Book 3 Pages 101 - End Flashcards
1
Q
an index in which the value of the index is equal to the sum of the prices of the securities in the index divided by a pre-determined dvisior
A
price weighted index
2
Q
true or false?
a price weighted index accurately reflects the movement of the underlying market values
A
false
3
Q
true or false?
an equal but opposite change in the prices of two stocks would offset each other in a price weighted index
A
true
4
Q
which index is an example of a price weighted index?
A
Dow Jones Industrial Average
5
Q
the dow jones industrial average consists of mostly ____ _____ stocks
A
blue chip
6
Q
true or false?
the dow jones industrial average fails to account for shares outstanding
A
true
7
Q
which index is an example of a market capitalization weighted index?
A
S&P 500
8
Q
what is the S&P 500 mostly used as a benchmark for?m
A
US large cap equity
9
Q
what index is used as a benchmark for small cap stocks?
A
russell 2000
10
Q
used as a measure of the US Broad Market securities
A
Wilshire 500
11
Q
used as a measure for international securities
A
Morgan Stanley International Eurpoe, Australia, and Far East Index (MSCIEAFE)
12
Q
an index based on geometric returns from ~1,700 stocks
A
value line index
13
Q
indices that track emerging markets, government debt, and corporate debt asset classes
A
JP Morgan Indices
14
Q
first offering of stock to general public by a corporation
A
IPO - initial public offering
15
Q
group of investment banks that collectively underwrite a new issue
A
Syndicate
16
Q
what is the primary market in regards to issuing securities?
A
where the initial sale of new securities to the public takes place
17
Q
what is it called when you assist in the sale of new issues?
A
underwriting
18
Q
when the underwriter purchases the entire issue of securities at a specified price and resells at a higher price
A
firm commitment
19
Q
when an underwriter purchases securities remaining after an initial offering at a predetermined price
A
standby underwriting
20
Q
when an underwriter sells as much of the issue as possible and remainder to the issuing company
A
best efforts underwriting
21
Q
true or false?
under firm commitment the risk is shifted to the underwriter
A
true
22
Q
true or false?
under standby underwriting all the risk if shifted to the underwriter
A
false, it is shared between the underwriter and issuing corp
23
Q
true or false?
under best-efforts underwriting no risk is shifted to the underwriter
A
true
24
Q
avoids registration requirements of an IPO
A
private placement
25
what is the most popular security when dealing with private placements?
bonds
26
provides investors with a method of buying and selling previously issued securities
secondary market
27
an exchange market where listed securities are traded
first market
28
give an example of first markets
NYSE
29
an over the counter market with unlisted securities
second market
30
give an example of a second market
NASDAQ
31
when stocks trade on both the organized exchanges and OTC
third market
32
traders who trade without the help of brokers
fourth market
33
true or false?
| fourth market is generally used by institutions who deal in very large volume
true
34
give an example of a fourth market
INSTINET
35
executed immediately at the market price
market order
36
true or false?
| market orders have the highest priority
true
37
order to purchase security at or below specified price or to sell security at or above specified price
limit order
38
___ priced purchase limit orders take priority over ___ priced limit orders
higher ; lower
39
___ priced sale limit orders take priority over _____ priced limit orders
lower ; higher
40
an order to create a limit order if the price of the security reaches a specified level
stop limit order
41
stocks trading in amounts evenly divisible by 100
round lots
42
any trade less than 100 shares
odd lot
43
what is this called .01%
1 basis point
44
if a bond's yield drops from 3.35% to 3.22% how many basis points did the bond's yield drop?
13 basis points
45
how do you calculate current yield on a bond?
annual interest payments / market price
46
if Jeff has a bond with an annual coupon of 4.25% that is currently trading at $965, what is the bond's current yield?
42.5 / 965 = 4.40%
47
the internal rate of return for cash flows associated with the bond, including the purchase price, coupon, and maturity value
yield to maturity
48
the longer the term to maturity, the ___ a bond's price volatility
greater
49
bonds with ___ coupon rates are more stable when interest rates change than bonds with ____ coupon rates
higher ; lower
50
a zero coupon bond will be ___ price volatile than a bond with a 4% coupon
more
51
if a bond gets its rating improved (AA to AAA or other) then the bond's yield will ____
decrease
52
bonds with ___ coupon rates and ____ maturities will be most price sensitive to interest rate changes
lower ; longer
53
states that long term rates consist of many short term rates and their long term rates will be the average or geometric mean of short term rates
unbiased expectations theory
54
what is the most volatile bond?
