Basics of Investing

Question 1

calculate gross return from net return

Answer 1

net return * 1+ inflation rate + inflation rate

Question 2

GIC Taxation

Answer 2

Taxable at end of gic year.
Market linked taxed in year of maturity
Corporate GICs taxed on accrual basis (principal * int rate * days in year).
Need to account for compounding on GIC (ex difference in fv between year 4 and 5 will determine interest payable in year 5)

Question 3

Underwriting

Answer 3

Bought deal - buys all securities and tries to sell with clients
best efforts - act as middle man for issuer

Question 4

Red herring prospectus

Answer 4

allows potential buyers to express interest in offering.

Question 5

Bond calculation c/y and p/y

Answer 5

always default to 2 for each setting

Question 6

Investment grade bond

Answer 6

bbb or baa

Question 7

explain how duration affects a bonds price and calculation

Answer 7

duration of 5 means has its price change by 5% if interest rates change by 1%. 100 - duration/100 * price of bond

Question 8

Immunization

Answer 8

diversification of bond durations, use a mix of high and low durations. steady stream of bonds maturing along the way

Question 9

Strip bond calc

Answer 9

can use p/y as 1 or 2. both acceptable

Question 10

Bond Types
(retractable, extendible)

Answer 10

retractable - can be taken back by investor
extendiblle - pay more interest during extended period (at the investors option)

Question 11

Ex-dividend and date of record

Answer 11

date of record, shareholders are eligible to receive dividend. 1-2 days before is the ex-dividend when shares no longer trade with rights (must buy before ex-dividend date)

Question 12

preferred shares taxation and yield and value chages

Answer 12

taxed as dividend, owed before common shareholders, can be fixed for a period but adjusted for a floating rate afterwards. Share price goes up when dividend yields fall and down when dividend yields rise. move more like bonds. preferred share price = quarterly dividend * 4/dividend yield

Question 13

Commercial paper

Answer 13

short term, highly liquid, corporate debt

Question 14

t-bill yield calculation

Answer 14

either maturity value - purchase price/purchase price * 365/days until maturity) or financial calculator (90 day t-bill would have c/y and p/y set as 4 and xp/y as days / 365

Question 15

Changes in rates calculation

Answer 15

calculate pv of t-bill is worth with days remaining and then calculate with new interest rate to determine capital gain or loss.

Question 16

spread or straddle optins

Answer 16

straddle is 2 opposing positions, call and option
spread is purchasing similar contracts with different expiries

Question 17

Sharpe Ratio

Answer 17

return - risk free return/ std. dev.

Question 18

CAPM

Answer 18

risk free rate + (beta *(market return - risk free rate)

Question 18

treynor

Answer 18

return - risk free return/beta

Question 19

Jensen’s measure (or alpha)

Answer 19

portfolio return - capm (essentially alpha)

Question 20

Cap Sizes

Answer 20

o Mega Cap: In excess of $200 billion.
o Large Cap: Between $10bn and $200bn.
o Mid Cap: Between $2bn and $10bn.
o Small Cap: Between $300M and $2bn.
o Micro Cap: Between $50M and $300M

Question 21

Cash Includes

Answer 21

fixed income/gics with one yeaer to maturity, or t-bills, savings

Question 22

Investor behaviour (loss aversion example)

Answer 22

investors will take a 100% of a small gain or a smaller chance of a large gain but would risk losing more money to avoid a loss at all in other scenario

Question 23

Biases

Answer 23

availability - only base decisions on what you know and dont seek out other information