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CFP - Finley > CFP - 3 Investments > Flashcards

CFP - 3 Investments Flashcards

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1
Q

What are the possible maturities for T-bills?

A

4, 13, 26, 52 weeks

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2
Q

How often are T-bills auctioned?

A

Weekly except 52s are every 4 weeks

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3
Q

T-bill increments and minimum purchase

A

$100, $100

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4
Q

Are t-bill subject to OID rules?

A

No

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5
Q

How are T-bills taxed?

A

Interest income in the year of maturity equal to the maturity price minus the purchase price

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6
Q

How are T-bills sold before maturity taxed?

A

Short-term cap gain or loss

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7
Q

Who issues cash management bills?

A

US Treasury

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8
Q

Are cash management bills auctioned?

A

No

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9
Q

Do cash management bills have variable or fixed terms?

A

Variable

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10
Q

How long is the usual maturity of a cash management bill?

A

a few days

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11
Q

What do companies use commercial paper to finance?

A

Accounts receivable and inventories

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12
Q

What are commercial paper denominations?

A

$100,000 or more

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13
Q

What is commercial paper a substitution for?

A

Short term bank financing

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14
Q

What is the range for commercial paper maturities?

A

1 to 270 days

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15
Q

What is CP usually backed by?

A

Lines of credit from banks

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16
Q

Who usually issues CP?

A

Large, financially strong corporations

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17
Q

Who usually buys CP?

A

Money market funds

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18
Q

How is CP taxed?

A

Interest is ordinary income in the year earned

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19
Q

What usually has a higher yield?

CP
T-bills
CDs

A

CP

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20
Q

What is the min for negotiable CDs?

A

$100,000

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21
Q

Who buys negotiable CDs?

A

Large institutional investors

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22
Q

Are CDs highly liquid?

A

Yes

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23
Q

Who buys non-negotiable CDs?

A

Individuals

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24
Q

Which type of CD has deductible early withdrawal penalties?

A

Non-negotiable

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25
Q

What type of interest rates do money market deposit accounts offer?

A

Variable, short-term interest rates

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26
Q

Are MMDA’s FDIC insured?

A

Yes

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27
Q

How many withdrawals can you make from an MMDA per month?

A

Usually no more than 6

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28
Q

What are repos used for?

A

Used by securities dealers to finance large inventories of marketable securities

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29
Q

What is a repo?

A

An agreement to purchase an underlying security back at a specific price on a specific date

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30
Q

A dealer uses a repo to finance a $5mm position. The repo term is 1 day and the repo rate is 4%. What is the interest due and how does this work?

A

Interest due = 5mm x 0.04 x (1/360) = $555.55

Dealer would sell repo for $5,000,000 then buy it back for $5,000,555.55 the next day.

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31
Q

How does a reverse repo work?

A

Dealer buys a security then sells it back at a higher price.

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32
Q

Reverse repos are AKA

A

Repurchase agreements

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33
Q

Repurchase agreements are AKA

A

Reverse repos

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34
Q

What are banker’s acceptances?

A

Securities acting as a line of credit issued from a bank

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35
Q

Are banker’s acceptances negotiable?

A

Yes

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36
Q

What are banker’s acceptances used for?

A

Smaller companies to fund short-term debt needs

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37
Q

What is a Eurodollar?

A

US dollar denominated deposits in foreign banks

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38
Q

Eurodollar maturities are less than…

A

6 months

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39
Q

Are Eurodollar CDs more liquid than domestic?

A

No

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40
Q

What is the duration of a zero-coupon bond?

A

The time to maturity

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41
Q

How are zeros taxed?

A

Interest accrued during a given year is taxed in the year earned even though the interest in not received until maturity

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42
Q

Where are registered bonds registered?

A

With the issuer

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43
Q

Where are bearer bonds registered?

A

They aren’t. The holder receives payments

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44
Q

Where are book-entry bonds registered?

A

With a depositor (DTCC for example)

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45
Q

What is a sinking fund?

A

Funded by the bond issuer to accumulate sufficient funds to pay off the debt upon maturity

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46
Q

Who holds the sinking fund?

A

Trustee

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47
Q

When do T notes and bonds pay interest?

