CFP Investments Flashcards

Question

Bond Intrinsic Value

Answer 1

FV = Par value PMT = coupon amount / 2 if semi annual N = # of years to maturity I = comparable debt rate

Answer 2

allowed to sell back to issuer in return for put privilege, buyer sacrifices some yield think: "put down" convertible privilege also decreases yield

Answer 3

Has longer duration than bonds (infinite/perpetual) More risk than bonds Pays FIXED income Bond interest is deductible but preferred stock dividends are not (assume this is to the corporation) USED BY CORPORATE ENTITIES with excess cash if they buy bonds all interest is taxable, preferred stock at least 50% excluded from tax

Answer 4

for shares of a foreign corporation held in US bank quoted in USD dividends paid in USD dividends declared in foreign currency exchange rate risk remains investors get foreign tax credit

Answer 5

Issuer has right to call back (redeem at a predetermined price prior to maturity) Likely to call back if interest rates DROP can then resell bonds at a lower rate pay the call premium

Answer 6

ETFS lower expense ratio Can trade options on ETF. MF not marginable and cannot be sold short. Trade ETFs at market price (marketable). MF only @EOD. ETFs will have capital gain at some point if appreciates NOT liquid (stable) due to market risk No sales load but brokerage commission Tax efficient because gains can be deferred by transferring to redeeming shareholders vs selling Index funds trade at NAV but ETFs may trade at a premium/discount, usually close to NAV

Answer 7

Think: Set IT and forget IT Passive Frozen Self-liquidating - distributed to UNIT holders (not shareholders) Redeemed at NAV have stated expiration date "units" bought and sold on secondary markets NOT purchased on a national exchange

Answer 8

Series 6 Series 7: stocks and bonds Series 6: Mutual funds (closed-end funds on the initial offering only) Variable annuities Variable life insurance Unit investment trusts (UITs) Municipal fund securities [e.g., 529 savings plans, local government investment pools (LGIPs)] However, holders of the Series 6 license are not permitted to sell corporate or municipal securities, direct participation programs, stocks, or options. Series 7: everything above plus products include common and preferred stock, bonds, exchange-traded funds (ETFs), real estate investment trusts (REITs), and options.

Answer 9

open end: traditional mutual fund NOT marketable closed end investment company: one time stock issuance, no new shares, traded on an exchange

Answer 10

S&P - all caps investment grade: AAA, AA, A, BBB (better bad bond) speculative: BB (bad bond) junk/high yield Moody's - NOT all caps investment grade: Aaa, Aa, A, Baa speculative: Ba and lower

Answer 11

NOT a good recommendation this is like a junk bond with a high yield to compensate

Answer 12

Global includes US International is foreign only

Answer 13

type of closed end fund sell shares, use $ to buy property, also leveraged w/loans, can sell shares to get out MARKETABLE compared to actual real estate Equity REIT - income producing (rental income) Mortgage REIT - property development - inflation is BAD bc income based on spread between lending rate and borrowing rate generally operate as pass thru investments

Answer 14

Gross rental receipts + Non rental income = Potential gross income - Vacancy and collection losses (% of PGI) = Effective gross income - Operating expenses (EXCL: interest/deprec) = NOI cash flow IV = NOI / cap rate

Answer 15

IV = NOI / cap rate

Answer 16

Real estate limited partnership popular in 80's until 1986 limited deductibility of passive losses passive loss rules not marketable managed by general partner

Answer 17

Real estate mortgage investment conduit more flexibility than CMOs rank of risk levels vs CMOs at AAA grade used for MBS pools limited life, self liquidating MAY eventually replace CMOs

Answer 18

CANNOT BE ZERO! COME call option Market - Exercise POEM put options Exercise - Market What is IV? minimum price the option will command as an option Positive: In the money Negative: out of the money Premium is the market price of option Premium approaches IV as it approaches experiation date Time premium = Option market price - IV

Answer 19

Right to put / sell shares at specific price Buy puts when bearish (think "put down") Stock goes down, owner can buy at lower price and deliver at higher price Writer / seller is bullish Earns premium income Thinks stock will not go down and option will expire

Answer 20

Write to buy / call shares at specific price Buy calls when bullish Stock goes up, able to buy shares at lower price Writer/seller is bearish

Answer 21

Selling Naked call-unlimited loss potential Selling Naked put - Limited loss potential (stock cannot go below zero) Nothing with puts is unlimited, always a zero dollar floor

Answer 22

Buying/owning a stock AND buying a put for the same stock Put acts as insurance against decline in underlying stock

