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CFP > Book 3 Pages 1-51 > Flashcards

Book 3 Pages 1-51 Flashcards

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1
Q

what are the different maturities of T-bills?

A

4, 13, 26, 52

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2
Q

what is the minimum purchase amount in regards to T-bills?

A

$100

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3
Q

do T-bills have default risk?

A

no

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4
Q

are T-bills subject to original issue discount rules?

A

no

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5
Q

when is interest income paid under T-bills?

A

at maturity

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6
Q

is interest income taxed at the federal level in regards to T-bills?

A

Yes

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7
Q

is interest income taxed at the state level in regards to T-bills?

A

no

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8
Q

publicly traded, short term, unsecured promissory notes issued by companies to raise cash to finance accounts receivable and inventories

A

commercial paper

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9
Q

true or false?

commercial paper is issued in denominations of $100k

A

true

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10
Q

what is the average maturity length of commercial paper?

A

30 days

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11
Q

what is the maturity range for commercial paper?

A

1 to 270 days

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12
Q

true or false?

commercial paper has a high default risk

A

false, it is low

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13
Q

true or false?

commercial paper usually has higher yields than T-bills and CDs

A

true

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14
Q

true or false?

commercial paper interest income is taxed at federal but not state levels

A

false, it is taxed at both

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15
Q

when is commercial paper interest income taxed?

A

in the year it is earned

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16
Q

deposits placed with commercial banks at a specified interest rate for specified time period

A

CDs

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17
Q

Do CDs have high or low default risk?

A

low

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18
Q

is interest income from CDs taxed at state, federal, or both levels?

A

both levels

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19
Q

are money market accounts subject to a limited amount of withdrawals per month?

A

yes

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20
Q

when is money market interest income taxed?

A

in the year earned

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21
Q

true or false?

interest income from a money market account is taxed at federal and state levels

A

true

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22
Q

used by securities dealers to finance large inventories of marketable securities

A

repurchase agreements

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23
Q

true or false?

repurchase agreements have a short term to maturity

A

true

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24
Q

true or false?

repurchase agreements have high risk

A

false

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25
Q

under a repurchase agreement, the repurchase price is ___ than the selling price

A

greater

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26
Q

securities that act as a line of credit issued from a bank

A

banker’s acceptance

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27
Q

calculate the dollar interest based on the below info:

Assume a portfolio manager use a repurchase agreement to finance a $5million position. Assuming the repo term is one day and the repo rate is 4%

A

$5million * 4% * (1/360) = $555.55

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28
Q

debt security obligating the issuer to make payments of interest and principal on specified dates to the owner

A

individual bonds

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29
Q

if the market interest rate is greater than a bonds coupon rate the bond will be issued at a ___

A

discount

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30
Q

if the market interest rate is less than a bonds coupon rate the bond will be issued at a ___

A

premium

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31
Q

A 5% coupon bond will pay $___ per $1,000 bond

A

$50

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32
Q

true or false?

zero coupon bonds sell at a discount

A

true

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33
Q

do zero coupon bonds have reinvestment rate risk?

A

no

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34
Q

bonds registered with the issuing company and payments are made to the owner of record

A

registered bonds

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35
Q

unregistered bonds in which payments are made to the bondholder

A

bearer bonds

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36
Q

record of ownership held electronically in a central depository allowing for greater efficiency in bond transactions

A

book-entry form

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37
Q

established and funded each year by the bond issuer to accumulate sufficient funds to pay off the debt upon maturity, held by a trustee

A

sinking funds

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38
Q

issued in terms up to 10 years and have a $100 minimum purchase

A

treasury notes

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39
Q

issued in terms of 30 years and have $100 minimum purchase

A

treasury bonds

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40
Q

are treasury notes/bonds exempt from state income tax?

A

yes

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41
Q

marketable securities whose principal is adjusted by changes in the CPI (consumer price index)

A

treasury inflation protected securities (TIPS)

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42
Q

what are the different maturities available under TIPS?

A

5, 10, 30 years

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43
Q

calculate the semiannual inflation rate based off the below info:
a TIPS has a 4.5% coupon rate and the annual inflation rate is 4%. On January 1st an investor purchases $100,000 of par value.

A

$4% / 2 = 2%

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44
Q

calculate the inflation adjusted principal at the end of a 6 month period:
a TIPS has a 4.5% coupon rate and the annual inflation rate is 4%. On January 1st an investor purchases $100,000 of par value.