A

Semi

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48
Q

What is the best investment to use as collateral for a loan?

A

Treasury note or bond

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49
Q

What is the longest maturity T bond?

A

30 years

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50
Q

What are the T note maturities?

A

2, 3, 5, 7, 10 years

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51
Q

What are T note mins?

A

$100

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52
Q

What are T bond mins?

A

$100

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53
Q

Is interest on T notes and bonds subject to state and local tax?

A

No

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54
Q

Are capital gains on T note/bond sales subject to state and local tax?

A

Yes

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55
Q

What are the terms for TIPS?

A

5, 10, and 30

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56
Q

What is the min/increment for TIPS?

A

$100

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57
Q

How does CPI affect TIPS?

A

Adjusts the principal value of the bond

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58
Q

Are TIPS interest rates based on the CPI?

A

No, just the principal is. The interest will accrue on the new inflation adjusted principal

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59
Q

How often do TIPS pay?

A

Semiannual

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60
Q

What is the maturity face for TIPS?

A

The greater of the inflation adjusted principal or the original principal

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61
Q

How is interest on TIPS taxed?

A

State and local exempt. Federally taxed as interest income in the year earned. Principal increase is taxed in the year earned and increases basis.

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62
Q

What are Treasury STRIPS?

A

Separate Trading of Registered Interest and Principal of Securities

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63
Q

How do STRIPS work?

A

The principal payment and each interest payment is separated into individual zero-coupon securities by a financial institution then sold

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64
Q

How are STRIPS taxed?

A

Like zeros

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65
Q

Series EE bonds issued after _____ earn a fixed interest rate

A

5/1/2005

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66
Q

What are series EE face values?

A

$25 to $10,000

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67
Q

How long must EE bonds be held?

A

At least 1 year

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68
Q

What is the penalty for EE bonds redeemed early and what is the cutoff?

A

5 year cutoff, 3 month interest penalty

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69
Q

EE bonds issued after _____ are excluded from gross income if used for higher education, if they are registered in the _______’s name, and the bond purchaser is ______ or older.

A

1989, parent, 24

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70
Q

Series HH bonds were discontinued on

A

9/1/2004

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71
Q

Series I bonds are inflation linked based on ____-

A

CPI-U - urban consumers CPI

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72
Q

How are series I bonds taxed?

A

Same as EE

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73
Q

Which US government agency bonds are backed directly by the US gov?

A

GNMA

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74
Q

What is a unique risk to MBS?

A

Prepayment risk

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75
Q

Private activity bonds must use more than ____% of the proceeds for ______

A

10%, private business use

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76
Q

Qualified private activity bonds are tax exempt if _____% or more of the net proceeds are used for IRS qualified purposes

A

95%

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77
Q

How are serial bonds usually called?

A

Oldest maturities first, as they have higher interest rates

78
Q

Formula for tax equivalent yield =

A

TEY = r / (1 - t)

r is the nominal rate of return
t is the tax rate

79
Q

Collateral trust bonds are backed by…

A

stocks and bonds of other companies held in trust

80
Q

What are debentures?

A

Bonds not backed by collateral

81
Q

What does conversion ratio mean? (convertible bonds)

A

The number of shares of issuer’s stock that will be acquired at exchange

82
Q

What is the conversion ratio formula?

A

Par value of convertible security / conversion price

83
Q

Is the conversion of a senior security into common stock taxable?

A

No

84
Q

Is systematic risk diversifiable?

A

No

85
Q

How do you decrease unsystematic risk in a portfolio?

A

Diversification

86
Q

What are the 5 systematic risks? (PRIME)

A 
Purchasing Power
Reinvestment
Interest Rate
Market
Exchange Rate
87
Q

Unsystematic risk can be significantly reduced with portfolios containing as few as _____ stocks

A

10

88
Q

A positively skewed distribution is ____ tailed

A

Right

89
Q

A positively skewed distribution has a high _____ and a low _____

A

Mean, mode

90
Q

A negatively skewed distribution is _____ tailed

A

Left

91
Q

A negatively skewed distribution has a high _____ and a low _____

A

Mode, mean

92
Q

What does Kurtosis measure?