a long term zero coupon bond
55
argues that the yield curve should always slope upward and that any other shape is only a temporary aberration
liquidity preference theory
56
based on the concept that longer term bonds are more price sensitive to interest rate changes than shorter term bond
liquidity preference theory
57
implies that investors pay a premium (i.e. lower yields) for shorter maturity bonds to avoid the higher interest rate risk associated with long-term bonds
liquidity preference theory
58
relies on the concepts of supply and demand for various maturities of borrowing and lending ; these different maturities of borrowing and lending make up different markets
market segmentation theory
59
states that different institutional investors have different maturity needs that lead them to restrict their bond selections to only predetermined maturity segments
market segmentation theory
60
determines the weighted average number of years until an investment is recovered
duration
61
how do you calculate the duration of a bond?
taking the time weighted present value of all cash flows and divide it by the current market price
62
the coupon rate and duration of a bond have a(n)____ relationship
inverse
63
true or false?
| zero coupon bonds will always have a duration equal to their time to maturity
true
64
true or false?
| a bond with coupon payments will always have a duration less than its time to maturity
true
65
the duration and YTM of a bond have a(n) ____ relationship
inverse
66
higher quality bonds (lower yield) will have ____ duration than lower quality bonds (high yield)
greater
67
an absolute measure of the interest sensitivity of a bond
Macaulay duration
68
refers to the degree which duration changes as a result of changes in YTM
convexity
69
the larger the convexity the ___ the change in duration
larger
70
when is convexity likely to be the greatest?
low coupon bonds
long maturity bonds
low YTM bonds
71
the coupon rate and convexity of a bond have a(n) ______ relationship
inverse
72
the term to maturity and convexity of a bond have a(n) ______ relationship
direct
73
the YTM and convexity of a bond have a(n) ______ relationship
direct
74
how do you calculate a percent change in the price of a bond?
negative Duration x [ the change in YTM as decimal / (1 + YTM)]
75
```
calculate the percent change in the price of the following bond:
maturity = 5 years
YTM changes from 4.5% to 3.5%
annual Coupon rate is 6% (paid annual)
Current price is $1,065.85
face value is $1,000
```
first calculate duration using CF Keys
```
CF 0 = 0
CF 1 = 60
CF 2 = 120
CF 3 = 180
CF 4 = 240
CF 5 = 300
I = 4.5%
NPV = $4,779.28
```
NPV / Current Price = 4.484 = duration
-4.484 x [ change in YTM / (1+.045) = 4.29%
or you could also use TVM keys
76
a relative measure for comparing different durations of bonds
modified duration
77
how do you calculate modified duration?
regular duration / (1 + (YTM / # of coupon payments in a year)
78
Jose's bond has a current market value of $821.87 and Macaulay duration of 4.6. If the bond's yield changes from 3.5% to 4%, what is the percent change in price of the bond?
-2.2%
79
the present value of future cash flows discounted at a risk adjusted interest rate (IRR)
intrinsic value of a stock
80
assume an investor can invest in a company who will pay a dividend of $1 in year 1 and increase the dividend by $1 for each of the next 3 years. Assume the stock can be sold at the end of year 4 for $40. How much would an investor be willing to pay if their required rate of return was 12%
use CF keys and NPV
$32.58 is the answer
81
used to determine the price for a security in which dividends are growing at a constant rate
constant growth dividend discount model
82
what is the formula for the constant growth dividend discount model?
D1 / (r-g)
83
assume francis corp stock is currently paying a dividend of $2 and the dividend will grow at a constant 7% rate. What should be the security's intrinsic value if the investor's required return is 11%?
d1 = $2 (1+.07) = 2.14
2.14/ (.11-.07) = $53.50
84
under the constant growth dividend discount model, the value of the common stock will ____ if the required rate of return increases
decrease
85
under the constant growth dividend discount model, the value of the common stock will ____ if the required rate of return decreases
increase
86
under the constant growth dividend discount model, the value of the common stock will ____ if the dividend growth rate increases
increase
87
under the constant growth dividend discount model, the value of the common stock will ____ if the dividend growth rate decreases
decrease
88
assume francis corp pays a $2 dividend and the investors required return is 11%, what is the value of francis corp's stock
$18.18
| $2 / 11%
89
how do you calculate the intrinsic value of a stock if there is no dividend growth rate?
