CFP - Investments Flashcards
What is the formula for Current Yield?
Ex. Calculate the Current Yield of a $1,000 bond with a 10% coupon selling for $900.
Current Yield = Annual interest in dollars / Bond’s market price
Ex. Current Yield = $100 / $900 = 11.11%
What is the formula for a property’s intrinsic value?
Ex. If the annual NOI is $40,800 and the cap rate is 10%, what is the intrinsic value?
Property’s intrinsic value = Net Operating Income (NOI) / Capitalization Rate
Ex. Intrinsic Value = $40,800 / 0.10 = $408,000
What is the formula for the Intrinsic Value of a Call Option?
Ex. If the market price of a call option is $60 and the exercise price is $50, what is its intrinsic value?
Intrinsic Value of a Call Option = Market Price - Exercise Price
Ex. IV = $60 - $50 = $10
What is the formula for the Intrinsic Value of a Put Option?
Ex. If the market price of a put option is $25 and the exercise price is $30, what is its intrinsic value?
Intrinsic Value of a Put Option = Exercise Price - Market Price
-IV = $30 - $25 = $5
True or False: The intrinsic value of an option can be negative.
False
What is the formula for Return on Equity (ROE)?
If Corporation X has a book value of $180,000,000, 6,000,000 shares outstanding, $1.5 div paid / share, $50 market price / share, and EPS of $3.00, what is the ROE?
ROE = Earnings available for common (EPS) / Common equity (net worth or book value)
Ex. ROE = $3.00 / ($180,000,000 / 6,000,000) = 10%
What is the formula for Stock Yield?
Ex. Using the ROE example, what is the Stock Yield if the dividend is $1.50 and the stock price is $50?
Stock Yield = Dividend per share / Stock Price per share
Ex. Stock Yield = $1.50 / $50 = 3%
What is the formula for Margin Call?
Ex. If an investor purchases 200 shares at $150 and the maintenance is 25%, what is the margin call price?
Margin Call = (1 - Initial margin percentage) / (1 - Maintenance margin percentage) * Purchase price of stock
Ex. Margin Call = (1 - 0.50) / (1 - 0.25) * $150 = $100
REMEBER - Options are not marginable + if initial margin is not given, assume 50%
What is the formula for Price / Earnings Ratio (P/E Ratio)?
Ex. If a stock has estimated earnings of $3 per share and a P/E ratio of 15, what is its valuation?
P/E Ratio = Current market price / Earnings
Ex. Valuation = $3 * 15 = $45
What is the formula for holding period return?
Ex. Client bought 100 shares at $100/share on 50% margin. Margin interest was 12% annually. After 1 year, client sold stock for $150/share. What’s client’s HPR?
Note - If you don’t have MP/ending value/P1, use CY formula to find it.
Ex. ( $15,000 - ($5,000 margin + $600 margin interest) - $5,000 purchase price) / purchase price = 88%
Phantom Income Producers
STRIPS (who purchases? - tax deferred account like pensions)
TIPS (have fixed interest rate w/ inflation adjustment that increases principal, which is phantom income that’s added to basis - hug/slug ex.)
Zeros
CATS
Federal Securities Taxation
Only pay FED tax on FED securities; no state/local tax
Mortgage Backed Securities & CMOs (mortgage-backed pools)
Mortgage Backed Securities
-GNMA - Guaranteed/govn. backed
-FNMA/FHLMC - If it has an F, you can get F-ed out of your money (not guaranteed)
CMOs - Has tranches A-Z (safest-riskiest + Z has no coupon)
Bond Ratings
REMEMBER - BBB (Better Bad Bonds) and up, investment grade - BB (Bad Bonds) and below, speculative/junk
Convertible Bonds
Preferred Stock
Who buys? Corporate treasurers (Warren Buffet); preferred stock dividends, only 50% are taxed
Other feature - Infinite maturity, longer duration than bonds
Mutual Funds
Are redeemable, NOT MARKETABLE
Options, LEAPS, Warrants, Futures
Ex. Client purchased 100 shares for $52 in Jan. In June, client purchased call option w/ $60 strike price for a $1 premium. Client sells option at $5 and stock at $65 in February of next year. How much does client make?
Ex. To solve gain/losses from calls/puts and options, break question into two transactions.
$1,300 LTCG ($65-$52) + $400 STGC ($5-$1)
LEAPS - Remember stock must be held for 12 mo. after a LEAP is exercised for LTCG.
Warrants - Unstandardized & issued by corporations with several year maturities (unlike standardized call options issued by individuals w/ 9 mo. maturities)
Futures - If you’re long/farm corn, take short position on the corn. If you’re short, take a long position.
Correlation Coefficient, Covariance, & SD
Correlation coefficient range = - 1 –> + 1
Ex. Client holds 2 funds in equally and covariance is 0. Fund A has a risk of 9.5% and Fund B has a risk of 12.5%. What is Standard Deviation of portfolio
-12.5% + 9.5% = 22% / 2 = 11% (this is SD if correlation coefficient is + 1), so if correlation coefficient is 0, should be somewhere around 6-8% range
ALSO, 2nd formula on right side
Coefficient of Variation (CV)
Ex. Which stock is more risky?