A

Whether a distribution is more or less peaked than a normal distribution

93
Q

Leptokurtic has a _____ peak than a normal distribution

A

Higher

94
Q

Platykurtic has a _____ peak than a normal distribution

A

Lower

95
Q

Which type of kurtic distribution is better for investors who want to minimize volatility?

A

Leptokurtic

96
Q

Lognormal probability distributions are skewed _____

A

Right

97
Q

A lognormal probability distribution has a greater than 50% chance that an observation will fall to the _____ of the mean

A

Left

98
Q

What is the formula for covariance?

A

Correlation coefficient of XY times St Dev of X times St Dev of Y

99
Q

What is the formula for the coefficient of determination?

A

R squared, correlation coefficient squared

100
Q

What is the formula for Beta?

A

Correlation coefficient of the market and the stock times the st dev of the stock divided by the st dev of the market

101
Q

What is the short formula for covariance?

A

Standard devation squared

102
Q

____% of outcomes fall within 1 st dev of the mean

____% of outcomes fall within 2 st devs of the mean

____% of outcomes fall within 3 st devs of the mean

A

68
95
99

103
Q

What is the formula for z-score?

A

(Value - Mean)/Standard Deviation

104
Q

Why is holding period return inferior?

A

Doesn’t consider the amount of time and ignores the time value of money

105
Q

What is the formula for holding period return (%)?

A

(( 1 + r1) x (1 + r2) x … (1 + rn) ) -1

106
Q

What is the arithmetic mean?

A

Average

107
Q

What is the geometric mean forumla?

A

nth root of

1 + r1 times 1 + r2 …. all the way to rn

minus 1

108
Q

What is the difference between APR and EAR?

A

APR is just the interest charged during a time period. EAR takes compounding into account

109
Q

If APR is 9.99% compounded daily, what is the EAR?

A

( 1 + (0.0999/365) ) ^365 -1 = 10.50%

110
Q

What is the difference between time weighted return and dollar weighted return?

A

Time weighted is the return over a certain period, no respect to cash flows (ie mutual fund returns reported)

Dollar weighted is the investor’s actual performance

111
Q

Connie bought 1 share of XYZ for $50. One year later she received a dividend of $4 and bought a second share for $65. At the end of the second year, she sold the stock for $75 per share. There was no dividend in the second year.

What was the time-weighted return of the XYZ stock?

A

CF0 -50
CF1 4 (does not take into account the second purchase)
CF2 75

IRR = 26.54%

112
Q

Connie bought 1 share of XYZ for $50. One year later she received a dividend of $4 and bought a second share for $65. At the end of the second year, she sold the stock for $75 per share. There was no dividend in the second year.

What was her dollar-weighted return?

A

CF0 -50
CF1 4-65 = -61
CF2 150

IRR = 22.63%

113
Q

What does the Markowitz Efficient frontier use as a measure of risk?

A

Beta

114
Q

What does the Capital Market Line use as a measure of risk?

A

Standard deviation

115
Q

Systematic or unsystematic?

Business risk

A

Un

116
Q

Systematic or unsystematic?

Financial risk

A

Un

117
Q

Systematic or unsystematic?

Default risk

A

Un

118
Q

Systematic or unsystematic?

Political risk

A

Un

119
Q

Systematic or unsystematic?

Reinvestment rate risk

A

Sys

120
Q

Systematic or unsystematic?

Exchange rate risk

A

Sys

121
Q

Calculate the standard deviation of the following returns:

13.5
12
5
-2
7
23
6
10
45
10
0.5
14
A

Put in each one then hit the E+ button. At the end, hit Shift Sx, Sy

=12.2938

122
Q

Are portfolios below the efficient frontier attainable?

A

Yes, but they are not preferred as they are inefficient

123
Q

Are portfolios above the efficient frontier attainable?

A

No

124
Q

What two points connect the Capital Market Line?

A

Risk free rate and portfolio “M” on the Markowitz Efficient Frontier

125
Q

How can portfolios on the Capital Market Line be above the efficient frontier?

A

Left of M is a lending portfolio, right of M is a borrowing portfolio. Using leverage allows you to have a portfolio above the efficient frontier

126
Q

What is the formula for market risk premium?

A

market rate of return - risk free rate of return

127
Q

What is the formula for stock risk premium?