Answer 23

the more volatile a stock, the higher the price of a call option due to potential for stock to go up Volatile stock more attractive to speculator than stable stock IF you see prices that don't indicate volatility then the biggest factor is TIME Short time to expiration - premium due to volatility/speculative value Long time to expiration - premium due to time value

Answer 24

Writer / seller: If lapse/expiration: Premium rec'd is STCG IF exercise: Premium added to sale price of stock (LTCG or STCG depending on stock) Holder/buyer: Premium paid is a non deductible expense At exercise, premium included in basis of stock If not exercised, produces a STCLoss SPLIT INTO TWO TXNS: Stock & Premium

Answer 25

If it lapses, premium rec'd by writer is STCG

Answer 26

Buying Call and Buying Put A long straddle options strategy occurs when an investor simultaneously purchases a call and put option on the same underlying asset with the same strike price and expiration date. An investor will often use this strategy when they believe the price of the underlying asset will move significantly out of a specific range, but they are unsure of which direction the move will take.

Answer 27

Buying Call and Selling Call (Bull Call Spread) Buying Put and Selling Put (Bear Put Spread) Spreads involve buying one (or more) options and simultaneously selling another option (or options). Both options will have the same expiration date and underlying asset. Different exercise prices

Answer 28

Buy a put / write a call limiting profit but limiting loss A protective collar strategy is performed by purchasing an out-of-the-money (OTM) put option and simultaneously writing an OTM call option (of the same expiration) when you already own the underlying asset. This strategy is often used by investors after a long position in a stock has experienced substantial gains. This allows investors to have downside protection as the long put helps lock in the potential sale price. However, the trade-off is that they may be obligated to sell shares at a higher price, thereby forgoing the possibility of further profits.

Answer 29

Long-term Equity Anticipation long term options (9 mos to 3 yrs) allows for holding positions for anticipated long term market movements (ex: S&P 500 Index option is useful hedge for manager whose funds mimic the index) Taxed at LT rates if held > 1 year ST if sold within a year of exercise

Answer 30

like a call option for corporate common stock issued by corporations not individuals warrant terms NOT standardized maturities of several years vs 9 mos

Answer 31

anticipating a decline borrows on margin (security is borrowed) sells the borrowed stock when share price goes down they buy the stock to cover the short cancel the short position by returning the security Net proceeds from initial short sale held by broker No funds immediately available No time limit. Dividends declared must be covered by short seller.

Answer 32

BUY LONG If you are LONG means you want/need to buy the commodity/financial (bullish) Kelloggs/General Mills long on corn Buys a contract today's prices to hedge against higher prices in future Sell SHORT If you are SHORT, want to sell (bearish) Corn farmer short on corn Sells hedge at today's prices in case it goes down Someone owning large Euro portfolio worried about it would SHORT the Euro

Answer 33

commodities financial futures foreign currency contracts settled by delivery OR offset (typical) delivery - actual delivery (pork bellies) offset - buyers sell and sellers buy opposite of initial transaction speculating is VERY RISKY due to high margin requirements used by businesses to HEDGE /mitigate against business risk Spot price: current market price Open interest: # of futures contracts trading Daily limit: max price change per day based on prior day

Answer 34

Tax rate 28% includes GOLD ETF and Crypto Basis is whatever the value is at death. Might step DOWN.

Answer 35

Not a public offering Does not require SEC registration Accredited investor 1/2/3 test $1m net worth indiv / $200k indiv annual income / $300k joint excluding primary residence Non-accredited must be "sophisticated" MAXIMUM of 35 "Qualified" investor has $5m in investments ex: Angel investing

Answer 36

+1 perfectly positively correlated (move exactly together) - no reduction of risk -1 perfectly negatively correlated (move exactly opposite) risk is eliminated in theory. portfolio std dev=0 between 0-1: risk is less than the individual assets if covariance is 0 then coefficient must be 0 (and vice versa)

Answer 37

Measure of relative variability to compare two investments CV indicates risk per expected unit of return STD DEV / Mean Return Higher result > Higher risk

Answer 38

Both express extent to which the movements of stocks in same portfolio are similar or not Covariance considers infinite possibility of outcomes Coefficient falls w/in range +1 to -1

Answer 39

Liquid = fast (marketable) + stable Illiquid = potential loss of principle Marketability only refers to speed Note:CFP may also use to refer to whether something is sold on a market Liquid assets: STABLE & MARKETABLE CD maturing soon/short term Laddered CDs Life insurance cash value Government bond fund Open end MMMF ?? NOT STABLE, but MARKETABLE: Open end mutual funds (prices can change) Growth fund Money market fund closed end funds ETFs brokered CDs REITS Not marketable: savings/checking money market accounts open end mutual funds EE bonds I bonds Not stable & not marketable: RELP Non Public REIT

