchased at PAR is…..

A

mkt price of bond = value at maturity

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8
Q
  • bonds issued at price less than face amt of the bond
  • DO NOT pay interest
  • bonds are issued at signif. discounts to the par value of the bond = risk of receiving no int. pmts
A

Original Issue Discount (OID) Bonds

also - zero coupon bonds or zeros

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9
Q
  • bonds purchased in the open mkt after issuance at a price greater than the face amt of the bond
  • investor pays more than the face amt for the bond rather than paying less than the face amt
A

bonds purchased at a premium

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10
Q
  • bonds issued by private corps
  • based upon the creditworthiness of the company upon which they are based
  • can be called, or redeemed, prior to maturity
  • inv. income is taxable
A

corporate bonds

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11
Q
  • type of corporate bond
  • backed by the full credit of the corp.
  • 1st claim on all assets
A

debentures

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12
Q

corp. bonds which have a claim on corp. assets after senior debentures

A

subordinated debentures

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13
Q
  • bond issued by a local gov’t or their agencies
  • int. pmts are tax-exempt
  • callable
  • highly rated - just under US gov’t bonds
A

municipal bonds

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14
Q

(3) pillars of taxibility for municipal bonds

A
  1. int. on public-purpose municipals remains completely tax-free
  2. int. on tax-exempt private-activity municipals is exempt from regular Fed’l income taxation
  3. int. on taxable private-activity municipals is fully taxable for Fed’l income tax purposes (very few have been issued)
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15
Q

types of municipal bonds

A
  1. general obligation bonds
  2. special tax bonds
  3. revenue bonds
  4. housing authority bonds
  5. industrial development bonds
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16
Q
  • type of municipal bond
  • secured by the full faith, credit and taxing power of the issuing state or municipality
  • usually offer a high state of security
A

general obligation bonds

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17
Q
  • type of municipal bond
  • payable only from the proceeds of a single tax, a series of taxes, or some other specific source of revenue
A

special tax bonds

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18
Q
  • type of municipal bond
  • issued to fin. projects such as electrical facilities, hospitals, bridges, and expressways
  • payable only from the revenues produced by the projects they are financing
A

revenue bonds

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19
Q
  • type of municipal bond
  • issued at the local level to finance the construction of low-rent housing projects.
  • top-quality inv.
  • secured by the Fed’l Housing Assistance Admin.
A

Housing Authority Bonds

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20
Q
  • type of municipal bond
  • secured by lease pmts made by industrial companies occupying or using the facilities that the bonds finance
A

industrial development bonds

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21
Q

U.S Gov’t / Treasury Bonds….

A
  • not callable
  • taxable for Fed’l income tax
  • exempt from state/local taxes
  • int/coupon rate = taxable as oridnary int. income
  • any cap gains realized = taxable as ordinary income
  • inflation guard = treasury inflation-protected securities (TIPS)
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22
Q

types of treasury bonds

A
  1. T-bills
  2. T-notes
  3. T-bonds
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23
Q
  • type of cash-equivalents
  • treasury bond
  • highly liquid
  • issued on a discount basis
  • redeemed at face value when mature
  • maturity = 13 weeks, 26 weeks, and 52 weeks
A

T-Bills

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24
Q
  • type of treasury bonds
  • maturies from 1-10 yrs
  • issued at/near par
  • int. is paid semi-annually
A

T-Notes

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25
Q
  • type of treasury bonds
  • longer maturity periods = 10+ years
  • issued at/near par
  • int. pd semi-annually
A

T-Bonds

26
Q

registered non-callable securities

A

U.S. Savings Bonds

27
Q

types of U.S. Savings Bonds

A
  • Series EE
  • Series I
28
Q
  • type of U.S. Savings Bonds
  • sold in face-volume denominations of $50-$10,000 w/ the purchase price of paper bonds at 50% of face amt, paying no int.
A