A

$100k x [1 + (4%/2)] = $102,000

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45
Q

calculate the inflation adjusted coupon payment at the end of a 6 month period:
a TIPS has a 4.5% coupon rate and the annual inflation rate is 4%. On January 1st an investor purchases $100,000 of par value.

A

$100k x [1 + (4%/2)] = $102,000

$102,000 * (4.5% / 2) = $2,295

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46
Q

does TIPS interest income get taxed at the state level?

A

no

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47
Q

does TIPS increase in principal get taxed at the state level?

A

no

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48
Q

does TIPS increase in principal get taxed at the federal level?

A

yes

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49
Q

permit investors to hold and trade the individual interest and principal components of eligible treasury notes and bonds as separate securities

A

treasury strips (Separate trading of registered interest and principal of securities)

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50
Q

true or false?

Savings EE bonds must be held for at least 12 months

A

true

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51
Q

what is the penalty for redeeming Savings EE bonds within 5 years of issue?

A

3 month interest penalty

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52
Q

true or false?

Savings EE bonds are subject to state income tax

A

false

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53
Q

is interest tax deferred under a Savings EE bond?

A

yes

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54
Q

is interest income from Series HH bonds taxed at state levels?

A

no

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55
Q

true or false?

Series HH bonds have been discontinued

A

true

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56
Q

offer a fixed interest rate that can earn interest up to 20 years

A

Series HH bonds

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57
Q

represents an ownership claim on a pool of mortgages, most commonly on residential property

A

mortgage backed securities

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58
Q

mortgage backed securities that have no default and are government backed

A

Ginnie Mae (GNMA)

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59
Q

what risks are mortgage backed securities subject to?

A

interest rate risk
prepayment risk
reinvestment rate risk

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60
Q

mortgage derivatives created by private investment firms

A

collateralized mortgage obligations (CMO)

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61
Q

what are the three types of payments received under a mortgage backed security?

A

scheduled interest
scheduled principal
unscheduled principal

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62
Q

what risks are collateralized mortgage obligations subject to?

A

market risk
prepayment risk
liquidity risk
interest rate risk

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63
Q

bonds that are repaid from the revenue generated from the financed project

A

revenue bonds

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64
Q

bonds that are backed by the full faith and credit of the municipality issuing the debt

A

general obligation bonds

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65
Q

issued to finance community capital improvements

A

general obligation bonds

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66
Q

issued by municipalities to finance specific projects

A

revenue bonds

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67
Q

true or false?

revenue bonds are less risky than general obligation bonds

A

false, revenue bonds are more risky

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68
Q

bonds where more than 10% of the proceeds of the issue are used for private business and more than 10% of the payment of the principal and interest is secured by an interest in property to be used for private business or derived from payments for property used for private business

A

Private activity bonds

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69
Q

a specified series of bonds that mature each year until the final year of maturity

A

Serial Bonds

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70
Q

what is the tax equivalent yield of the following municipal bond:

yield of muni bond = 5% and the tax payer is in the 25% tax bracket

A

5% / (1 - 25%) = 6.67%

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71
Q

a legal document that sets forth repayment schedule, redemption rights, and amount of issue

A

indenture agreement

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72
Q

bonds that have a legal claim to specific assets in the event of default, insolvency, or liquidation

A

Secured bonds

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73
Q

true or false?

secured bonds generally have lower yields than unsecured bonds

A

true

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74
Q

bonds that are backed by real estate, land, or property

A

mortgage bonds

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75
Q

bonds secured by stocks and bonds of other companies held in trust

A

collateral trust bonds

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76
Q

bonds not backed by collateral

A

debentures

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77
Q

true or false?

subordinate debentures have high yield than secured bonds and regular debentures

A

true

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78
Q

bonds that have a high probability of payment of interest and repayment of principal

A

investment grade bonds

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79
Q

what agencies rate bonds?

A

standard and poors
Fitch
Moody’s

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80
Q

what ratings are considered investment grade?

A

anything BBB or higher

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81
Q

bonds that have a significant risk of defaul

A

non-investment grade bonds

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82
Q

what ratings are considered non-investment graded?`

A

anything BB+ or lower

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83
Q

what other names do non-investment grade bonds go by?

A

junk or high yield

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84
Q

what is the lowest bond rating by Standard and Poor’s?