Answer 40

Return 1 (SIGMA + key) Return 2 (SIGMA + key) Return 3 (SIGMA + key) mean: Gold 7 std dev: Gold 8

Answer 41

risk per unit of expected return relative variability to compare different investments std dev / mean HIGHER CV means more risky

Answer 42

Std dev measures VARIABILITY of returns used in a NON DIVERSIFIED portfolio and a measure of TOTAL RISK Beta measures VOLATILITY of returns used in a DIVERSIFIED portfolio and is a measure of SYSTEMATIC risk In finance, variability measures how spread out an asset's returns are likely to be. Volatility measures how much returns deviate from average over a set period of time.

Answer 43

volatility of security's return relative to market market as a whole = Beta of 1 higher beta = higher risk (and greater potential return) beta < 1 return fluctuates less than market (0.75 is 75% as volatile as market) beta > 1 return fluctuates more than market (1.5 is 50% more) negative beta means stock moves in opposite direction of market

Answer 44

to standardize across mutual funds for risk return / beta highest risk adjusted return is best

Answer 45

tolerance = comfort level capacity = amount one MUST take to reach financial goals

Answer 46

used to evaluate performance of portfolio manager measures performance - income and price changes - as a % of capital at work eliminates the effect of additions and withdrawals and timing On formula sheet, bottom right Shortcut 1. add 1 to each return 2. multiply all #'s in step 1 3. Step 2 = FV 4. PV = -1 5. n = # of years of investment 6. solve for I

Answer 47

Dollar weighted measures chagne in total dollar value of portfolio including +/- capital and gains/losses allows for comparison against financial goals but not manager to manager (only through time weighted return) Time weighted factors %'s Dollar weighted factors cash flow ($) amounts

Answer 48

discount rate at which PV of future cash flows equals cost of investment an investments "effective" return when NPV is zero discount rate is IRR when IRR exceeds expected return, investment is acceptable want IRR > expected rate

Answer 49

enter cash flows for EVERY period including zeroes with the CFj button then Solve for IRR/YR If payments more frequent than annual either multiply to get annual rate OR start with setting N number of P/YR

Answer 50

Total return / price of investment (OOP cost) Income from sale + div/int - Initial outlay (non-margin amount) - (Margin loan payback + margin interest) Divided By Initial outlay

Answer 51

Taxable EQUIVALENT Yield Interest rate on taxable bonds required to provide same after tax return as a municipal security TEY = tax-exempt yield / (1- tax you don't pay) or (1-marginal tax rate) Without additional detail use federal rate For state situations, if someone is buying an IN STATE municipal bond, then it would 1- both fed + state (+ local) to compare

Answer 52

After figuring out the gain, multiply by 1-tax rate, then divide by the investment amount

Answer 53

HPR doesn't consider timing if > 1 year it overstates return if < 1 year it understates return

Answer 54

Length of time for investor to be paid back (breakeven) ALLOWS COMPARISON PRICES OF BONDS WITH EQUAL COUPON, DIFFERENT TERMS Duration = Maturity for 0 coupon Low coupon > Longer to pay back Higher duration Higher volatility Greater interest rate change sensitivity High coupon > Faster to payback Shorter duration Less volatility Lower int rate change sensitivity Any bond with a coupon: Duration < Maturity

Answer 55

INterest means INverse Rates go up Prices go down Rates go down Prices go up

Answer 56

If interest rates are going up, Shorten duration (UPS) If interest rates are FALling, LENthen duration (FALLEN) Immunization is a passive strategy Immunized (neutralized against int rate changes) if average duration = pre selected time horizon for the goal PAY ATTENTION do not match to YTM timeframe but to average DURATION

Answer 57

from inverted to normal Always select the longest maturity to lock in long term rates even if the return is slightly less than other answers from normal to inverted choose SHORTEST timeframe/maturity TIME is the most important factor in duration questions.