Dividend paid / rate of return
90
assumes the growth rate of the stock's dividend is not constant but rater changes
multistage growth dividend discount model
91
when is the multistage growth dividend discount model most appropriate to use?
when a company is going through it's growth phase
92
XYZ corp has a current dividend of $2 per share. This dividend is expected to increase 6% for the next 3 years and then 7% thereafter. Assume the investor's required rate of return is 9%. What is the intrinsic value of the stock?
```
first find the dividend in year 4
D1 = $2 x 1.06 = $2.12
D2 = $2.12 x 1.06 = $2.25
D3 = $2.25 x 1.06 = $2.39
D4 = $2.39 x 1.07 = $2.56
```
$2.56 / (.09 - .07) = $128
then plug into cash flow keys
CF 1 = D1
CF 2= D2
CF 3 = D3 + Value of stock at year 4 ($128)
93
this model should be used when a firm is not currently paying a dividend
Discounted Free Cash Flow Model
94
what is the formula for the discounted free cash flow model?
Free cash flow to equity(1) / r - g
free cash flow to equity(1) = FCFE(0) x (1+g) / (r-g)
95
PLV corp has an estimated FCFE for next year of $3 per share. In addition its FCFE is expected to grow at a constant 3% per year. The client's required rate of return is 10%, what is the stock's intrinsic value
$3 / (.10-.03) = $42.86
96
how do you calculate the value of a stock using the capitalized earnings approach?
earnings of company / discount (AKA capitalization) rate
97
refers to the amount of equity within a company
book value
98
true or false?
| book value depicts an accurate measure of the value of the company
false
99
a real estate valuation approach that is most appropriate when there are several properties in a market that have been sold that have similar characteristics as the property being valued
the sales comparison approach
100
a real estate valuation approach that estimates the value of the property by determining how much it would cost to replace the property and then making any adjustments for depreciation or deterioration of the property
the cost approach
101
when is the cost approach most appropriate to use?
when evaluating special use buildings such as a church or when evaluating newly constructed property
102
bases the value of the property on the income that can be generated from the property
the income capitalization approach
103
what are the two methods under the income capitalization approach?
direct capitalization
| discounted cash flow analysis
104
how do you calculate the direct capitalization method?
net operating income / discount rate
where net operating income is the net income before depreciation and mortgage debt service
105
what is the implied capitalization rate of a property that recently sold for $12 million and generated net operating income of $2.16 million per year?
18%
$2.16 million / $12million
106
when is the discounted cash flow analysis for real estate most appropriate?
when it is not reasonable to assume income will remain constant for the foreseeable future (i.e. when income is expected to fluctuate)
107
the process of determining the FMV or intrinsic value of a security
fundamental analysis
108
analyzing, in order, the economy, the specific industry, then the specific company
top down
109
analyzing, in order, a specific company, specific industry, then the economy
bottom up
110
what are some factors considered by fundamental analysis?
```
economy
stock market tendencies
monetary policy
fiscal policy
money supply
interest rates and business cycles
industry analysis
```
111
stocks that can be drastically affected by changes in the economy
cyclical stocks
112
stocks that are relatively unaffected by changes in economic conditions
defensive stocks
113
true or false?
| declines in interest rates have preceded many of the economic recoveries
true
114
true or false?
| rises in interest rates have preceded many of the recessionary periods
true
115
the sum of demand deposits, coins, traveler's checks, and currency
M1
116
the sum of demand deposits, coins, traveler's checks, currency, savings accounts, time deposits under $100k, and balances in retail money market mutual funds
M2
117
who controls the money supply?
the federal reserve bank
118
when the money supply increases resulting in the circulation of more money
loose/expansionary monetary policy
119
when the money supply decreases resulting in less circulation of money and less money for banks to lend
tight/restrictive monetary policy
120
federal government taxation, expenditures, and debt management are called ____ policy
fiscal
121
as tax rates increase, a corporation's after-tax income will _______
decline
122
as tax rates increase, a corporation may not be able to pay ______ which may cause the stock price to _____
dividends ; decline
123
as tax rates increase, the demand for tax free investments ____
increases
124
occurs when government expenditures exceed revenues
deficit spending
125
corporate earnings will benefit from a(n) ____ in government expenditures
increase
126
under easy or loose fiscal policy taxation ______
decreases
127
under easy or loose fiscal policy government spending ______
increases
128
under tight or restrictive fiscal policy taxation ______
increases
129
under tight or restrictive fiscal policy government spending ______
decreases
130
what are the stages of an industry life cycle?
