Basics of Investing Flashcards
calculate gross return from net return
net return * 1+ inflation rate + inflation rate
GIC Taxation
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)
Underwriting
Bought deal - buys all securities and tries to sell with clients
best efforts - act as middle man for issuer
Red herring prospectus
allows potential buyers to express interest in offering.
Bond calculation c/y and p/y
always default to 2 for each setting
Investment grade bond
bbb or baa
explain how duration affects a bonds price and calculation
duration of 5 means has its price change by 5% if interest rates change by 1%. 100 - duration/100 * price of bond
Immunization
diversification of bond durations, use a mix of high and low durations. steady stream of bonds maturing along the way
Strip bond calc
can use p/y as 1 or 2. both acceptable
Bond Types
(retractable, extendible)
retractable - can be taken back by investor
extendiblle - pay more interest during extended period (at the investors option)
Ex-dividend and date of record
ex-dividend is 1 day before date of record. shares purchased on the ex-dividend date not eligible for dividend, must be day before.
preferred shares taxation and yield and value chages
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
Commercial paper
short term, highly liquid, corporate debt
t-bill yield calculation
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
Changes in rates calculation
calculate pv of t-bill is worth with days remaining and then calculate with new interest rate to determine capital gain or loss.
spread or straddle optins
straddle is 2 opposing positions, call and option
spread is purchasing similar contracts with different expiries
Sharpe Ratio
return - risk free return/ std. dev.
CAPM
risk free rate + (beta *(market return - risk free rate)
treynor
return - risk free return/beta
Jensen’s measure (or alpha)
portfolio return - capm (essentially alpha)
Cap Sizes
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
Cash Includes
fixed income/gics with one yeaer to maturity, or t-bills, savings
Investor behaviour (loss aversion example)
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
Biases
availability - only base decisions on what you know and dont seek out other information