A

D

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85
Q

allows the issuer to redeem a bond issue before its maturity date, either in whole or in part

A

callable bond

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86
Q

corporate bonds that may be exchanged for a fixed number of shares of the issuing company’s common stock

A

convertible bond

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87
Q

true or false?

convertible bonds usually have a lower yield than regular bonds

A

true

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88
Q

the price that is paid for each share of common stock that is acquired through the conversion of the security

A

conversion price

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89
Q

the number of shares of the issuing company’s common stock that can be acquired by exchanging the convertible security

A

conversion ratio

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90
Q

how do you calculate the conversion ratio?

A

par value of convertible security / conversion price

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91
Q

represents the cost of each share of stock obtained through the conversion

A

market conversion price

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92
Q

calculate the market conversion price based off the following info:
if the market price of the convertible bond is $1,100 and 50 shares of common stock can be obtained

A

$1,100 / 50 = $22

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93
Q

represents the value of the bond if it were converted based on current market conditions

A

conversion value

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94
Q

calculate the conversion value based on the following info:

if ABC company was trading at $70 per share and its convertible bond had a conversion ratio of $15

A

$70 x $15 = $1,050

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95
Q

true or false?

you have pay taxes on the conversion of a security into common stock

A

false

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96
Q

true or false?

corporate bonds offer high yields than government bonds

A

true

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97
Q

true or false?

Yankee bonds are traded in the United States on exchanges or OTC markets

A

true

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98
Q

true or false?

Eurodollar bonds are traded in the United States

A

false

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99
Q

true or false?

Eurodollar bonds are registered with the SEC?

A

false

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100
Q

true or false?

Yankee bonds are registered with the SEC

A

True

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101
Q

true or false?

Foreign pay bonds are registered with the SEC

A

False

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102
Q

True or false?

Foreign pay bonds are issued and traded overseas

A

true

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103
Q

are foreign pay bonds subject to exchange rate risk?

A

Yes

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104
Q

true or false?

if the exchange rate goes from 1.50 per 1.00 to 1.40 per 1.00 you will lose principal on a foreign pay bond

A

true

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105
Q

a promise to pay a certain sum of money at a prescribed time or to make a series of payments over a certain period

A

promissory notes

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106
Q

type of investment that has a guaranteed rate of return for a fixed time period and is primarily sold to pension plans

A

Guaranteed Investment Contract

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107
Q

true or false?

guaranteed investment contracts have low default risk

A

true

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108
Q

states that one share of common stock permits one vote for each vacant position on the board of directors

A

statutory

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109
Q

states that a shareholder can cast votes equal to the number of vacant positions on the board of directors multiplied by the number of shares owned

A

cumulative

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110
Q

give an example of statutory voting

A

shareholder has 100 shares, there are two vacant positions…. this means the shareholder can put 100 votes towards each vacant position

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111
Q

give an example of cumulative voting

A

shareholder has 300 shares, there are three positions vacant…this means the shareholder can cast 300 total votes combined between the 3 vacant spots

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112
Q

true or false?

cumulative voting protects minority shareholders

A

true

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113
Q

entitles existing common stockholders the right to maintain ownership percentage

A

preemptive right

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114
Q

allows stockholders to purchase common stock below the current market price

A

rights offering

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115
Q

stock held by brokers on behalf of investors

A

street name stock

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116
Q

the date the board of directors approves and declares that a dividend will be paid

A

declaration date

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117
Q

the date on which the stock begins trading without the dividend; investors who held the stock on the day before this date will receive the dividend

A

ex-dividend date

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118
Q

the date by which stock trades must be settled for shareholders to receive the dividend

A

record date

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119
Q

when is the record date for common stock?

A

two business days after the ex-dividend date

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120
Q

the date the company actually pays the dividend to the shareholders

A

payable date

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121
Q

true or false?

the corporation paying the dividend receives a tax deduction

A

false

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3
4
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122
Q

if a company is worth $11million with 1 million shares outstanding and issues a 10% stock dividend, what will the stock price of the company be?

A

1 million x 10% = 100,000 new shares

$11 million / 1.1 million shares = $10 per share

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123
Q 
true or false?
stock dividends (different than regular dividends) received by the investor are taxable
A

false

124
Q

commonly used to reduce the market price per share of the stock

A

stock splits

125
Q

if an investor owns 100 shares of a company that trades at $150 per share and the company declares a 3 to 1 stock split how many shares will the investor own and at what price?