```
rapid growth
declining growth
maturity
decline
deletion
```
131
what happens to debt management under easy or loose fiscal policy?
buy government securities
132
what happens to debt management under tight or restrictive fiscal policy?
sell government securities
133
provide insight into a company's ability to convert assets into cash without sustaining a loss on the transaction
liquidity ratios
134
how to calculate the current ratio
current assets / current liabilities
135
measures the ability of a firm to meet its short term obligation
current ratio
136
how to calculate the quick ratio
(current assets - inventory) / current liabilities
137
measures the company's effectiveness in managing its business operations
active ratios
138
indicates the speed with which inventory is turned into cash
inventory turnover ratio
139
how to calculate inventory turnover ratio
cost of goods sold / average inventory
140
companies that have low inventory turnover may have ___ inventory costs
higher
141
measures how often the company is able to turn over its receivables
accounts receivable turnover
142
how to calculate accounts receivable turnover
sales / average accounts receivable
143
the higher the accounts receivable ratio, the ____ the company receives cash to service its short term obligations
quicker
144
indicates the sales per dollar investment of fixed assets
fixed asset turnover
145
how to calculate fixed assets turnover
sales / fixed assets
146
provide different measures of a company's earning capacity
profitability ratios
147
how to calculate operating profit margin
earnings before interest and taxes / sales
148
how to calculate net profit margin
net income / sales
149
how to calculate ROA
net income / total assets
150
how to calculate ROE
net income / equity
151
ratio that indicates the net income generated per dollar of investment in the company
ROE
152
how to calculate the debt ratio
total debt / total assets
153
how to calculate the debt to equity ratio
total debt / total equity
154
what are 3 important ratios for bondholders to pay attention to?
inventory turnover
accounts receivable turnover
times interest earned ratio
155
indicates the number of times a company can service its debt
times interest earned ratio
156
how to calculate the times interest earned ratio
earnings before interest and taxes / annual interest expense
157
what are 5 important ratios for stockholders to pay attention to?
```
ROE
ROA
Gross profit margin
dividend payout ratio
P/E ratio
```
158
indicates what portion of earnings has been paid to stockholders in the form of dividends
dividend payout ratio
159
how to calculate the dividend payout ratio
dividends / earnings
160
calculate the dividend payout ratio in the following example:
ABC pays a dividend of $1 per share
ABC earns $4 per share
1/4 = 25%
161
indicates what the market is willing to pay for a dollar of earnings
P/E ratio
162
how to calculate P/E ratio
price per share / earnings per share
163
a higher P/E ratio could indicate a(n) ____ stock
overpriced
164
indicates how much an investor is paying for a specific revenue stream
price/sales
165
a measure of relative valuation that can be used to compare companies with different growth rates
PEG ratio
166
how to calculate the PEG ratio
(price/earnings) / growth
167
proponents of the PEG ratio believe that companies with a low PEG ratio will have ______ rates of returns
higher
168
an attempt to determine the demand side of the supply/demand equation for a particular stock or set of stocks
technical analysis
169
based on the belief that studying the history of security trades will help predict future price movements
technical analysis
170
true or false?
| technical analysis and the efficient market hypothesis are in direct contradiction with each other
trueq
171
type of movement that represents large trends that last anywhere from 1-4 years
primary moves
172
moves that are considered bull/bear markets
primary moves
173
moves that are temporary, generally less than two months
intermediate moves
174
used as indicators of trends in the market
moving averages
175
what is on of the more popular moving averages to follow?
200 day moving average
176
states that a trend will generally continue until a major event occurs to change the direction of the market
relative strength analysis
177
states that most of investors are generally wrong regarding investment decisions and predictions
contrary opinion theory
178
theory/indicator based on the assumption that the small individual investor is always wrong
odd lot theory
179
under odd lot theory, if a small investor is selling a security its is probably a good time to ____ the security
buy
180
theory that states that increased short selling is a sign that the market is near a trough and will soon turn around
short interest theory
181
how to calculate the confidence index
average yield of high-grade bond / average yield of low grade bonds
182
bondholders have a tendency to shift their bond holdings to a higher graded bond when the market is _____
weak
183
the closer the confidence index gets to 1, the ____ the market is getting
stronger
184
increasing levels of debt (margin) in brokerage accounts is an indicator that investors believe the market to be ____
strengthening/bull
185
value investing focuses on the ____ in the P/E ratio
Price (numerator)
186
growth investing focuses on the ____ in P/E ratio
earnings (denominator)
187
true or false?