Series EE

29
Q
  • type of U.S. Savings Bonds
  • sold at face amt and accrue earnings at a composite rate consisting of a fixed rate and an inflation rate until they are redeemed or mature in 30 yrs.
  • taxed on difference b/w purchase price and the redemption value as ordinary int. income
A

Series I

30
Q
  • investor participates in a pool of mortgages whereby the investor receives a certificate denominating his int. in the pool
  • P&I - returned to inv. each month
  • i/r risk - if rates drop, borrowers will refinance mortgages at lower rates (decreases income to investors)
  • reinvested pmts will produce lower income b/c they will be at lower rates.
A

pass-through or morgage and asset-backed securities

(Ginnie Mae)

31
Q

types of pass-through or morgage and asset-backed securities

A
  • mortgage-backed securities
  • asset-backed securities
  • collateralized mortgage obligations
  • collateralized debt obligations
32
Q
  • equity capital of a corporation
  • claim agasint assets of corp. follows bondholders, but precedes CS holders
  • fixed divs received before common s/h
  • corps can’t deduct from corp. income tax
  • no voting rights (usually)
  • can be converted into CS
A

preferred stock

33
Q
  • type of guaranteed principal fixed income inv.
  • int.-bearing, redeemable evidences of time deposits issued and sold through banks
  • sold in different amts w/ periods of few months to over a decade
  • i/r - fixed (higher rates = higher periods)
  • int. penalty for early w/drawal (penalty is deductible)
  • int. pd is fully taxable as ordinary int. income
A

traditional CDs

34
Q

example of Liquid Assets

A
  • s/t CDs
  • bank savings accts
  • MMFs
  • T-Bills
35
Q

adv. of MF’s

A
  • higher levels of disversification (for all types of investors - lg, sm, skilled, unskilled)
  • prof. investors can easily select their own inv.
  • convenience and ready mktability through funds; obs to redeem shares
  • reasonable inv. unit sizes for small investors
  • convenience for inv., reinv., and liquidation of assets
36
Q

disadv. of MF’s

A
  • servicing expenses are a portion of the offering
  • fund must align w/ an investor’s objectives, which may not always happen
  • cap gains are treated as pass-throughs, and an investor cannot control these
  • may not need prof. advice but paying for it
37
Q
  • type of MF
  • # of outstanding shares of inv. are not fixed
  • constantly changing as investors obtain and liquidate assets
  • purchase these funds from the fund and when they sell them, they prepare to buy them back.
  • pricing is based on the most recent Net Asset Value (NAV)
A

open-end mutual funds

38
Q

Net Asset Value (NAV)

A

(total value of all assets in fund - fund liabilities)

_ _

outstanding shares

39
Q
  • type of MF
  • issue a fixed # of shares, which does not fluctuate except as new stk is issued
  • shares of these funds are bought/sold on open mkt (supply and demand)
A

closed-end MFs

40
Q

level loads; annual sales fees taken against MF assets to reimburse the MF for distrib and servicing costs

A

12b-1 Fees

41
Q

sales charge declines due to previous fund purchases.

form of volume discount taken historical purchases into consideration

A

accumulation discount

(right of accumulation)

42
Q

contingent-deferred sales fees, low-loads, which charge fees if shares are redeemed w/in a few yrs of purch. or at any time

fees may or may not decline over time

A

back-end load

43
Q
  • type of cash-equivalents
  • time drafts usually used to finance internat’l trade that are guaranteed by a bank
A

banker’s acceptances

44
Q
  • hedging by buying ONLY bonds w/ durations in the form of short maturities and long maturities
  • hope is that any i/r scenario that negatively impacts one duration will not impact the other
A

Barbell Strategy

45
Q

the purch. price at which the %age sales charge declines

occurs when an investor makes larger-$ purchases

A

breakpoints

46
Q
  • type of cash-equivalents
  • s/t, unsecured loans made to creditworthy corps.
  • often purchasd by MMMFs
A

commercial paper

47
Q
  • provide the security of a bond or a PS, but also provides an opportunity for cap. appreciation through anticipated appreciation of underlying CS
  • gives holder right to convert into a certian # of shares of CS at a predetermined price for CS
  • callable
  • cost is the difference b/w yield on a convertible versus a non-convertible security
A

convertible bonds

48
Q

where an investor pays the sales charge for an open-end fund when purchasing shares