Stock 1 - Average/mean of 5.75% & SD of 7.59%
Stock 2 - Average/mean of 7% & SD of 10.52%
CV indicates risk per unit of expected return. Formula - CV = standard deviation / expected return
-Ex. Stock 2: 10.52% / 7% = 150% > 7.59% / 5.75% = 132%
Solve for Mean & SD of stock on TI BA II
Step 1. Enter returns in DATA
Step 2. Solve 1-Var (2nd STAT, 2nd SET, scroll to 1-V)
When choosing what stock to buy, choose highest return (X bar), lowest risk (SD/Sx)
Ex. IV p.25
Beta Range
> 1 = more volatile
1 = in line with the market
<1 = less volatile
0 = no correlation
Negative = inverse relationship
Solve for geometric return on BA II
Ex. Annual returns have been 30%, 40%, - 40%, - 20%. What is the geometric mean over the 4 years?
Step 1. ( (1 + return 1) X 1+ return 2) X (1 + return 3) ) - 1 = x
Step 2. TVM Calc - x = FV, - 1 = PV, N = 3, Solve = I/y
Ex.
Step 1. 0.8736
Step 2. FV = .8736, N = 4, PV = -1, ANS = - 3.32%
Immunize Portfolio
Goal - Protect bond portfolio from interest rate fluctuations; in practice this looks like average duration being = to time horizon to goal
REMEMBER - Zero coupon, duration = maturity
CML & SML
Capital Market Line (macro) - CML is tangent to Markowitz Model Point B
(which is the optimal risky portfolio)
-Point of tangent of Markowitz & CML = Point B
-Point of intersection = Rf aka risk-free rate (100% T-Bills)
Security Market Line (micro) - SML expresses the relationship between risk/return for one asset.
-SML formula is same as Required Rate of Return/CAPM (right side 4 down)
Jensen (alpha) / Treynor + Sharpe
REMEMBER
1. If R2 numbers are mixed (high and low), go for the highest Sharpe answer
2. Alpha measures manager’s ability (so S&P500 Alpha = 0, Beta of S&P500 = 1)
3. R2 of S&P500 is close to 100%, R2 of sector fund is low like 25%
R2 = Coefficient of determination
Stock Split
I have 100 shares.
Ex. 5:2 split –> 250 shares
Ex. 2:5 reverse split –> 40 shares
Ex-Div. Date - When do you have to buy a security for the dividend to get paid out?
Purchase 1 open market day (non-holiday + non-weekend) before Ex. Dividend Date to be on corporations books to receive dividend
Ex. Friday = Purchase Date, Sat-Sun = market closed, Mon = Ex. Div. Date, Tues = Date of Record
What is the % change in a stock? (formula)
Percentage Increase = ((New price - Old price) / Old price) X 100
Covert basis points to %
Basis points / 100 = %
Ex. 500 basis points = 5%
Assume that MicroHard Corporation is currently paying a $3.50 per share in dividends
and that investors expect dividends to grow at a rate of 5% per year for the foreseeable
future. What is the estimated price of MicroHard if the market return is 9%, the risk-free
rate is 3%, and the stock has a beta of 1.2?
$70.67
If the standard deviation of the stock is 24% and the standard deviation of the market is
16%, what is the beta of the stock if the covariance of the stock to the market is .007?
.2734
What is the investor’s required rate of return for a stock that has a market premium of
7%, a beta of 1.4, and a risk-free rate of 4%?
13.8%
Roger Moore has invested $110,000 into a bond with a coupon of 5%. According to his
calculations, the bond has a YTC of 3% and a YTM of 4.5%. The bond has a duration of
8.9. What percentage will the bond price change if interest rates decrease by 0.5%?
+ 4.26%
Vito Scaramucci is resident of New Jersey. Due to his booming protection services
business, he is in the 37% federal tax bracket. New Jersey state tax is a flat 6.625%.
Because of his high tax bracket, Vito decides to purchase Treasury Notes paying 5.5%.
What is his tax-equivalent yield on those bonds?
5.89%
Karis Choi is a South Carolina resident. Due to her new found success as a TikTok model,
she finds herself in the 37% federal tax bracket. South Carolina imposes a 6.5% state
tax. Due to her high tax bracket, she found some municipal bonds issued by the State of
Illinois paying 7.75%. What is her tax-equivalent yield on those bonds?
13.72%
Fund A has the following annual returns of 10%, 12%, and -4%. The average rate of
return on risk-free assets during the same period is 2.5% and the beta was 1.2. What is
its Sharpe measure of performance?
.4015
Marty McFly purchases 1,000 shares of Walmart, Inc at $80 per share on margin. The
initial margin requirement is 50%. If the maintenance margin is 25%, what is the
amount of the maintenance call if the stock drops to $50?
$2,500
Sandy Speculator is looking to make a quick buck playing the stock market. She calls her
broker and puts in an order to buy 500 shares of GameStop stock on margin. GameStop
is selling for $150/share but has an initial margin requirement of 70% due to its volatility
and the annual margin interest is 12%. One month later, GameStop is trading at
$250/share and Sandy sells her entire position. What is her holding period return
(HPR)?
94.81%
Factoring exchange rate into return
Ex. Client invests $10,000 in US dollars into Toyota on the Tokyo exchange when the exchange rate is 100 Yen to 1 USD. The stock grows by 50%. Client sells stock when the exchange rate is 90 Yen to 1 USD. What’s the client’s return?
66.7%
Step 1. Calculate initial investment in Yen.
Step 2. X by growth
Step 3. Divide by new exchange ratio = New value in USD
Step 4. ( New value is USD - initial USD investment ) / initial = % growth factoring in the exchange rate