| growth stocks usually have a high dividend payout ratio
false
188
a written document that sets forth a client's objectives and limitations on the investment manager
investment policy statement
189
the process of comparing the performance of an investor's portfolio with the relevant market's performance over the same period of time
benchmarking
190
states that the composition and weighting of the components of the benchmark must be clearly delineateed
unambiguous
191
states that the option to invest in the benchmark is available
investable
192
states that analysts should be able to calculate the benchmark's return on a frequent basis
measurable
193
states that the benchmark must be consistent with the manager's investment philosophy and style
appropriate
194
states that the manager has current investment knowledge of the securities that make up the benchmark
reflective of current investment opinions
195
states that the benchmark should be constructed before the beginning of the evaluation period
specified in advance
196
a method of financial analysis that attempts to forecast how investment returns on different asset classes vary over time by using thousands of simulations to produce probability distributions for various outcomes
stochastic modeling
197
a computer generated distribution technique used to model uncertainty
monte carlo analysis
198
measures the relative measure of risk adjusted performance of a portfolio based on total risk
sharpe ratio
199
sharpe ratio uses _____ as a measure of portfolio risk
standard deviation
200
how to calculate the sharpe ratio
(return of portfolio - risk free rate) / standard deviation of portfolio
201
the treynor ratio uses _______ as a measure of porfolio risk
beta
202
how to calculate the treynor ratio
(return of portfolio - risk free rate) / beta
203
measures how well the managed portfolio performed to an unmanaged portfolio of equal risk when comparing actual return to expected return
alpha
204
how to calculate alpha
return of portfolio - [risk free rate + (return of market - risk free rate) x beta]
205
true or false?
| alpha is a relative measure of performance
false, it's an absolute measure
206
```
calculate alpha on the following portfolio:
portfolio return = 12%
beta = .6
market return = 15%
risk free return = 3%
```
1.8%
207
measures the portfolio's average rate of return in excess of a comparison (benchmark) portfolio divided by standard deviation of the excess return
information ratio
208
how to calculate the information ratio
alpha / standard deviation
209
measures the consistency with which a manager beats a benchmark
information ratio
210
a relative measure of total risk per unit of expected return
coefficient variation
211
used to compare investments with varying rates of return and standard deviations
coefficient of variation
212
how to calculate the coefficient of variation
standard deviation of asset / expected return of asset
213
which of the following stocks has more total risk per unit of expected return:
ABC stock has an expected return of 5.95% and standard deviation of 4.35%
XYZ stock has an expected return of 10% and standard deviation of 6%
calculate the coefficient of variation (standard deviation / expected return)
4.35 / 5.95 = .7311
6 / 10 = .6
so ABC is more risky per unit of expected return
214
true or false?
| a positive alpha indicates the portfolio manager outperformed the benchmark
true
215
Franklin has a separately managed account with a large cap growth investment objective. The account returned 7.75% over the past year. During the same time period, the DJIA has returned 6.45%. The risk free rate is 1.85%. The account has a beta of 1.12. Did the managed portfolio outperform the benchmark return on a risk adjusted basis, if so by how much?
Yes by .75%
calculate alpha
7.75% - (1.85% + (6.45% - 1.85%) x 1.12))
216
the process of purchasing securities over time by investing a predetermined amount at regular intervals
dollar cost averaging
217
what is the goal of dollar cost averaging?
to reduce the effects of market price fluctuations
218
purchasing additional shares only when the market price of the shares declines
averaging down
219
the investor purchases the same number of shares everytime
share averaging
220
plans where dividends are reinvested back into the investment from which they were earned
Dividend reinvestment plans (DRIPs)
221
accomplished by establishing a portfolio of bonds with staggered maturities
laddered portfolio
222
initially acquiring a portfolio of bonds consisting of both very long-term and very short-term maturites
barbell/dumbbell strategy
223
investors purchasing a series of bonds with similar maturities that are focused around one point in time
bullet strategy
224
an active portfolio management strategy that emphasizes and over allocates certain economic sectors or industries in response to the next expected phase of the business cycle
sector rotation
225
individuals who engage in short selling are ____ about the future direction of the marke
bearish
226
what is Elayne's profit in the following scenario:
she believes that ABC stock is overpriced. She short sell 20 shares when ABC is trading at $100 per shares. 3 months later ABC can be purchased at $85 per share. Elayne repurchases 20 shares at that time
$100 - $85 = $15
| $15 x 20 shares = $300
227
when an investor takes a short position with the same market value as a long position
shorting against the box
228
give an example of shorting against the box
Larry owns 100 shares of ABC stock, he then sells 100 shares of ABC stock short
229
when is a short sell considered not constructive?