A

market risk premium (rm - rf) times Beta

128
Q

What is the equation for SML?

A

Security Market Line = same as CAPM

129
Q

Mike has a portfolio. It returned 16% last year. The market returned 12%. The risk-free rate was 7% and Mike’s portfolio had a Beta of 1.25. Did his portfolio do well on a risk adjusted basis?

A

E(r) = 7 + (12 - 7)(1.25) = 13.25%

13.25% was expected and his returned 16% so it did great

130
Q

What are the 3 factor breakdowns for Arbitrage Pricing Theory?

A
  1. Some factors affect all securities: inflation, interest rates, population growth
  2. Some factors affect specific sectors
  3. Some factors affect a single company
131
Q

What is the Arbitrage Pricing Theory (APT) formula?

A

ri = a0 + b1F1 + b2F2 … + e

ri = expected return
a0 = risk free return
bn = sensitivity to factor n
Fn = factor that affects the security (i.e. GDP)
e = error term (should drop out if all relevant factors are captured)
132
Q

Howie uses multiple regression to determine the sensitivity of a certain stock to various factors.

Inflation: 1.1 Factor Beta, 5% factor risk premium
Unemployment: 0.8, 7%
Industrial Production: 0.5, 6%

If the rate on 90 day T-bills is 2%, what is the expected return of his stock?

A

= 0.02 + (1.10.05) + (0.80.07) + (0.5*0.06) = 0.1610

16.10%

133
Q

Which form of EMH?

Holds that current stock prices have already incorporated all historical market data, such as prices, trading volume, and published financial information?

A

Weak

134
Q

Which form of EMH?

Technical analysis is already priced in.

A

Weak

135
Q

Which form of EMH?

Fundamental analysis and inside information may produce above-market returns.

A

Weak

136
Q

Which form of EMH?

The current stock price reflects all past historical price data and data from analyzing financials, industry, and current economic outlook.

A

Semi-strong

137
Q

Which form of EMH?

Insider information is the only way to outperform.

A

Semi-strong

138
Q

Which form of EMH?

Using inside information is unlikely to produce consistent out performance.

A

Strong

139
Q

Which form of EMH?

Fundamental, technical, and insider info is already reflected in price.

A

Strong

140
Q

What is the January effect?

A

Stocks have a tendency to decline during December and go up during January

141
Q

What is a collar?

A

Selling an option and buying an opposite option.

Ex. Writing a covered call (establishes a ceiling) and using the premium to pay for a put (establishes a floor)

142
Q

Private placements are limited to ______ unaccredited investors.

A

35

143
Q

What makes an accredited investor?

A

Income of more than $200k (or $300k with a spouse) in each of the last two years

OR

Net worth over $1 million

144
Q

What are the 4 types of markets?

A

First (Exchange)
Second (OTC)
Third (Overlap of Exchange and OTC)
Fourth (Large volume institutions, within 3rd)

145
Q

Limit order purchase a security at or (above/below) a certain price or sell at or (above/below) a certain price.

A

purchase below

sell above

146
Q

What is a stop order?

A

An order to create a market order if the price reaches a specific level

147
Q

What is a stop limit order?

A

An order to create a limit order if the price of a security reaches a specific level.

148
Q

What is a bond’s current yield?

A

Annual interest payment / current market price

149
Q

Jeff has a bond with a coupon rate of 4.25% trading at $965. What is the current yield?

A

42.50 / 965 = 4.40%

150
Q

A 3 year bond has a coupon of 8% paid semi. If the yield for a comparable bond increases to a 10% rate, what will this bond trade at?

A 
FV = 1000
PMT = 40 (8% * 1000 / 2)
I/Y = 5 (10% / 2)
n = 6 (3 * 2)

PV = $949.24

151
Q

What is the YTM of the following bond?

Price = $750
3 Years to maturity
6% annually paid coupon

A 
PV = -750
PMT = 60
n = 3
FV = 1000

I/Y = 17.385%

152
Q

What is the YTC of the following bond?

Price = $1000
Callable @ $1050 in 5 years
6% coupon (semi)

A 
PV = -1000
FV = 1050
n = 10
PMT = 30

I/Y = 3.4276 * 2 =6.8553%

153
Q

What does the unbiased expectations theory state?