A

300 shares at $50 per share

$150/3 = $50) (100 x 3 = 300

126
Q

used to reduce the total number of shares outstanding

A

reverse stock split

127
Q

an investor owns 500 shares of stock with a price of $2 per share. The company declares a reverse stock split of 5 for 1, how many shares will the investor own and at what price?

A

100 shares at $10

500/5 = 100) ($2 x 5 = $10

128
Q

true or false?

Blue chip stocks are represented by the DJIA

A

true

129
Q

issued by highly regarded, cash flow stable companies

A

blue-chip stocks

130
Q

true or false?

blue chip stocks usually don’t pay dividends

A

false, they usually do

131
Q

issued by companies with sales, earnings, and market share growth rates exceeding those typical of the industry

A

growth stocks

132
Q

true or false?

growth stocks usually pay a dividend

A

false, they don’t usually pay dividends

133
Q

true or false?

growth stocks usually have high price to earnings ratios

A

true

134
Q

stocks that tend to prosper during economic expansion and perform poorly during contractions

A

cyclical stocks

135
Q

what industries will you typically find cyclical stocks in?

A

automobile, construction, air travel

136
Q

stocks currently trading at prices that are low considering their historical earnings and asset values

A

value stocks

137
Q

true or false?

value stocks usually have low price to earnings ratios

A

true

138
Q

stocks relatively unaffected by economic fluctuations

A

defensive stocks

139
Q

stocks affected by changes in market interest rates

A

interest sensitive stocks

140
Q

what industries are you most likely to find interest sensitive stocks?

A

insurance
financials
construction
real estate

141
Q

preferred stock is an example of a ____, there is no fixed maturity date

A

perpetuity

142
Q

true or false?

preferred stock usually has a fixed dividend

A

true

143
Q

a hybrid security with features of both equity and debt securities

A

preferred stock

144
Q

what is the value of the dividend that would be paid under the following preferred stock:

A $100 par 5.5% issue

A

$5.50 annually per share

145
Q

states that unpaid preferred stock dividends from prior years must be paid before dividends are paid to common stockholders

A

cumulative preferred

146
Q

states that shareholders are not paid missed dividends

A

straight preferred

147
Q

states that shareholders are paid a regular fixed dividend plus an additional dividend if common stock dividend exceeds a specified amount

A

participating preferred

148
Q

stock issued with the right to convert the preferred shares into a specified number of common shares

A

convertible preferred

149
Q

stock issued that gives the company to repurchase preferred shares from investors at a stated call price after a specified date

A

callable preferred

150
Q

trust receipts issued by a US bank for shares of a foreign company purchased and held by a foreign branch of the bank

A

ADR (american depository receipts)

151
Q

true or false?

exchange rate risk is completely eliminated with ADR’s

A

false

152
Q

corporation or trust that pools investors’ money and uses proceeds to invest in a portfolio of securities

A

investment companies

153
Q

to be classified as an investment company what four characteristics must be present?

A
  1. at least 90% of income derived from interest, dividends, and capital gains
  2. at least 90% of taxable income distributed to shareholders
  3. 25% or less of the value of a fund’s assets invested in the securities of one issuer
  4. for 50% of the portfolio, investment in any one issuer limited to 5% of the total assets of the fund and 10% of the outstanding voting securities of such issuer
154
Q

true or false?

unit investment trust (UIT’s) are self liquidating

A

true

155
Q

true or false?

unit investment trusts are actively managed

A

false

156
Q

true or false?

shares of a close end investment company are traded in the secondary market

A

true

157
Q

true or false?

close end investment companies usually have a fixed capitalization

A

true

158
Q

true or false?

open end investment companies are mutual funds

A

true

159
Q

true or false?

mutual funds are not traded in the secondary market

A

true

160
Q

true or false?

mutual funds have a fixed market cap

A

false, it varies

161
Q

funds that focus on capital appreciation

A

aggressive growth stock funds

162
Q

true or false?

aggressive growth stock funds have higher risk

A

true

163
Q

true or false?

aggressive growth stock funds have lower turnover

A

false

164
Q

____ funds are similar to aggressive growth funds but have less volatile stocks

A

growth

165
Q

funds that focus on capital appreciation and current income

A

growth and income funds

166
Q

funds that invest in domestic and foreign securities

A

global fund

167
Q

funds that invest in companies outside the US

A

international funds

168
Q

funds that invest in foreign markets of developing countries

A

emerging markets fund

169
Q

bond funds that focus on tax-free income

A

municipal funds

170
Q

investment in junk bonds or higher level income bonds

A

high yield funds

171
Q

funds that invest in a fixed percentage of stock and bonds or money market securities

A

balanced funds

172
Q

true or false?

money market funds are used as an emergency fund

A

true

173
Q

if a client is concerned with maximizing current income which type of fund suits them?