Answer 58

Intersection of indifference curve and efficient frontier is the optimal portfolio above the curve - not feasible/unattainable below the curve - not efficient CML expression of CAPM macro level straight line tangent to the efficient frontier CURVEd line. intersection is the OPTIMAL risky portfolio - proportional % of all possible risky assets Intersection of CML and expected return is the risk free rate (100% tbills)

Answer 59

security market line used to value any asset whether indiv security or portfolio formula is the expected r formula aka CAPM

Answer 60

Value = D1 (D0+g) / expected return - growth rate may have to solve for r IF MULTIPLE growth rates use the last value to calculate, then pick the lower value

Answer 61

Common dividends paid / Earnings per share EPS = ROE per share x Book value per share

Answer 62

ROE per share * book value per share

Answer 63

EPS (net income) / Common Equity (net worth/book value per share)

Answer 64

maintenance $ amount = ( (1-initial)/(1-maint)) * initial price

Answer 65

coefficient of determination square of the correlation coefficient to what degree is movement of fund determined by market as a whole R2 of S&P index fund is .99 R2 of Fidelity nursing home fund is .2 higher means well diversified so use beta (Alpha or Treynor) if low need to use Sharpe b/c portfolio not diversified always pick the highest return

Answer 66

favored by those who believe in passive strategy. NO value in technical analysis. prices incorporate new information, so any changes will occur in a random walk Random walk means price changes are unpredictable and patterns are accidental Any active strategy would not add value Strong form reflects ALL information. No tech or fundamental analysis can improve results. Semi-strong form reflects all PUBLIC information. No tech or fundamental analysis can improve results. INSIDER information might. Weak form - historical price data already reflected in current prices, cannot be used to predict future. Tech analysis will not help. FUNDAMENTAL analysis might.

Answer 67

Tech analysis - studying moving averages and other charts. NOT focused on company's financials Fundamental analysis - studying financial statements, Int rates, GDP, Inflation, Unemployment

Answer 68

One ratio can be misleading Set of ratios can be misleading without benchmarks Do: Compare INDIVIDUAL ratios for a firm over time Compare INDIVIDUAL ratios to INDUSTRY averages

Answer 69

P/E effect January long weekend small firm effect neglected firm effect Value Line

Answer 70

believe in patterns consistent enough to provide some degree of predictability Resistance Level (top bound) Support Level (lower bound)

Answer 71

If R2 are mixed, use the fund with the highest SHARPE number

Answer 72

If split is 5:2 then multiply par value times 2/5

Answer 73

Day BEFORE the "date of record" of the corp Investor must own stock BEFORE the ex-dividend date Look out for weekends and holidays

Answer 74

Reg T - standard initial margin requirement 50% set by Federal Reserve Board Maintenance margins set by FINRA usually 25%

Answer 75

Amount of equity required to maintain position on margin Current stock value * maintenance % (total amt required) minus Actual equity = current stock value minus amount on margin = amount due

Answer 76

Passive strategy

Answer 77

PRICE weighted 30 industrial, 20 transportation, 15 utility DJIA is the 30 industrial widely quoted but narrowest measure A price-weighted index is a type of stock market index in which each component of the index is weighted according to its current share price. In price-weighted indices, companies with a high share price have a greater weight than those with a low share price. A stock with a higher price will be given more weight than a stock with a lower price and will thus have a greater influence on the index's performance. Price-weighted indexes are useful because the index value will be equal to (or at least proportionate to) the average stock price for the companies included in the index. This allows the construction of indexes that will track the average stock price performance of a specific sector or market.

Answer 78

cap-weighted and FLOAT-weighted (book says float) broad measure of NYSE largest issues on NYSE plus a few OTC issues With this method a float factor is assigned to each stock to account for the proportion of outstanding shares that are held by the general public, as opposed to "closely held" shares owned by the government, royalty, or company insiders (see float). For example, if for some stock 15% of shares are closely held, and the other 85% are publicly held, the float factor will be 0.85, by which the company's market capitalization will be multiplied before weighting its value against the rest of the index. In other words, the number of shares used for calculation is the number of shares "floating", rather than outstanding.

Answer 79

SMALL CAP popular capitalization weighted index smallest 2000 stocks in the Russell 3000 cap-weighted aka value-weighted

Answer 80

BROADEST measure of activity and movement of the market VALUE WEIGHTED by total market value of outstanding shares 7000 issues on NYSE, AMEX and OTC market cap weighted aka value weighted

Answer 81

Think NOT value weighted instead EQUALLY weighted 1700 issues on NYSE, AMEX and OTC market

Answer 82

1st: determine original yield to maturity PV = NEGATIVE purchase price of bond FV = 1000 N = # of years PMT = 0 Solve for I 2nd: apply yield to determine PMT - assumes it applies for every year PV = value of bond (POSITIVE) FV = 1000 N = # of years I = answer from above Solve for PMT