A

front-end load

49
Q

inv. mgmt and other expenses expressed as a %age of the fund’s net assets
charged by both load and no-load MFs

A

expense ratio

50
Q
  • type of guaranteed principal fixed income inv.
  • the CVs of guaranteed-$ life ins. contracts can be viewed as guaranteed princ. fixed income inv.
A

guaranteed-$ life ins. CVs

or guaranteed-$ annuity CV

51
Q

bonds w/ ratings below inv. grad (belwo the top 4 ratings of a ratings agency)

generally have higher yields than safer, higher-rated fixed income inv.

A

junk bonds

52
Q

diversify a bond portf. w/ bonds of different maturity lengths

A

laddering

53
Q

these promise the investor a stated amt of income periodically and in most cases they also promise to pay the face amt of the inv. at its maturity date

A

fixed income investments

54
Q

tax treatment of the following bond items:

  • current int. paid (state int or coupon rate)
  • mkt discount
  • original issue disc. (OID)
  • premium price pd for bond
  • earnings from bond sole or redeemed prior to maturity in excess of basis
A
  • current int. paid (state int or coupon rate) - ordinary int. income
  • mkt discount - ordinary income
  • original issue disc. (OID) - ordinary income
  • premium price pd for bond - amortize premium over remaining life of bond would reduce otherwise taxable int. on the bond or as an itemized ded.
  • earnings from bond sole or redeemed prior to maturity in excess of basis - excess amt of basis is taxable as cap gains
55
Q

an indiv. whose marginal tax rate is 31% is considering buying a public-purpose miunicipal w/ a yield of 5.5% and a corporate bond w/ a yield of 7%.
Which of the 2 inv. would provide higher A/T yield?

A

since int. from public-pupose municipal is exempt from Fed’l income tax, the after-tax return from the municipal bond is 5.5%

the A/T return on the corporate bond is .07(1-.31) = 4.38%

bond yield (1-marginal tax rate) = A/T return

therefore, the investor will receive a higher A/T return w/ the municipal bond.

56
Q

a note that pays a fixed i/r that is applied to a principals amt that is adj’d periodically for inflation or deflation based on an adj’d consumer price index

A

inflation-indexed T-Note

57
Q

tax status of zero-coupon bonds

A
  • annual amt of accrued OID is currently taxable to owner as oridnary int. income for fed’l income tax purposes (even if no cash income from the bonds is received)
58
Q

taxable vs. tax-exempt

zero coupon bonds

A
  • taxable: since int. is accrued and subj to taxation, these are usually held in tax-protected vehicles such as IRAs, qualified retirement accts, variable annuities, variable life insurance since this taxable income is not taxed currently.
  • tax-exempt: since accrued OID is not included in gross income, investors will hold them directly
59
Q
  • this type of CD is NOT redeemable before maturity.
  • can be traded before maturity on to the secondary mkt
  • if sold before maturity - value received may be less or more than the initial face amt (purchase price) depending on the mkt i/r
  • similar bonds - full-face amt is payable at maturity
  • issued by banks but usually sold through inv. firms
A

negotiable CD

60
Q
  • type of guaranteed principal fixed income inv.
  • highly liquid and are financially secur
  • s/t maturities
  • lower yield
A

cash-equivalents

61
Q

types of cash-equivalents

A
  • s/t CDs
  • bank savings accts
  • MMFs
  • T-bills
  • comm. paper
  • banker’s acceptances
  • Eurodollars
  • Yankee CDs
62
Q

(3) kinds of inv. companies

A
  1. those that sell face-amt certificates - where issuer promises to pay investor a stated amt
  2. unit investment trusts - fund invests in a fixed portf. of securities
  3. mgmt companies

RPA 4 (12 decks)

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