A

corporate bond fund

174
Q

if a client is concerned with growth what type of fund suits them?

A

stock fund

175
Q

if a client is concerned with income (current or not) what type of fund suits them?

A

bond fund

176
Q

if a client is concerned with immediate liquidity what type of fund suits them?

A

money market fund

177
Q

if a client is concerned with tax relief what type of fund suits them?

A

muni bond fund

178
Q

a sales charge that is deducted from the initial investment

A

front-end sales charge

179
Q

a sales charge that is deducted upon withdrawal from the fund

A

back-end sales charge

180
Q

fees for marketing and advertising expenses

A

12b-1 fees

181
Q

pays for general operating expenses of the mutual fund

A

admin and management fees

182
Q

what type of share class has a front end load

A

Class A Shares

183
Q

what type of share class has a back end load

A

Class B Shares

184
Q

generally speaking B shares have a ___ 12b-1 fee than A shares

A

higher

185
Q

what share class has a back end load for the first year only?

A

Class C Shares

186
Q

if a fund has a turnover rate of 100% or more, the fund is generally holding its securities for ___ than a year

A

less

187
Q

higher turnover results in ___ transaction costs

A

higher

188
Q

higher turnover can lead to ___ taxable income for the investor

A

more

189
Q

changes in fund’s investment style affect the investor’s asset allocation

A

style drift

190
Q

calculate the investors adjusted basis and capital gain in the following scenario:

tommy invested $10k into a mutual fund two years ago. He elected to reinvest all his capital gains and dividends. Last year he received dividends of $500 and cap gains of $200. This year he received $700 of dividends and $300 of cap gains. He sold his shares at the end of this year for $20,000

A

his adjusted basis = ($10k + 200 + 500 + 700 + 300) = $11,700

his capital gain from sale = $20k - $11,700 = $8,300

191
Q

private partnerships that use advanced investment strategies in an effort to achieve higher returns

A

hedge funds

192
Q

what risks are associated with hedge funds?

A

leverage
short selling
riskier investment options
lack of transparency (don’t disclose a lot of info)

193
Q

true or false?

a hedge fund manager charges a performance based fee

A

true

194
Q

what is difference between the trading strategies of an investment company and a hedge fund?

A

hedge fund managers usually makes use of derivatives, leveraging, short selling

195
Q

true or false?

hedge funds generally do not have daily liguidity

A

TRUE

196
Q

security whose value is derived from the value of an underlying secuirty or asset

A

derivative

197
Q

contracts between two parties to make or take delivery of a specific commodity or financial asset of a specified quality at a future time, place, and unit price

A

Futures

198
Q

futures that involve currency and interest rates

A

financial futures

199
Q

futures that involve wheat, sugar, and lumber

A

agricultural futures

200
Q

futures that involve oil and gas

A

mineral futures

201
Q

what are three examples of future contract exchanges?

A

New York Mercantile Exchange
Chicago Mercantile Exchange
Chicago Board of Trade

202
Q

true or false?

derivatives require a margin account

A

true

203
Q

what is the initial margin of a derivative equal to?

A

initial deposit

204
Q

the current price of the commodity

A

spot rate

205
Q

maximum change in a commodity’s price that is permitted during the trading day

A

daily limit

206
Q

the number of contracts outstanding for a particular futures contract

A

open interest

207
Q

price specified in the contract for future delivery of the commodity

A

futures price

208
Q

the required minimum balance of a derivative

A

maintenance margin

209
Q

what is the purpose of hedging?

A

to reduce risk associated with fluctuating commodity prices

210
Q

give an example of a short hedge?

A

farmer is long in wheat, he could go short in a wheat futures contract

211
Q

if September wheat contract is currently selling for $3.10 per bushel and a farmer locks in his future wheat price at $3.10 what happens in September of next year when the wheat price is $4 per bushel

A

the farmer is locked into his $3.10 price so he will lose $0.90 per bushel

212
Q

how are gains or losses treated in regards to futures contracts?