A

Long-term rates consist of many short-term rates and long-term rates will be the geometric mean of short term rates

154
Q

What does the liquidity preference theory state?

A

Long term bonds are more price sensitive and investors pay a premium (lower yield) for short term bonds. Argues that the yield curve should always slope upward.

155
Q

The market segmentation theory breaks borrowers up into short, intermediate, and long. Who borrows in each camp?

A

Short = commercial banks lend, consumer finance firms borrow

Int = Savings and loans lend, manufacturers borrow for working capital

Long = Life insurance companies lend, expansion of plant/equip/property are the borrowers

156
Q

In the duration equation, what are the variables?

Y
C
D
T

A 
Y = YTM
C = Coupon
D = Duration
T = Term to maturity
157
Q

What is an alternate way to calculate duration?

A

NPV / current market price of the bond.

Each cash flow equals the cash flow for that year (including principal) times the number of that year

158
Q

What is convexity?

A

The degree to which duration changes as a result of changes in the YTM. (same relationship to factors as duration)

159
Q

What reflects an investor’s willingness to take risks?

A

Indifference curves

160
Q

An investor selects an appropriate portfolio by choosing the portfolio:

A

represented by the highest point attainable on the indifference curve, the point of tangency between the indifference curve and efficient frontier

161
Q

What is the sales comparison approach to real estate valuation?

A

Finding several properties in a market that have been sold with similar characteristics

162
Q

What is the cost approach to real estate valuation?

A

Estimates the value of a property by determining how much it would cost to replace the property and then make adjustments for depreciation or deterioration

163
Q

What is the income valuation approach to real estate valuation?

A

Bases the value of the property on the income that can be generated from it

164
Q

What is the direct capitalization formula for valuing real estate?

A

V = net operating income / discount rate

165
Q

What is NOI?

A

Net operating income, net income before depreciation and mortgage debt service

166
Q

How do you calculate the implied capitalization rate?

A

Annual NOI / Cost of property

167
Q

What is M1 money supply?

A

Sum of demand deposits, coins, traveler’s checks, and currency

168
Q

What is M2 money supply?

A

M1 plus savings accounts, time deposits under $100k, and balances in retail MM funds

169
Q

Current ratio

A

Current assets / current liabilities

170
Q

Quick ratio (acid test)

A

(Current assets - inventory) / current liabilities

171
Q

Inventory turnover ratio

A

COGS / average inventory

172
Q

Accounts receivable turnover

A

Sales / average accounts receivable

173
Q

Fixed asset turnover

A

annual sales / fixed assets

174
Q

Operating profit margin

A

EBIT / sales

175
Q

Net profit margin

A

net income / sales

176
Q

ROA

A

net income / total assets

177
Q

ROE

A

net income / equity

178
Q

Debt ratio

A

total debt / total assets

179
Q

Debt equity ratio

A

total debt / total equity

180
Q

Times interest earned ratio

A

EBIT / annual interest expense

the number of times a company can service its debt

181
Q

Dividend payout ratio

A

dividends / net income

182
Q

PEG ratio

A

Price / earnings / growth

PEG < 1 is a possible value company

183
Q

What is the information ratio and what does it measure?

A

Alpha / Standard Deviation

Measures the consistency with which a manager beats a benchmark

184
Q

Coefficient of variation (CV) equals…

A

standard deviation / expected return

185
Q

What happens when a shorted stock pays a dividend?

A

The short seller is required to make payment in lieu of dividends to the investor who’s stock was borrowed

186
Q

Formula for margin call =

A

debit balance / (1 - maintenance margin)

187
Q

What is the formula for debit balance?

A

Price per share times initial margin (50%)

188
Q

What is a substitution bond swap?

A

Swapping bonds with identical characteristics but different prices as an arbitrage opportunity

189
Q

What is an intermarket bond swap?

A

swapping one type of bond with another (i.e. government bond for corporate bond)

190
Q

What is a rate anticipation swap?

A

Swapping for more or less duration based on beliefs in change of interest rate

191
Q

What is the formula for current yield?

A

Coupon payment $ amount divided by price of bond

CFP - Finley (11 decks)

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