short sale is closed on or before the 30th day following the tax year that the short sale was entered into and
the long position is held (unhedged) for a period of at least 60 days after the close of the short postion
230
represents the amount that the investor is required to fund in the margin account
initial margin
231
who sets the initial margin requirement
federal reserve
232
what does the federal reserve set the initial margin requirement to
50%
233
the level at which an investor will be required to add funds to the margin account
maintenance margin
234
the loan amount owed to the broker ; this amount includes the original amount borrowed plus any accumulated interest
debit balance
235
the value of the security less the debit balance
equity
236
what is the formulate for determining when a margin call will occur
debit balance / (1 - maintenance margin)
237
Harry pays $20,000 to purchase shares of ABC company trading at $25. If Harry uses a margin account (50% initial margin) to purchase this stock, he can buy 1,600 shares (20,000 x 2 / $25). An amount of $20,000 is borrowed from the broker. Harry is concerned about receiving a margin call. At what point would he receive a margin call if the maintenance margin is 35%?
$25 x 50% / (1 - 35%) $19.23
$19.23 is the price per share
238
Harry pays $20,000 to purchase shares of ABC company trading at $25. If Harry uses a margin account (50% initial margin) to purchase this stock, he can buy 1,600 shares (20,000 x 2 / $25). An amount of $20,000 is borrowed from the broker. If the stock priced dropped to $15, how much money would Harry be required to deposit to meet the margin call?
```
first find required equity
$15 x .35 = $5.25
next find current equity
$15 - $12.50 (initial margin or loan amount) = $2.50
then find the difference between the two
$5.25 - $2.50 = $2.75
```
$2.75 is the price per share to maintain the equity postion
239
used to protect a bond portfolio from interest rate risk and reinvestment rate risk
portfolio immunization
240
true or false?
| for a bond portfolio to be immunized the duration should be equal to the time horizon of the investor's goals
true
241
the process of selling one debt instrument and replacing it with another with the goal of increasing the overall rate of return
bond swapping
242
a swap that involves exchanging bonds with identical characteristics (credit rating, maturity, coupon payment, call features, etc.) selling for different prices
substitution swap
243
a swap that involves the exchange of one type of bond (example: government bond) with another type of bond (example: corporate bond)
intermarket spread swap
244
when does an intermarket spread swap occur?
when investors believe one type of bond is currently mispriced in relation to the other
245
a swap that involves exchanging long term bonds for short term bonds or vice versa
rate anticipation swap
246
if interest rates are expected to increase then you should swap ______ term bonds for _____ term bonds
long term ; short term
247
if interest rates are expected to decrease then you should swap ______ term bonds for _____ term bonds
short term ; long term
248
a swap that involves exchanging a lower YTM bond with a higher YTM bond
pure yield pickup swap
249
swaps that are motivated by current tax law
tax swap
250
occurs if the taxpayer sells or exchanges stock or securities for a loss and within 30 days before or after the date of the sale or exchange, acquires similar securities
a wash sale
251
used to manage risk associated with changes in interest rates
interest rate swaps
252
Company A enters into a fixed for floating swap with Company B on $100,000 of notional principal. Company A agrees to pay a fixed 5% ; Company B agrees to pay one-year London Interbank Offered Rate (LIBOR) less 1%. At the end of the first year, one-year LIBOR is 6.8%. What will each company have to pay each other?
Company A's liability = 5% x $100,000 = $5,000
Company B's liability = 5.8% x $100,0000 = $5,800
So company A nets $800
253
true or false?
| Liability investing is usually better used in non-taxable accounts
true
254
true or false?
| it makes the most sense to hold non-taxable bonds such as muni bonds in a tax-deferred account
false
255
what are the 6 steps of the investment planning process?
1. determine if client has means and commitment to invest
2. Determine the time horizon for investment based on the client's financial objectives
3. Determine the appropriate level of risk and return for the portfolio based on the investor's risk tolerance and required return
4. Select investments suitable to the investor's time horizon, return requirements, and risk tolerance
5. compare actual returns vs. expected returns
6. adjust and rebalance the client's porfolio
256
the _____ _______ of the client are the driving force behind an investment plan
financial goals