A

60% long term and 40% short term regardless of holding period

213
Q

the right to purchase the underlying security for a specified price within a specified period

A

call option

214
Q

when the writer of the option owns the underlying security

A

covered call option

215
Q

when the writer of the option does not own the underlying secuirty

A

naked call option

216
Q

true or false?

naked call options are not risky

A

fasle

217
Q

the right to sell the underlying security for a specified price within a specified period

A

put option

218
Q

purchase of a put index option, reflective of the portfolio, to protect an investor’s portfolio against a market downturn

A

portfolio insurance

219
Q

options where the underlying security is a market index or average

A

index option

220
Q

options where the underlying security is an individual stock

A

equity option

221
Q

one option contact covers ___ shares of the underlying security

A

100

222
Q

the price per share cost of the option

A

premium

223
Q

a call option trading for $4 would cost the investor ___

A

$400

224
Q

the price at which the underlying security in an option can be bought or sold

A

exercise price

225
Q

minimum price at which an option will trade

A

intrinsic value

226
Q

true or false?

intrinsic value can be less than zero

A

false

227
Q

the difference between market price and the exercise price

A

intrinsic value

228
Q

the intrinsic value of a call option = _______

A

greater of the market price minus the exercise price

or zero

229
Q

the intrinsic value of a put option = _____

A

greater of the exercise price minus the market price

or zero

230
Q

what is the intrinsic value of the following put option:
exercise price = $25
market price = $28

A

zero

231
Q

what is the intrinsic value of the following call option:
exercise price = $72
market price = $78

A

$6

232
Q

what is the intrinsic value of the following put option:
exercise price = $30
market price = $29

A

$1

233
Q

what is the intrinsic value of the following call option:
exercise price = $50
market price = $45

A

$0

234
Q

the greater an option’s time to expiration the ____ it’s time value

A

greater

235
Q

the greater an option’s volatility the ___ it’s time value

A

greater

236
Q

what is the time value of the following put:
put option selling for $5
exercise price is $60
current price is $67

A

$5 (premium - intrinsic value)

237
Q

what is the time value of the following call:
call option selling for $7
exercise price is $38
current price is $42

A

$3 (premium - intrinsic value)

238
Q

how do you calculate an option’s time value?

A

premium - intrinsic value

239
Q

if you are buying a call option you are expecting the price of the stock to ___

A

rise

240
Q

if you are buying a put option you are expecting the price of the stock to ___

A

drop

241
Q

if you are selling a call option you are hoping the price of the stock will ___

A

drop

242
Q

if you are selling a put option you are hoping the price of the stock will ___

A

rise

243
Q

clears option transactions and acts a guarantor for option contracts

A

Options Clearing Corporation

244
Q

number of outstanding option contracts in the market

A

open interest

245
Q

options that are exercisable at anytime during the contract period

A

american options

246
Q

options that are exercisable only on the expiration date

A

european options

247
Q

when are you “in the money” for a call option?

A

when the exercise price is less than the market price

248
Q

when are you “in the money” for a put option?

A

when the exercise price is greater than the market price

249
Q

term used to describe when the exercise price equals the market price

A

at the money

250
Q

when are you “out of the money” for a call option?

A

when the exercise price is greater than the market price

251
Q

when are “out of the money” for a put option?

A

when the exercise price is less than the market price

252
Q

what is the maximum gain when you buy a call option?

A

unlimited

253
Q

what is the maximum gain when you buy a put option?

A

exercise price minus the premium paid

254
Q

what is the maximum gain when you sell a call option?

A

the premium received

255
Q

what is the maximum gain when you sell a put option?

A

the premium received

256
Q

what is the maximum loss when you buy a call option?

A

the premium paid

257
Q

what is the maximum loss when you buy a put option?

A

the premium paid

258
Q

what is the maximum loss when you sell a call option?

A

unlimited (naked)

259
Q

what is the maximum loss when you sell a put option?

A

exercise price minus the premium received

260
Q

used to estimate the price of a call option

A

binomial option pricing

261
Q

assumes the price of the option will change in discrete increments on the basis of movements in the price of the underlying stock

A

binomial option pricing

262
Q

estimates the price of a european call option

A

black-scholes option valuation method

263
Q

states that the underlying security price movement is assumed to follow a geometric pattern

A

black-scholes option valuation method

264
Q

a call option price will increase if the current market price ___

A

increases

265
Q

a call option price will increase if the exercise price ___

A

decreases

266
Q

a call option price will increase if the time to expiration ___

A

increases

267
Q

a call option price will increase if the volatility of returns ___

A

increases

268
Q

a call option will increase if the risk free rate ___

A

increases

269
Q

used to protect a gain in a long position with no cash outlay

A

zero cost collar

270
Q

involves an investor giving up stock price appreciation above the exercise price of the call option

A

zero cost collar

271
Q

what three aspects does a zero cost collar include?

A

a long stock position
a long put position
a short call option

272
Q

what is the maximum profit, maximum loss and breakeven price given the following info:

an investor purchases a stock for $29 and a put on the same stock for $0.20 with an exercise price of $27.50. The investor also sells a call on this stock for $0.20 with an exercise price of $30

A

max profit = $30 - $29
max loss = $29 - $27.50 +0 = $1.50
breakeven = $29 + $0 = $29

273
Q

term used to describe outs and call with lengthy expirations

A

LEAPS

long term equity anticipation securities

274
Q

right to purchase a specified number of common shares for a specified price within a specified period

A

warrants

275
Q

what is the profit on the following transaction:

Stewart purchases a warrant for $1 per share that gives him the right to buy 50 shares of KRF stock at $10 per share for a period of 5 years from date of purchase. Assume that KRF stock goes up to $14 per share after 3 years and Stewart exercises the warrant.

A

profit = (gain on stock - cost of warrant) x # of shares

profit= ($4 - $1) x 50 =$150

276
Q

attached to a bond or preferred stock issue and is offered as an inducement to make securites more attractive

A

warrant

277
Q

true or false?

A warrant will reduce the interest rate or dividend required by an investor

A

true

278
Q

true or false?

investors buy warrants when they are bearish on a stock

A

false

279
Q

partner who controls business activities

A

general partner

280
Q

person who determines when distributions are made to limited partners

A

general partner

281
Q

true or false?

general partners have unlimited liability

A

true

282
Q

partners who do no participate in management

A

limited partner

283
Q

limited partners have ___ liability

A

limited

284
Q

are private limited partnerships registered with the SEC?

A

no

285
Q

true or false?

limited partnerships are usually riskier investments than bonds or exchange traded funds

A

true

286
Q

true or false?

limited partnerships may offer periodic income payments to investors

A

true

287
Q

true or false?

warrants have long expiration dates, typically up to 5 years

A

true

288
Q

a warrants exercise price is set ____ the current market price

A

above (Well above)

289
Q

a managed, diversified portfolio of real estate or real estate mortgages and construction loans

A

Real Estate Investment Trust (REIT)

290
Q

invest in income producing properties

A

equity trusts

291
Q

make loans to develop property and/or finance construction

A

mortgage trusts

292
Q

manage real estate and transact mortgages

A

hybrid trusts

293
Q

true or false?

real estate capital gain distributions are treated as long term capital gain regardless of holding period

A

true

294
Q

a self liquidating, flow through entity that invests exclusively in real estate mortgages or mortgage backed securities

A

real estate mortgage investment conduits (REMICs)

295
Q

do holders of REMICs have to report taxable income received from the underlying mortgages?

A

yes

296
Q

are willing to take significant risks and lose their entire investment in several ventures, in hopes of cashing in on a few highly profitable ventures

A

venture capitalists

297
Q

true or false?

venture capitalists have a high correlation with equities

A

false

298
Q

funding for the purpose of research and development of an idea

A

seed financing

299
Q

funding for product development and marketing

A

start-up financing

300
Q

funding for initial manufacturing and sales

A

first-stage financing

301
Q

funding for expansion of an existing company

A

second-stage financing

302
Q

funding for major expansion

A

third-stage financing

303
Q

funding for companies that expect to go public within the year

A

mezzanine or bridge financing

304
Q

individual investment accounts offered by financial consultants who provide advisory services and are managed by independent money managers using an asset based fee structure

A

separately managed accounts

305
Q

what is the key difference between a mutual fund and a separately managed account?

A

with a separately managed account the money manager is purchasing securities for the investor not the fund

306
Q

true or false?

in a separately managed account, the investor directly owns the underlying security

A

true

307
Q

true or false?

in a mutual fund, the investor directly owns the underlying secuirty

A

false

CFP (9 decks)

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